Leading vs Lagging KPIs for First-Time Business Owners

I want to start today with a simple example. If you had to do your daily commute without a dashboard, you'd be able to do it. That's not that complex. You know roughly how fast you're going. It's comfortable. The challenge is, what if you were dropped into a different country? You're driving on the left side of the road, the speed limits are in kilometers, not miles, and I looked it up: the first careless driving offense in Singapore is up to six months in jail. Now you're not feeling as good about not having a dashboard.

To me, that's what it's like to be a first-time business buyer. Even if it's not your first time, if you're in a new industry, you're new to the industry, you're new to operating a small business, and you probably have 90% leverage, or at least I did, which makes me not that smart. The seller of your business is from Singapore. They know their business. They don't need what you will need to run their business.

So today, I'm focused on what makes a good KPI, because left to our own devices, we'll measure everything. What do we actually care about? What should we be measuring as a first-time owner? And then, how do we actually do that measurement in a relatively straightforward way without losing your mind?

One key concept: a useful KPI helps you understand if something's gone wrong before it's too late to do anything. A lot of people focus on vanity KPIs. Revenue, to me, is a vanity KPI. By the time your revenue's moving, it's too late. And whatever you choose as your KPI, you're clarifying priorities to your team. Your team learns what you prioritize by watching what you measure and talk about.

A helpful indicator is the sign that says, "Your GPS is wrong. Turn left." It tells you before the turn. An unhelpful indicator says, "Turn right 500 feet ago." A lot of KPIs people focus on are like that.

Look at a basic P&L. Every small business owner checks their cash in the bank every single day. I do that too. By the time cash has changed in your bank account, it is too late to do anything about it. That's the most trailing of trailing indicators. People then go up the chain and say, okay, revenue or gross profit are leading indicators. I think no. That's turn right 100 feet ago. We're still not early enough in the value chain to actually do anything.

Quick thought experiment: let's work backwards from revenue. I'm a PE guy originally, so we'll do a widget maker. Number of widgets sold times price per widget gets you revenue. Those are two leading KPIs of revenue. Pick number of widgets sold. That's number of orders times widgets per order. Pick number of orders. That's website traffic times conversion rate. Pick website traffic. That goes to paid search and organic search. These are all the leading indicators to the output, which is revenue. If you're starting with revenue, you're already at a set of trailing indicators from what really matters.

Quick question, and I will ask somebody to answer: if you couldn't look at your financial statements for the next three years, what would you track? Can't track EBITDA, gross margin, revenue, or cash.

- Lead gen conversion rate.
- Signed engagements.
- Meetings booked with ICP.

Great. Let's select KPIs. I'll give you examples from my tree company to make it tangible. I think of two types of leading KPIs. The first: is an employee doing a good job? That's an accountability tool. The second: is the business doing okay? That's the planning tool, and that's what you need as a business owner. Accountability tools could be a whole other session. I'm focused on planning tools.

You can map this against your various employees, contractors, or agencies. Lead gen, you're holding your PPC and SEO agency accountable. Your website designer is in charge of conversion rate. Your marketing team is doing pricing and retargeting. You allocate accountability KPIs to different people, but you have to pick for yourself what your planning KPIs are. That's a very different thing.

For us, these are the leading KPIs I care about: number of bids per week (similar to meetings with ICPs), closed sales per week (or conversion rate), and backlog in weeks. It's a project-based business, so every job has to be sold, scheduled, and contracted. Backlog in weeks is a planning tool because it tells me how much room I have to add or pull back capacity. This is trailing of the first two, so I'm not saying you have to just pick the most leading indicator possible.

Question: How did you decide where to stop and not go all the way down to root KPIs?

Number of bids per week starts with website traffic, then conversion from traffic to lead forms, lead forms to scheduled appointments. Everything above bids per week I controlled directly when I set this up. Bids per week is where my team takes over. That's why.

