Leading vs. Lagging Indicators: A Dashboard for Business Decisions

Let's talk metrics

One challenge in managing finances is the overwhelming amount of numbers and metrics available to look at.

Scoreboards in professional sports generally display only the most relevant stats, and your business should do the same.

How do we handle it?

Stick to 6-7 key metrics with a combination of leading and lagging indicators to watch on a weekly basis. Ignore everything else.

In past newsletters, we've established that you shouldn't be looking at your P&L or financial statements more frequently than monthly. Unpacking all of those numbers too often will create a lot of noise. Set it all aside and focus on the important few until it's time to dig into the full set of financials.

In my world, managing a handful of businesses means I need to track a variety of metrics for each company. Here are 6 metrics I look at every week:

1. Total sales — looking to hit my breakeven/goal levels
2. Sales growth YoY — I prefer to see us moving in the right direction (up)
3. Weekly cash flow — did we collect more than we spent (or at least inline with what we thought)?
4. Bank balances and available line of credit — what are my resources to make payments in the very near future
5. Email subscribers + social followers — we want to broaden our reach and this is a great indicator for our lead generation
6. Inventory on order — many of our businesses are inventory-heavy so we watch it closely

This brings me to leading vs. lagging indicators.

Lag measures the goal while lead measures predict and influence the lag. If the lead measure changes, you can predict the lag measure will also change.

Lagging Indicators — Lag measures tell us what already happened (what was the result). Total sales, profit margin, 5k run time, etc. Lagging indicators are still useful, they tell us at a high level whether things are going well (i.e. a "check the box" situation).

Examples of lagging indicators:

• Margins
• Turnover ratios
• Total sales dollars
• On time deliveries
• Average order value
• Receivable collection timeframes
• Financial performance metrics of any kind

Leading Indicators — Lead measures both predict and influence the lag measure. That means if we change the lead measure, then we'll be able to change the lag measure. A higher volume of sales calls to qualified leads (leading indicator) should lead to more overall sales (lagging indicator). Try to keep these activity-based and influenceable. More practice sessions should lead to a better 5k time. And so on.

Some examples of leading indicators:

• Cash runway
• Utilization rates
• Supplier metrics
• Inventory shrinkage
• Website traffic trends
• Backlog of future work (pipeline)
• Cycle times (how long it takes to start and complete)
• Lead generation metrics (calls / inquiries from qualified leads, etc.)

A good mix of both measures is best. Keep it simple and keep the list small. Pick metrics that are truly meaningful to your business (you know, the ones that are constantly on your mind). Make sure your leading indicators truly drive results. And don't be afraid to swap out metrics that aren't working or don't seem important. Naturally, some of the best metrics aren't easily gathered and you need to make an effort to get that data!

Homework

Think about a few metrics that are most important to you and your business. Try to gather 3-4 leading and 3-4 lagging metrics.

Drop them into excel or Google sheets and track them for a few weeks. See how they feel.

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