What good is a lagging indicator?

It's a lagging indicator- the event(s) or action(s) that caused the change have already occured. Things happen quickly in business these days. As a manager or business owner, you don't have the time to dwell on the past.

But you need information to make good decisions.

lagging-indicator

A lagging indicator tells a story about your business.

Indicators of all types only provide information. Your work as a manager or owner should never become about managing the indicator.

Unless you want to go crazy trying to control things you can't, keep your focus on the processes that make up your business.

Indicators, leading or lagging, should only be studied to understand how your business processes are performing.

Consider sales and profit. If management is focused only on these measures, you can be sure there is missed opportunity.

In reality, financial measures are almost always lagging indicators.

The problem (or opportunity) for the manager or business owner lies in explaining the cause of the number. Profit is a simple summary of the complex system that created it. Implied is: sales, revenue, cost of goods, expenses...it's a good thing to know, but how does it help you decide what to make better?

Because if you didn't know these things, the business would be in way worse shape. In fact, if you're not measuring the simpler things (like sales, expenses, and profit), then it is highly unlikely that you're measure the things that may really help.

The value of a lagging indicator? The measure, no matter what the value is, is a prompt to learn more. Asking questions, studying, identifying the processes that provide the result...these actions are the true value to the business. And, these things won't happen in the absence of a mindset that values measurement.

Get started now by regularly measuring the basics. Then, don't just look at them. Use them as a guide to identify the processes that influence them.

For example: If revenue is low or trending down, identify the things the business does that could be classified as sales and marketing.

  • How are you answering the phone?
  • What do you say to a customer when they enter your store?
  • What questions are asked that lead a potential customer to understand their problem and how your business provides the solution?

Then, identify all the things the business does to set pricing.

Then, understand how seasons of the year impact sales.

Then, investigate if sales are higher during certain times of the day.

(This could go on and on- your business, market and situation determine how far you should go.)

Do you see the pattern? By dissecting the components of the equation that creates the indicator, you can move from knowing to improving.

Control the things you can.

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