These are accountability KPIs I have for my team: four and five-star Google reviews are a leading KPI of repeat revenue for crew leads. Callbacks or job fixes are leading KPIs of lost clients. These are controllable by our crew leaders. But they're not the right planning KPIs for me. By the time these happen, I can't do much. My planning KPIs aren't controlled by one person. If they were, something else is going on. This is a system-wide concept. As a new owner, you need planning KPIs. The managers need accountability KPIs.

Now, tracking the KPI, importantly, without implementing a fancy vertical SaaS product. I see so many searchers turned early business owners get spun around the axle: "I just need this data flow to connect to there, this API to that, and then I'll start tracking my KPIs." That's where people get stuck.

Examples: This is 2022, the year I bought the business in February. I'm counting my bids per month, things are going great, up and to the right. Then we hit August, and I had no clue what was happening. It turns out people just go on vacation in August, and we're a home service. That's when you're the new driver in Singapore. You have no idea how seasonality shows up. My seller had no tracking of this because he knew it would happen. He didn't freak out. Then it came back when school started. Same thing in November and December for our slow season.

What's important is you start tracking it, and then the next year you have year over year. You can say, "We're doing exactly what we expected in July. That's not our money month. Can we offset the decline in August?" Because you know it, you plan. You throw marketing dollars at August, send texts to repeat clients, send emails. You can't do that in 2023 if you didn't know it from 2022. Starting to track KPIs early matters so you have a data set to compare year on year.

For the first two and a half years, this is what our bid calendar looked like. Each one is an in-person appointment for an arborist to meet with a client at their home. For two and a half years, I counted every week by hand. One, two, three, four... it took 30 seconds. I did that once a week forever, put my finger on the screen, and counted. You end up with an Excel spreadsheet. It's not that hard. You can just make data by doing it. This specific week, March 25-29, I counted 39. That's a hard-coded number. Then you get year-to-date and year-over-year. It's not complex. I have 169 weeks of data. Now we have an actual data flow, but for two and a half years, we just counted once a week and had real data.

For closes: when I bought the business, all our bids were on pen and paper, no digital invoicing. I went into our sent inbox and searched "job scheduled" in quotes. It pulled up all the booking emails our scheduler sent. I counted those. That's how I counted closes for six months. Good enough. Every incremental six months of data as a planning tool is so valuable.

Now I have the fancy software. Some week in 2025: how many bids, how many work orders converted, exact dollar amounts. My operations manager fills out the spreadsheet for me now. Same output. Just easier. We have bids by quarter for all four years into the fifth. This is how you run a small business. When do I hire the next salesperson? When do I cut pricing? When do I push pricing? All started from counting off Google Calendar once a week for two minutes for two and a half years.

Backlog in weeks is more complex. In tree care, the longer you book jobs out, clients get wishy-washy. You can't let backlog go too far. But if it's too tight, your guys run out of work. The key question: how do I know if I have enough work scheduled for the winter? The former owners would just lay off one team for January and February. That works. You don't run out of work if you lay off people. My goal was not to do that. It's bad for the team and you waste training investment.

I started tracking backlog in weeks. The seller had this in the back of his head: "In November, I want to be booked out to January." All these sellers know their businesses so much better than you do. They have that gut sense. I had no idea, so I had to measure it.

I measured capacity hours. Two crews meant 80 hours of weekly capacity. How much is booked, also in hours? Divide. That's backlog in weeks. The challenge: we were on pen and paper, with a paper job schedule. I'd go through the next 12 weeks, count open slots, add up hours. Did this by hand. Spit out a nice answer: 4.8 weeks. Today, we just know our backlog, our pipeline in dollars and hours. But we wouldn't have the comparison to the first two and a half years unless we'd been doing it manually.

My first year, 2022: bought in February with 10-11 weeks of backlog. Fine. Went down a bit. Came back. Then my first true winter as owner, backlog fell to three weeks. That's the worst feeling. You have no clue how it'll stop. You throw everything at the wall on marketing. You can't do lead attribution, so you're throwing random ad dollars. It came back. That's our seasonality. I got lucky, but also lost money on bad advertising. Now I know our actual cycle with no layoffs.

