Edition 3 – Leading Indicators
When most family business owners talk about the performance of their business, they talk in terms of profit, cashflow, debtors and creditors.
All of those are a result of an activity. And, they are all representative of what happened in the past.
In economics, these would be called lagging indicators. They’re after the fact evidence of what has occurred in the economy.
Leading indicators, on the other hand, are often overlooked in a family business. However, they are vital to achieving top performance for any family business.
Let’s go back to economics for a moment.
A leading indicator in the economy is home building approvals. The building industry is one of the key drivers of the economy. If building approvals out of local councils drop, that’s a warning the economy is slowing down. If they increase, it means there is a pick up happening.
As most people know, the time between local councils granting approval to build, and the home owner starting to build, can generally be anywhere from 2 months to 12 months.
If there is an increase in home building approvals, it means there will be a demand in the economy for labour and materials within a 2 to 12 month period. Hence, they are a leading indicator of where the economy is heading.
So, back to the family business! What are the leading indicators in your business that determine where your business is heading, and not just where you are at today?
Here are some examples of leading indicators from some of the family businesses that we work with:
- The dollar value of your sales pipeline.
- The length of your sales pipeline.
- The rate of conversion from enquiry to sale.
- The number of new customers you are seeing.
- The ratio of repeat business to new business.
- The average dollar value of each sale.
- The total dollar value of your client relationships.
- The number and value of your different services that your clients are taking advantage of.
- How far ahead you are booked for work?
- The level of delight the client has in your product or service.
There’s plenty more. But, that’s a start.
How these measures stack up will vary between family businesses.
For instance, if your family business sells high dollar value equipment to a particular industry, your sales pipeline might be of a higher value, for a longer period of time. Alternately, if you are in a retail operation, the sales pipeline might be much lower and considerably shorter.
Whichever industry you play in, you need to stop and consider what the leading indicators are in your family business.
Keeping a close eye on those leading indicators will go a long way towards solving your future cashflow and profit problems and help drive your family business towards achieving its strategic vision.
This Week’s Tip
When cashflow gets tight in a family business or profit starts to dip, the wrong question to ask yourself is what is going on?
The right question is what happened in the immediate past that has lead to this point? And how does that compare to the same period 3 months ago, 1 year ago and 3 years ago.