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Emphasis is always placed on financial metrics when evaluating a business such as net profit margin, wages as a percentage of sales etc. However, these measures are what are known as lag measures. A lag measure is a statistic that measures history or is a result based measure. When looking to drive a business an owner must identify lead indicators. A lead indicator is a measure that will foreshadow a change in a lag indicator such as revenue.
If you understand the lead indicators that are important to your business and they are monitored then it should ensure a desired effect on your lag indicators. That is easier said than done in that defining the lead indicators is not easy. For example let’s look at a sales based organisation, a lag indicator could be revenue, but what would drive revenue in a sales based organisation be? It might be number of phone calls made, conferences attended or sales meetings booked. However, contrast that with a hair dresser and a significant driver of revenue might be client satisfaction as repeat customers. They are generally unique to an industry and you can’t simply pick up one businesses lead indicators and apply it to another. Typically these indicators are non-financial measures which in itself makes it harder to monitor than a financial based measure. However, if there is a system in place to track these in a business generally the business is more likely to succeed than a business that does not.
I am not saying that financial measures are not important or they are not drivers of profit in any way. Financial drivers should most definitely be monitored. Financial drivers may include
What I am saying is that these measures are commonly measured but non-financial measures are commonly ignored. Understanding what drives a business and what strategy it is pursuing is key to ensuring success. Financial and non-financial measures should play an important part in any businesses management reports and key performance indicators. These indicators should be formulated in line with the strategy pursued.
Are you after more information on evaluating your business, or your clients? ABN Members can access business tools and templates in ABN's Pillars of Public Practice, housed in their ABN Member Centre.