Next year, same thing, but I wasn't stressed. We got down to three weeks but didn't spend on marketing. It came back naturally. Profitability worked out. Without year-over-year data, you'd freak out each year until enough scar tissue. This gets you there without all the scar tissue.

Last winter, we weren't going down as much as expected. Time to add a crew. We added a fourth crew. Now it's even scarier this winter, but we expect it. As long as we stay at two to three weeks through April, where we're at now, it should come back in May.

Every decision in a small business is uncertain and based on poor data. You're trying to get directionally right. This is how you get directionally right on when to add capacity.

A couple thoughts: these planning KPIs will lead you astray because the data isn't great and we picked KPIs that didn't go all the way to the base. Example from 2022: April-May, we had a certain number of bids and jobs, and lost some backlog, normal for end of slow season. In April-May 2023, we had 35% more bids and 26 more closed jobs than the prior year, and our backlog still went down by 0.7 weeks. I went from 4.2 to 3.5, which is scary, versus 10.4 to 9.7. How could that be? There's a conflating variable.

Any guess where your brain would go? Average job size. Our average job size had dropped dramatically. Our sales team stopped talking about the other trees on the property. They became order takers instead of advisors. I missed it, but you don't know to look for something wrong without this in the first place. Then you find a solution: train the sales team on how to walk a full property. KPIs lead you wrong, and they help you figure out why.

Punchlines: Identify true leading KPIs for your business. Differentiate between planning and accountability KPIs. Don't overcomplicate tracking. I made this whole presentation for this point. I've invested in six search deals and talk to those searchers a lot. Overcomplicating tracking is one of the most common things I see. Make adjustments over time. Your KPIs might shift. Don't be too precious. I have no perfectionism in my body. I'd have lost my mind otherwise. A lot of business owners are more perfectionist than me. Don't let perfect be the enemy of good. That will destroy you mentally.

Q: Do you review KPIs with investors or advisors so they push you on blind spots?

For the first couple years, yes. Monthly financial report with monthly KPIs. As the business matured, it went to quarterly then annual. I met with an advisory board quarterly for the first three years. Super helpful. Pulls you out of the day-to-day to get a broader view.

Q: How much buy-in from team members from the start, since you don't want to rock the boat?

The first three years, nobody on the team saw the planning KPIs except me. These are how I manage the business as glorified general manager. Only in the past year, with a leadership team, do others get this weekly. Accountability KPIs went out from the start, though it honestly took me too long, about two years. Part of the problem is I didn't know what to hold tree crews accountable to. Once figured out, you don't want to ruffle feathers too fast. Between performance KPIs and management KPIs, I'm not very good at management KPIs. That's a weakness.

Q: Your stance on linking compensation to accountability KPIs?

When I hired my operations manager 18 months ago, I debated this with an investor. Do I comp her off EBITDA? That's what I care about. I made a jerry-rigged version of EBITDA called operating manager profit. My investor said there are so many levers to get to operating margin profit, it's hard for her to know what to focus on. Isolate the three management KPIs you really want her to focus on.

The trade-off: either I'm a more active manager telling her what to focus on, with comp truly aligned with me, or I'm more hands-off and let her manage KPIs I'm pretty sure trickle to what I want. KPIs can be gamed. I'm still 100% in this business and will be hands-on, so I gave her a comp package based on the bottom line. We meet weekly to make sure she's focusing on the right things, then I let her run.

For crews and sales team, our number one accountability KPI is labor rate: revenue divided by direct labor hours. Crew leads and sales team are comped by company-wide labor rate. Quarterly bonus, based on a range. Above a certain number to get into the bonus, 100% at a higher number. I don't compensate for going higher because in tree work, you end up with safety issues. It's not tied to personal crew or sales performance, it's company-wide, because personalizing creates side issues. That's debatable.

Q: How do you investigate aberrations in the data?

