Everyone wants to know how their business is doing. There’s nothing wrong with that; you need to be able to keep an eye on your company, set goals and evaluate whether or not those goals are being met even as your business changes.
You want to make sure you’re using the right metrics for those goals; there’s no point in checking your sales figures every day if your company makes its money through affiliate deals. Just because you have a lot of sales doesn’t mean those two businesses are doing well; it may be better to measure profitability per partner and consider the value of customer satisfaction as well.
But if you’re measuring the wrong numbers, it won’t matter one bit. You’ll make bad decisions based on faulty information and end up spinning your wheels as your business fails to improve; here’s how to avoid that:
Your own knowledge is the first step towards properly evaluating which metrics will work for you. Know what each one means and why it impacts your business — then you can use that knowledge to put together the perfect set of KPIs (abbreviation for “key performance indicators,” the metrics you track to measure your business’s performance).
Leading and Lagging Indicators
A leading indicator tells you that something is going to happen; a lagging indicator tells you that it already happened. Knowing the difference between a good leading indicator and lagging indicator is critical to developing solid KPIs (key performance indicator) that provide actionable waypoints to steer your business.
Here’s an example: if we know our company sells $100,000 worth of widgets in July and so far this month we’ve only sold $10,000, we can assume something bad has happened even without seeing September’s financials yet — leading indicators tell us so much coming up ahead of time. But if we see a sharp drop in our sales numbers over the month of September, we can’t say for sure if things are slowing down; only after the final number comes out do we know for sure. That’s a lagging indicator — it tells us what already happened.
One common business mistake is to make decisions based on lagging indicators because they look like they tell you more information than they actually do.
A leading indicator may be that our widget sales spike every February; that means February should be high as well. If February doesn’t meet expectations despite the previous year’s success, then something is definitely wrong and needs to be fixed ASAP because there aren’t that many lagging indicators to show where the problem happened.
Identifying Leading Indicators
A leading indicator is any number that gets larger or smaller before you see the associated event happen. To use another example, if we’re expecting more summer heat in July than in June, our power consumption will spike — so checking up on June’s usage compared to last year’s can be a good way of predicting whether or not the hotter weather has hit us yet. Tracking these numbers ahead of time gives us control over how much money we spend trying to keep things cool later on.
So what are some other leading indicators? Your sales numbers (if your company makes most of its cash through widgets) may depend on new product releases; stock market activity and company financials can be leading indicators, too. Any number that gets larger or smaller before you see the event it’s associated with take place is a leading indicator.
Leading indicators are great for teaching us about your business and giving you insight into how you can improve; they tell us what to expect and help keep our business running smoothly. Lagging indicators aren’t as useful because by the time we know it happened, it’s already too late to do anything about it. The only way we’ll ever increase profits is if we make changes after we see lagging numbers go up — but without the context of knowing why those numbers changed (or which direction they’re likely to go next), we won’t have any idea how to fix things.
Identifying Lagging Indicators
A lagging indicator is any number that gets larger or smaller after you see the associated event happen. Let’s use our example again: if we’ve seen our sales numbers go down in September, it means something happened during August to decrease traffic — so tracking what happened can help us figure out how to fix it. Maybe the discount sale last month made people buy less stuff this month? Or maybe some of our regular visitors didn’t like a feature update in August, and they’re boycotting until that change is undone. These are good questions to know the answer to — but there isn’t anything we can do about them besides >react< accordingly when we read the final numbers for September.
Tracking the numbers after the event has already taken place doesn’t give us any clue as to what causes those events so we can change our next course of action.
So what are some good lagging indicators? If you have sales, that’s a perfect example. Your sales numbers are great for measuring how many widgets you sold over time — but by the time you see your number go down, it will be too late to do anything about it. Lagging indicators are useful for understanding what just happened , not for predicting what might happen next .
Getting Started with KPIs
One common business mistake is to make decisions based on lagging indicators because they look like they tell you more information than they actually do. For example, if we know our widget sales dropped in October, we might think that was because of what happened in September — when it fact, the drop could’ve been caused by any number of events (or nothing at all).
But if our widget sales rise every January and February, then stay low the rest of the year… well, now we know something’s wrong. Maybe there’s an issue with our production process that makes more widgets come out unusable. Or maybe another company just put out a new product that stole all of our customers over Christmas break. If we track lagging indicators properly, we’ll find these things before they snowball into bigger issues down the line.
Finding the Right KPI for Your Business
It’s not easy to figure out which numbers are leading and lagging indicators — but it’s worth the extra effort because that knowledge will give you insight into how your business works.
If we can keep our sales numbers healthy, we know we’re spending money on things that bring in more than they cost us. If our sales go up, we know we did something right and should do more of it. If they go down, then we know there’s a weakness in our system somewhere — and the only way to figure out where is by asking what happened before (the leading indicator), not after (the lagging indicator).
And don’t forget: both types of indicators are important for tracking your company’s performance over time — but knowing which to use when is key to understanding your business better and making smarter decisions.
A KPI is an effective tool used by companies for measuring organizational success at all levels, with different kinds of metrics based on what they’re trying to achieve.
Some common types of organization-wide KPIs include sales volume, profitability, market share, revenue growth rate, and number of employees. Some examples at the corporate level might be ROI (return on investment), cash flow, goodwill, productivity, or collection ratio.
KPIs are often used in conjunction with SWOT analysis , which helps companies identify their internal strengths and weaknesses along with external opportunities and threats they need to address in order to better position themselves for future success.
Different kinds of businesses will choose different types of KPIs based on what they’re trying to achieve — but all successful KPI-based systems use numbers to measure progress toward organizational objectives.
