As we approach 2011 and put 2010 in the review mirror it’s important to understand that there are two types of key performance indicators in your business: leading and lagging.
We had our first snow fall this weekend and it reminded me of how many business only use lagging (retrospect looking) indicators to operate their business. Imagine you had to drive your car with the front windshield covered with snow. That’s what it’s like if you are only using lagging indicators to operate your business.
Both Lagging and Leading (forward looking) indicators are critical. The most successful growth companies measure and monitor both for successful development and execution of their quarterly and annual plans!
Using only lagging indicators in your business is very much like trying to drive your car using only the rearview or side mirrors. It’s great for backing out of the driveway. Moving forward is difficult if not impossible.
Some of the most important information you need in order to drive, avoid peril and successfully navigate on the road is what you can see before you are there!
We recommend that for every one lagging indicator you have for operating your business you have two leading indicators. Leading indicators let you know what to expect. They help with forecasting and predicting where your business is going and protect you against falling off the cliff.
Let me give you an example. When I was in radio as a sales manager and general manager I was always concerned with sales. A leading indicator for sales success that I closely monitored was how many dollars are sales people were proposing to clients. We had a graph that showed the amount they presented and with it another corresponding graph that showed the amount they sold. The latter [sold] always trailed the former [dollars presented] by 30-45 days. With both numbers plotted on the same graph I could get a pretty good idea of what our numbers would be in the next 30 days. When dollars presented faded I could expect that closing sales and revenue would be declining.
We’ve discussed previously that the two most important leadership qualities are delegating and predicting. Having a group of reliable, predictable and historical leading and lagging indicators [Key Performance Indicators] will put you in a position to excel in the area of forecasting for your business.