Measuring profit is a lagging indicator. What drives your business?
Social Responsibility: Measuring profit is a lagging indicator
What are the leading indicators that drive your organisation?
How socially responsible is your organisation?
Inputs vs outputs?
Measuring expenditure, profit and loss have been what we have always done. It is institutionalised into our financial processes and procedures and measured quarterly and annually.
If we take an analogy of weight loss:
If you set a goal to lose weight and you just weigh yourself every Monday morning you will not necessarily lose weight. You are measuring the ‘output’, the ‘lagging indicator’.
The output or the lagging indicator is the weight loss.
If you set goals around your inputs for example, what you eat and how much exercise you do – you are more likely to lose weight.
By focussing on the inputs, you are more likely to affect the outputs.
So, to take this into a business context – if you only or mainly measure the profit you could be missing an opportunity to improve the things that really drive and affect your business.
To use a couple of examples:
- If you have happy employers, they are likely to be more engaged, productive and stay longer. Reducing recruitment costs, retaining business intelligence and strengthening the organisations culture will ultimately increase profits.
- If you engage local communities and align with charitable organisations – your business will benefit from potentially attracting new talent, providing a new route to engage with clients and enhance brand reputation.
But how do you measure these inputs? Some are easy to measure like employer retention, others harder but it does not mean they are any less important.
The soft stuff is actually the hard stuff.
During my career, the people, community and environmental elements of a business were often described as the ‘softer issues’ but in actual fact they are the much harder things to get right. They require different skills, possibly a little less technical and more emotional. Do we have the right skills?
Businesses in the future will be measured on social as well as financial value.
How do you measure the social and environmental indicators of your business?
If you would like advice about how to become more a more socially responsible organisation, how to protect your business in the future then don’t hesitate to contact me for an initial discussion.
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