Leading and Lagging Indicators, also known as measures, numbers, drivers, are important (key) measurable values in a business that are used for measuring and evaluating the performance, progress and success, toward an intended result or goal you want to accomplish over time. Lagging Indicators reports past results that already happened, while Leading Indicators predicts future results
Your business success will come from your ability to identify, analyze, and manage the performance of these simple but very important Lagging and Leading indicators in the 6 Top Key Success Factors areas of your business. To change any current results in your business, you have to focus on the Lead indicators or measures. They are the things you can control and influence that will lead to a different result.
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In this article we will cover:
What are Leading and Lagging
Indicators in your business?
Definition of Lagging Indicators
Lagging Indicators are an important (key) measurable value of an intended result or goal that you want to achieve. For example, to increase your business growth, sales, profit and income.... Lagging measures, reports past results or events that already happened -the end result. For example, total sales for the month, total Net or Gross profit for the month. These results have past, and there is nothing you can do to change it. They are history.
Definition of Leading indicators
Lead indicators or measures in business are the day-to-day activities that leads to the result of the "Lag Indicators"(The goal or objective you are trying to achieve). These Lead activities (Input) drive the performance and success of the "Lag Indicators" and predicts future results.
A good example may be "Sales" - If you main goal or objective is to increase Sales the Lag Indicator will be: "Total sales for the month". A simple formula that you can use to double your sales and your income is by measuring the Leading Indicators for sales:
- Prospecting (Number of prospect you find every month)
- Presenting (Number of presentations completed to prospects)
- Closing.(Number of presentations that lead to deals closed)
These are the day-to-day activities that leads to the Sales result, goal or objective you are trying to achieve. They directly influence the result you want and predict your success for achieving your goals.
The Law of Probabilities says that you can increase the probabilities of a Lagging Indicator (Goal) success by doing more of the things every single day that influence or drive the results of the Leading Indicator.
The way to double your sales is simple: Spend 80% or more of your time every day prospecting, presenting and closing and do all your “busywork” before and after hours.
Why Leading and Lagging Indicators
are important in your business?
The key tasks, duties and responsibilities of a small business owner is to maximize revenue, profit, cash flow, income and long-term net worth, by consistently producing greater results and performance from the same time, the same effort, the same activities, the same people, and the same money invested in your business. Secondly to continually reduce cost, and neutralize or eliminate weaknesses, risk and threats and develop a strategic competitive advantage to combat increasing competition.
Your business success will come from your ability to identify, analyze, implement and manage the performance of these simple but very important Lagging and Leading Indicators in your business.
The real challenge
Perhaps you already know how to improve your business performance – increase growth, sales, profit income and cash flow, but there’s a catch. What to do is the easy part. Doing it is the stumbling block. When trying to implement your plan from paper to real-world successful results, something gets lost. Knowing is not enough, being willing is not enough, we must implement and execute. The real challenge is, 70% of strategies fail due to failure of execution.
We have enough on our plate managing our business and keeping up with the massive amount off work that is necessary just to keep our operation going on a day-to-day basis, we don’t have the time to focus on the important things…. It's the thing that makes it's so hard to execute anything else. It requires focus and discipline to deal with urgent items while remaining focused on what's important to achieve our goals and move forward
Leading and Lagging Indicators will keep you focused on what is really important and narrow you focus on what you need to do to reach your business goals faster.
It's the One Thing that will make your income exceed your effort - It will eliminate 90% of the hard work and show you where is the best place to investment every hour you work and every dollar you invest in your business. You will simply accomplish more in a few months or years than most people accomplish in a lifetime producing greater results and performance from the same time, the same activities, the same capital, and the same people – optimizing and multiplying your results with minimum effort, expenses and risk.
Examples of Lead and Lag Indicators in business
Typical Leading indicators in business include weekly new customers, average sale per customer, average hours worked in manufacturing, sales per person and, Lagging indicators include things like monthly total revenue, net profit, total cost and units produced in manufacturing.
