Years ago, one of the businesses I ran had sales that fluctuated month to month for no apparent reason. This was a traditional brick and mortar company not involved in the financial industry in any way. We thought we knew what caused sales and devoted time, money and organizational resources to generate more. While we grew the business, it didn’t change things regarding the inconsistent sales volumes and certainly didn’t give us any greater insight into our future. We told ourselves it was a seasonal event. If we went back 5-10 years, we found ways to convince ourselves that if our hypothesis was correct 4 out of 10 times then seasonality was the answer and continued investing in what we had done in the past.
Then one day it hit.
On a hunch, we began tracking the strength of the dollar to foreign currencies and noticed the correlation between currency rates and domestic production of the products we handled. Sure enough, when the dollar was strong our sales decreased and when it weakened our sales rose. When the dollar was weaker, product was being manufactured domestically and needed our involvement to distribute. When the dollar was strong, product was being made overseas and traditional distribution logistics were bypassed.
Right away, we were able to predict future requirements, manage labor better and make budgeting a useful exercise rather than educated guessing.
Every company should track sales, profits and cash. Every company also has its own operational indicators and metrics that its managers should follow on a regular basis. These are all lagging indicators. But what if you could see into the future and assertively manage your business for what was surely to come? That’s what leading indicators do. They’re not always easy to determine; in my case it took three years of trial and error, but once you do identify leading indicators and can validate their predictability factor, you will find your self considerably less anxious about what tomorrow will bring.
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