To track the pulse of your business, you are going to rely on indicators. An indicator is a thing, a trend, or a fact that indicates the state or level of something.
An example would be the gas gauge indicator in front of the steering wheel in your car. It will indicate whether you have enough gas and tell you if you still have the runway until the next gas station.
To fully utilize this in your business, you must have a good understanding of the definition of leading and lagging indicators.
Let's illustrate this by using your favorite new year's resolution; you're trying to lose weight. What is the indicator that will be helpful for you? Weighing yourself every week? This is a lagging indicator. The number on your scale tells you what happened in the past week, it tells you that you lost weight in prior weeks, but it doesn't tell you if you will be losing weight further in the following days and weeks. We all know that past performance does not guarantee future results.
Now using the same example, what would be a leading indicator in weight watch? Which indicators can you use that will help you understand what lies ahead? One would be the amount of time spend exercising each day. A second leading indicator would be the total daily calorie intake.
With this understanding, a leading indicator will allow you to use today's data to predict what's going to happen tomorrow with greater accuracy.
Now let's apply this to your business;
- Your income statement and balance sheet are an example of a lagging indicator. Although we are not dismissing its importance, take note that they are lagging indicators and will only tell you how your business is doing as of today. They will not help you accomplish your goals.
- What are leading indicators that will help you predict the future conditions of your business?
- Team skills development > leads to being more productive and accomplishing more with less time.
- Status of production equipment > will allow you to produce more.
- Cash on hand > will allow you to have greater purchasing power = more sales
Understanding your leading indicators will help you grow your business. As part of the Oberlander & Co advisory service, we will help you set goals and monitor the leading indicators that are needed to grow your business. Read more about our Virtual CFO and Advisory services and reach out to us if you like to learn more.