Financial Clarity for Entrepreneurs

Lag Your Putts – Not Your Indicators

Lagging Indicators are those pieces of data that tell us what happened. They’re history.

The most common collection of lagging indicators that business owners are familiar with are the financial statements – Balance Sheet, Income Statement and Cash Flow Statement – along with the other management and financial reports pouring forth from the accounting department.

If you’re like a lot of companies I come across that are transitioning from small business to small enterprise, you get your financial statements for the previous year in April July. So not only are your indicators history, they’re ancient history. That’s a tough way to manage a business.

Leading indicators, on the other hand, predict the future. To be useful, an indicator must have a measurable connection to an outcome and that outcome must be something meaningful to your business. A full moon may be a leading indicator of increased emergency room visits, but it doesn’t mean anything if you’re in the online book-selling business.

For example, a business selling high-end semi-customized items to consumers by way of call-ins can establish a link between the number of people who call in to get configuration and price quotes and the number of people who eventually order…and when. This is measurable and meaningful – we can establish an accurate level of future revenue based on the number of quotes given this week. That’s useful information. Likewise, a company doing business with other businesses can establish a link between proposals given this month and revenue booked during the upcoming months.

Leading indicators of one outcome can also be lagging indicators of a different input. Taking the B2C example above, call-ins don’t just happen – they’re the result of some other action. Perhaps they’re coming in as a result of advertising in magazines or websites targeted to the company’s prospects.

Now we can see a chain of actions and results. So many ads results in a certain number of call-ins during the next two weeks, which result in some percentage of sales in the two weeks after that. So, to be really useful, a leading indicator should be something that is not only measurable and meaningful, but also that we can control directly. In this case we don’t directly control the number of call-ins, but we can control the number and placement of advertisements.

Identifying these controllable leading indicators (CLI’s) allows you to not only predict the future, but shape it as well. Taking the time to identify a small number (probably no more than 3 to 5) of these CLI’s will give the business owner who doesn’t have unlimited time and resources the leverage he or she needs to manage and grow the business.

The trick, of course, is identifying that handful of CLI’s that can be leveraged. Do you have any examples you’d like to share?

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