I have included the video below "The 4 Disciplines of Execution" by FranklinCovey that does a really great job in explaining it
Examples of a Lagging Indicator in a business
Examples of Lagging Indicators in business may include:
- Total monthly or annual Sales & Revenue of a business
- Total monthly or annual Cost Of Goods Sold, Manufactured or Service
- Total monthly or annual Gross Profit
- Total monthly or annual Net Profit
- Total monthly or annual EBITDA
- Total monthly or annual Profit Margins or Markup in %
- Total monthly or annual Fixed Cost or Overheads (Fixed Cost)
- Total monthly or annual Cash Flow
- Total monthly or annual Working Capital
- Customers Satisfaction
- Customer Lifetime Value
- Customer Acquisition cost
- Employee Satisfaction
- Website traffic
- Return On Investment
- Units produced
- Unit Total Cost
Examples of a Leading Indicator
in a business
The Leading Indicators will always be several numbers, financial or non-financial that have the potential to influence the Lagging Number(The goal or objective you are trying to achieve). Examples of Leading Indicators in business may include:
For instance, the Leading Indicators for Profitability of a business may include:
- Total Sales or Revenue
- Variable Cost ("COGS" Cost Of Goods Sold)
- Profit Margin or Markup %
- Fixed Cost or Overhead cost
Here is a real life example: The Fastest Way To Increase Small Business Sales!
The Leading Indicators for Sales/Revenue may include:
- Total leads or potential customers you meet every month
- How many of these leads you convert into customers
- How frequency customers buy from you every month
- The average amount of money a customer spend every time they buy from you
Here is a real life example: The World's Fastest Way To Increase Your Profit!
The Leading Indicators for variable costs (COGS) Cost Of Goods Sold may include:
- The cost for each product
- Spillage, Waste
- Productivity
- Workflow
- Customer cost
Here is a real life example: How To Reduce Cost In Business Safely: Step By Step!
The Leading Indicators for Profit Margin or Markup % may include:
- The price you charge
- The markup percentage or profit margin for every product or service
- How much of your sales are coming from your highest and lowest margin products
- Profit margin per customer
The Leading Indicators for Fixed Cost may include:
- Rent
- Utilities
- Insurance
- All your monthly fixed expenses.
The Leading Indicators for Cash Flow may include:
- Average Receivables
- Receivable Collection Days
- Average Payables
- Payables Payment Days
- Average Inventory
- Inventory Days
- Inventory turnover ratio
- Cash conversion cycle or Days Working Capital
- Working capital
The Leading Indicators for Sales people may include:
- Prospecting (Number of prospect)
- Presenting (Number of presentations done)
- Closing.(Number of deals closed)
- Total Sales Pipeline
- Average Closing Rate in %
- Number of presentations completed per month
- Number of appointments made per month
The Leading Indicators for measuring Customers may include:
- Customer Lifetime Value
- Customer Acquisition cost
- Customer Retention rate
- Sale per customer
- Profit per customer
- Customer frequency of purchase
The Leading Indicators for Marketing and Advertising may include:
- Cost Per Lead
- Total Leads Acquired
- Acquisition Cost per Qualified Lead
- Total Clients Acquired
- Acquisition Cost per Client
Some leading Indicators from Social media such as Facebook, Twitter, Linked-In, may include:
- Unique visitors
- Returning users
- Number of pages viewed
- Time spent on website
- Number of subscribers/ likes...
Some leading Indicators from manufacturing may include
- Average hours worked in manufacturing.
- Daily or Weekly units produces
- Spillage and Waste in units
- Equipment downtime
How to identify leading and lagging indicators
How to identify and implement Lead and Lag Indicators in your business
Now that you understand the different Lead and Lagging Indicators It is time to identify your own Lead Indicators Start by looking at the Top 6 Key Success Drivers for in any business are
1.
First choose a goal that you want to accomplish, like for instance, increasing profit, sales, growth, leads, .... This is your big number but also your Lagging Indicator.
2.
Secondly, you have to identify your Leading Indicators that will lead you to more "profit." (your goal). The Leading Indicators for every business will be different. In this case for profit, the basic Leading Indicators will be:
- Total Sales or Revenue
- Variable Cost ("COGS" Cost Of Goods Sold)
- Profit Margin or Markup %
- Fixed Cost or Overhead cost
3.
After you have identified your own Lead Indicators, you need to measure their "numbers". Start by looking at past results - where the business is now. Then you can set some targets for improvement for each indicator - where the business wants to be.
4.
Create some kind of measuring "Scoreboard" to track the results. Seeing the results, no matter how small will motivate you into even more action.
5.
Every week ask yourself "What is the most important things you can do this week that will have the greatest impact"? Focus on the critical few day-to-day activities that you can improve (Lead indicators) to create the results you want.
6.
By the end of the week evaluate your results "Did you meetlast week comitmets"? "Did they have an impact"? "What will I commit to this week"?
In Conclusion
Leading and Lagging Indicators is vital for your business growth, revenue, profitability and your income — if you use them correctly. 80% Of your results will depend on identifying and measuring the right indicators on a consistent basis and the other 20% will depend on how well you implement it into your business.
Thanks for reading the post. Hope it was helpful. Talk soon
Hans
(Obsessed with your business success)