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Why is this Important?
“One of the primary jobs of management is to read the trail signs (key indicators) and take appropriate action to make the company more successful. The problem is that even though most managers know how to read key indicators, they don’t take the action. But when you combine the two steps — reading key indicators and taking appropriate action — the company invariably makes more money.” Kraig Kramers
There are 2 kinds of Key Indicators: trailing and leading. Most CPA’s, banks and businesses are familiar with trailing indicators and use them to their advantage. Below are some examples of typical trailing indicators that Banks use to determine if they will lend money.
Common Trailing Indicators:
Current Ratio (current assets/current liabilities) – owner has $x in curr assets to pay curr liabilitiesQuick Ratio (cash + AR/current liabilities) – owner has $x in liquidity to pay ea dollar in current liabilitiesDebt to Equity (total debt/equity) – for every $ owner puts in business, creditors have put in …Return on Assets (Pretax Profit/total assets) – for every $ in assets used in the biz owner gets profit ofReturn on Equity (Pretax profit/equity) – for every $ invested in business the owner generates a return of..AR Turn (sales/AR) – average times per year AR is collected (eg 9x per yr)These ratios are trailing indicators. They will let you know what has already happened and if you are going to have cash flow problems. For example, if your AR turn is 45 days and you can reduce that by 10 days you will generate more cash, will need less from the bank and can grow better. Banks are interested in:
Leading Indicators:
Leading Indicators are predictors for a business. They allow insight into how a company is handling the work flow. They allow for planning and predicting Revenue. They allow insight into the business that allows for greater efficiencies and greater profitability. Leading Indicators are unique from company to company. Each company needs to develop them as they are unique to their company structure (it is not even industry specific, it is company by company). What is needed to create a leading indicator:
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