The Importance of Leading Indicators - Victor Cheng - New Orleans Growth Summit
THURSDAY, MAY 7TH, 2009
“Leading indicators are much more important now than the numbers looking back historically.” These were Victor Cheng’s words as he discussed the rules for surviving in the new economy. You need to solve a problem that gets worse in a recession, and if there is no demand, or failing demand he said don’t pursue it.
The problem for most businesses is we discover this failing demand too late. As Cheng noted the key to success is to be ahead of the game and to act fast.
Lagging indicators by definition are those that provide historical data on your business. As an example when you get your financial reports at the end of the month, quarter or year, these are lagging indicators. No matter when you are receiving them, a day, ten days, 30 days or even 10 minutes after the time frame of that period they are still lagging indicators, reporting what has happened. That’s not to say getting them sooner, or faster isn’t better, however there’s no debating that these numbers are after the fact. They provide you with information on what’s happened.
Leading indicators are predictive measurements. A good example of this would be leads generated. If you’ve quantifying the number of leads you are getting then these can be a good predictor of your sales conversions you will probably generate. There are other examples in business for leading indicators; however each business has its own unique “leading” indicators that predict outcomes. In a manufacturing business often times absenteeism can be a predictor of defects.
They key for your business is to discover what measurements you need to be taking that predict outcomes. These are your leading indicators and they allow you to make decisions before the lagging indicators reveal what has truly happened.
This might be a poor example, however if we go back in history, a leading indicator for the Titanic might have been the ice berg warnings they received on their voyage. The captain either disregarded these or was informed by the White Star Line to proceed so they could set a speed record, which probably led to their hitting the iceberg. Leading indicators are warning lights that help signal to you what you can anticipate for the future. It may be only a few days, weeks or months in the future, but it is, depending on the accuracy of your indicators, a pretty good predictor.
Today’s environment absolutely requires your business to have leading indicators to help you take corrective measures. These indicators can be positive or negative, but either way they signal an action to take. Wouldn’t you rather be proactive than reactive? The nature of a leading indicator helps you to be proactive, to change ahead of the curve. After the fact is too late.
It can be argued that companies like Chrysler and General Motors needed leading indicators to warn them of the dwindling demand for their vehicles. Had they had enough foresight they could have made changes to their operations and prevented the challenges they are facing now.
One critical leading indicator we recommend every business have is a cash flow dashboard that can predict the cause and effect relationship decreasing sales will have on your cash position. To be able to accurately predict your cash needs weeks and even months in advance is a necessity for any business today.
Speaking of icebergs, let’s take a look at the importance of strategy and how Dominos Pizza’s 30 minute delivery strategy was just the tip of the iceberg in our next blog.
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