Quick. The next time you’re driving your car, take note of how much time you spend looking forward versus looking backward in the rearview mirror. My guess is that you are looking forward the majority of the time. What if it weren’t? Can you imagine driving a car and looking in the rearview mirror almost the entire time? It would be like driving backward. At some point, you would probably crash your car.
How about your business? How much time to spend looking forward versus looking backwards?
Most small business owners have a set of financial metrics, Key Performance Indicators (KPIs), they look at on a regular basis. The numbers may include sales, profits, cash flow, receivables, etc. These are all good metrics to track the financial performance of your company. The past financial performance of your company. It’s like looking in the rearview mirror of your car. They’re considered lagging key performance indicators.
What about the future? What metrics do you look at that point to what’s approaching? These are considered leading financial indicators. They help you predict what your sales, profits, and other financial measures will be in the future.
Leading Indicators
What are some examples of leading indicators? For sales, they might include the number of proposals you have outstanding, or sales backlog, or possibly the number of meetings your sales team has had with prospective clients in the past month. All of these would help you predict the level of sales to expect in the next month, quarter, or even year.
I was first introduced to Key Performance Indicators while working for my dad during summer break in college. My job was to load and unload trucks in the warehouse of a large tire distribution business. Not glamorous! One day after work I sat down in my dad’s office and noticed a small piece of paper, like a sticky note, on the corner of his desk. I asked my dad what the numbers on the piece of paper meant.
My dad explained that these were the three most important numbers he needed to manage the business every day. They were his sales from the past day, his current accounts receivables, and the cash balance that day. He said that as long as he had those three numbers every day, he could effectively make every key decision required of him including staffing, purchasing, customer requests, and more. Those numbers always showed up on his desk by 10 am each morning like a hot cup of coffee.
Because of this experience with my dad, I believe every business has at least three numbers that should be followed each day. What are yours? Are they leading or lagging indicators?
Safe driving.
If you’d like to see examples of Key Performance Indicators, please let me know and I’ll send you a great list.