We all are in business to make money unless you are a non-profit organization, but profit is not a manageable activity, it’s a “Result”.
Certain activities are directly linked to profitability like Sales and Expenses. Performing these activities more effectively leads to greater profit.
The accounting system is the historical “System of Record” that captures all physical transactions. Geared primarily around financial criteria, profit, cash flow, assets & liabilities. Measuring profits only is imperfect and influenced by many variables like inventory, sales cycles, timing issues and more. It is historical and therefore purely retrospective.
There is a better way, switching from past tense management to current and future-facing management. Here are the three Stages of Management:
- What happened (Accounting View – Financial KPI)
- What is happening (Real Time KPI)
- What’s going to happen (Future Facing Management – Leading KPI)
Weather forecasters are using radar to predict the short-term weather changes (we all knew when and where the hurricane would make landfall and could prepare in time). Leading KPI’s are like a Radar for your business. You can see the changes coming and prepare in time.
What leading indicators are critical in your business? Share your experience.