To Make More Money, Stop Watching Profits
To Make More $, Stop Watching Profits
By Michael McDermott, owner of Enterprise Tune-Up
and author of 2009-2011 Recession Survival Guide
Entrepreneurs are taught to be laser-focused on the bottom line. Profit, after all, is the scorecard we’re measured against. In professional sports the final score is the outcome of actions on the field: yards gained, QB sacks, field goals kicked. The best coaches focus on perfecting these “basics” believing that the final score should positively reflect those better performance efforts.
Making a profit is the same. Profit is what is called a “lagging” indicator. Lagging indicators are performance measurements that represent the consequences or results of your business activities; outcomes of your business processes. Examples of lagging indicators are customer satisfaction, scrap rate, shrinkage, SKU turnover rate, and profits.
Rather than focus on the end result, profit, focus upon strengthening the “leading” indicators. A “leading” indicator is the “cause” in the business performance cause & effect relationship. They describe the important business processes that your business performs today in order to create the positive outcomes tomorrow (the lagging indicators such as profits). Examples of leading indicators are # of sales lead conversions, # hours of employee training, store traffic volume, $ per transaction, # repeat customers, etc.
Leading indicators can be considered a type of “key success factor” (KSF) that have been described in employee behavioral terms or quantified and measurable activities and processes. Have you made a written list of the “leading” indicators and “Key Success Factors” for your business? KSF’s in retail, for example, are product turn rate and inventory shrinkage (theft). KSF’s in manufacturing are throughput time and scrap rate. What are the KSF’s for your industry? Better find out!