As a member of a Vistage executive group, we routinely present our companies’ key performance indicators in our meetings. Key performance indicators, or KPIs, are simply a group of metrics that you can use to predict future business trends, evaluate company performance and make adjustments for the future. No matter what your organization does – whether it sells products, services or is a not-for-profit entity, there are KPIs that can serve as a “dashboard” to indicate the health of your organization and where your business is headed.
Lagging Indicators vs. Leading Indicators
Most often, when companies measure KPIs, they are really measuring “lagging” or historical results. Lagging indicators certainly have their place in keeping score and measuring progress toward goals, but leading indicators are much more valuable to company leadership.
- Lagging indicators – Lagging indicators tend to look into the rear view mirror. They measure past and current results, confirm that strategies and tactics are unfolding as planned and (hopefully) allow you to make course corrections. All businesses have unique attributes, and your KPIs need to be relevant to your business and industry. Some general lagging indicator measurements include sales, profitability, overhead, working capital, productivity, capital investments, employee turnover, etc.
- Leading indicators – Leading indicators are more predictive in nature – they give you information that helps you forecast future business conditions. If you can find a good set of leading indicators, even if it’s only one or two predictive metrics, that’s golden. Leading indicators can be internal (i.e., forward contract commitments and order backlogs) or more “macro” in nature – for example: published economic data, changes in the legal or regulatory environment, demographic or technology trends, Federal Reserve policy, weather trends (think agriculture and transportation), etc.
After you identify your KPIs and develop a clear way to summarize and present them, I recommend the following:
- A regular monthly discipline of critically evaluating your KPIs. Study the trends; ask yourself what actions you need to take.
- Continue to evolve your KPIs as your business and the competitive and economic landscape change.
- For fresh perspectives, invite an objective review from colleagues – even people in different industries or other size companies.
Obviously by now, there is no “one size fits all” set of KPIs and leading indicators that work for all organizations and industries. While there may be some common themes (sales, profitability, working capital, etc.), each business must identify KPIs that are meaningful and relevant to their situation. Most importantly, institute a regular discipline of critically reviewing your KPIs and making business adjustments for the future. If you do the above, I suspect you will be far ahead of 95% of small businesses, including your competitors!