Looking for a leading indicator of your company’s health? You might find it in an unexpected place. Sales and cash flow are lagging indicators. Sales and marketing people hate that. Accountants probably do too. But hate as they may, it doesn’t make it any less true.
So much happens before the sale and before the company sees the cash that there’s no way sales or cash flow can be anything but lagging. The number of businesses that fall apart or were nearly scuttled because they knew little more—beyond sales—about what drove their performance is too long to list.
We’re typically wired to believe that sales is “top line”. That sales equals money, revenue, oxygen. But that’s just a convenient model. As British statistician George Box once said, “All models are wrong. Some are useful.” As far as models go, for accounting purposes or even raising investment thinking of sales as “money” is useful, but it is incomplete.
Even if a business does get some money when inking the deal, and even if the salesperson orders their new beemer on the expected commission, the real money doesn’t flow until delivery. In fact, the real “real” money doesn’t flow until after the customer accepts the product (or service) and doesn’t complain or return it. Until then, the sale is just a forward-looking speculation of a desirable cash state.
Let’s start with delivery. The sale isn’t money until the product/service is paid for and the customer has no recourse for reversing it. This gives us a clue as to what might be one of the better-than-sales performance indicators. We tell clients all the time, “you don’t make money unless you deliver.” While also mostly true, it’s only truly true if your delivered product meets customer expectations, doesn’t have detrimental defects, and doesn’t require unplanned work to satisfy the customer.
Otherwise, a product/service that causes your business post-delivery issues is a product that’s not finished costing your business money to make, let alone sell. In other words, it’s not money your business can bank, it’s money your business is spending.
So where does one find a leading indicator is all of this? In customer satisfaction. Often this is made obvious and measured by complaints, returns, warranty requests, field repairs, and defect reports. If a business is lucky, they might find them sooner, before letting the deliverable out the door, such as in product fix punch-lists, piles of scrap, missed deadlines, or failed tests.
One could argue that even these are “lagging” indicators. That once these become obvious it’s clear that there are performance issues. And, one would be correct. On the other hand, many can imagine a situation where these “obvious” indicators are ignored because “sales are up, UP, UP!”
In these situations we would likely benefit from even earlier indicators. In this regard, there’s good news. There are indeed earlier indicators. If it wasn’t obvious by now, all of the listed indicators, as well as all of the “next level down” indicators, are all operational in nature. Spelling it out, leading indicators of a company’s performance are found in the metrics passively radiating from its operations.
Sales may appear to be the tip of the spear for a business, and to be sure it’s an apt metaphor. But that tip doesn’t get anywhere and doesn’t penetrate if not for the remainder of the spear. The bulk of the spear’s heft is not in the tip. In this metaphor, the rest of the blade, socket, and rod are the operations. If the rod is bent, the blade is brittle, or the socket isn’t secure, what good is the tip?
Operations are teeming with performance indicators. Many executives are just too busy to notice or to know which to pay attention to. And for many executives, these indicators aren’t obvious because they’re not on the balance sheet, P&L statement, or taught in B-school.
In important ways, operations constitutes money already spent. So while a bit lagging on the spend side, what better way to gauge performance than to see how well the money actually spent is doing? When looking for leading indicators, look to operations. There’s a wealth of data there with direct ties to business performance. Operations issues are leading indicators of performance issues.
For now, we’ll leave you with a list that we’ll flesh out in future entries here.
You might have a performance issue if:
Inventory is piling up
Batches of work are growing in size and quantity
Lead times are stretching out inside your walls
Queues of work are developing and not ebbing
New features, functionality, upgrades, or innovation are missing the mark
Number or duration of meetings is increasing
Decisions are bogging down anywhere in the organization
Plans, estimates, and reality are diverging
Response times on customer inquiries is growing
If you know of a business experiencing any of the indicators mentioned in this post and don’t have the time to wait for future updates, don’t hesitate to reach out.