Tearing your hair out and digging. The PE analyst in me really tries to figure it out. But often you go do ride-alongs with sales team, talk to crew leaders: "Why is our labor rate struggling?" We used to run five-person crews because the seller did. Twelve months in, crew leaders came to me and said they didn't know how to use the fifth person effectively. We switched to four-person crews. Some is feedback from the team, some is staring at QuickBooks at 2 a.m.

Q: Example of a KPI you thought would be important that turned out not to be?

Gross profit per hour. I've tracked it weekly forever. I thought if revenue per hour matters, gross profit per hour matters more. But unless I get really good at figuring out exactly what hours are direct vs indirect labor, which is extremely difficult, it's not that meaningful. Too much noise. The juice isn't worth the squeeze.

Q: During due diligence, how much visibility to KPIs the owner kept?

None. None of these existed pre-close. I got a full export of QuickBooks at customer-revenue level. I could do math like, 60-70% of revenue last year was from a client already in the system. You get a sense of repeat revenue. But they had no actual tracking.

Q: Were there conversations with the owner where, even though they weren't tracked KPIs, you extracted insight?

Yes. Ask, "We're sitting here in December. What are you looking at to feel good about next year?" Or, "We're in June. What went well the last six months? What do you need to see for the next six months to go well?" You unhook certain things. The challenge: it's anecdotal. My seller is 100% convinced our clients are waiting for tax refunds, which is why it turns around in late April, early May. I don't think that's right. I think it's weather-based. But it's more or less the same date, so who cares. You can get led astray. Ask: "What are you keeping an eye on? What's the tell for you that something's gone wrong?"

Q: How do you differentiate between leading and lagging indicators?

Almost every indicator has a leading indicator. You could do this ad nauseam. You're picking a point where you feel you have control or it matters. When I worked in PE, I did case study interviews. Classic interview: "You're running a hotel. How do you figure out revenue?" 90% of candidates figured out: room rate times number of rooms. Only 10% would say, "And it's your occupancy rate." That's the key variable. Understanding unit economics tells you your controllables. In a hotel room, you don't need to track number of rooms. It never changes. Track average daily rate and occupancy. There are a million KPIs you could pick going more leading, but somewhere in there you have actual control.

Q: Backlog and bids are specific to tree care. Are there two or three KPIs that transcend industry?

Understanding your unit economics is first principles. Service or product business, it always applies. In a service business, your unit of value is an hour of labor. In a product business, your unit of value is one product unit. The question is: how do you get from one unit sold to profit? Articulate each cost on a per-unit basis. Every business can be broken down to gross margin, with overhead below. Overhead tells you volume needed.

When I say labor rate is our most important productivity metric, it's not really tree-care specific. Revenue divided by direct labor. An accounting firm can do the same. All professional services, all blue-collar services. A product business says, "If we can sell a unit for $100, our unit economics work." I know if our labor rate is north of $130, our unit economics work. Find the line item that gives you enough of the answer. Consistent across industry.

Q: On working capital and excess cash, how do you decide what to do with it?

That's a capital allocation decision. The textbook PE answer: every dollar has a best use case. Your job as owner is to figure out where the dollar is best used. Three options: reinvest, pay down debt, or pull out to your personal balance sheet to invest elsewhere. Whether to take distributions, the ROI is almost impossible to calculate.

What matters more to me: one of the most important things for my business is the odds it will exist 10 years from now. Enterprise value is today's cash flows and the durability of cash flows over time. My job as owner and capital allocator is to ensure durability forever. Two ways: grow cash flow, or lower downside risk. Lower downside by improving revenue quality, lowering debt, investing in brand.

Four years ago, coming out of PE, I'd have given you the first answer. Today, I think about the odds the business still exists in 10 years, and the odds I still want to run it in 10 years. Time in game is a huge part of value. If holding cash on the balance sheet lets me sleep better and run this business three years longer, the incremental value is so in excess of taking that cash out and putting it into more search deals. My answer is way more wishy-washy than it used to be. It's a bad answer, but that's my answer.

Thanks everyone.