Which Underutilized Financial KPI Provides Significant Business Insights?
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Which Underutilized Financial KPI Provides Significant Business Insights?
To uncover the financial KPIs that experts believe are underutilized yet impactful for business decision-making, we’ve gathered insights from a Growth Strategist and a Principal Attorney. While they highlight key metrics like Debtor Days and CLV:CAC, we’ve also included additional answers to provide a well-rounded perspective. From monitoring debtor days for cash flow to examining the debt-to-equity ratio, here are several insightful KPIs to consider.
- Monitor Debtor Days for Cash Flow
- Utilize CLV:CAC for Strategic Insights
- Analyze Customer Retention Cost
- Track Inventory Turnover Ratio
- Assess Net Promoter Score
- Review EBIT for Operational Efficiency
- Examine Debt-to-Equity Ratio
Monitor Debtor Days for Cash Flow
Whilst the two KPIs in any business that I like to track are Gross Margin and EBITDA, alongside monthly actual-against-budget variance analysis, one other metric that I like to closely monitor and manage, and use to drive performance and cash flow, is Debtor Days or Days Sales Outstanding.
It is a very underutilized metric, but if used effectively, it provides significant insights for business decision-making.
It is calculated: Aged Receivables (or Trade Debtors) / Sales x number of days in that period. It can also be calculated on a roll-back basis, which is more accurate. This is done by comparing Aged Receivables to gross sales.
For example: Aged Receivables at May 31 is £1,000,000, and May gross sales are £700,000, and June gross sales are £600,000. Debtor days is 46, which is made up of May sales (£700,000 with 31 days in May) plus 50% of June sales (£300,000 and 50% of 30 days). It is done by taking the most recent month's sales first and adding prior months until the total outstanding is covered.
This metric is underutilized and is valuable because it measures the average number of days that it takes to collect receipts from customers. Clearly, the lower this is, the better. However, it is the change that I believe is just as important, which is why it must be closely and regularly monitored, and how closely it aligns to the credit terms offered by the business.
If it has gone from 40 to 36 to 33, that is moving in the right direction, whilst an increase is not good and indicates it is taking more time to collect cash.
Similarly, if the credit terms are 30 days and average debtor days is 60, it indicates poor credit control and clients not adhering to agreed credit terms. This clearly needs action. Debtor days should closely align with credit terms.
Remember that your price and credit terms are a package deal, and your customers should not just accept the price and ignore your payment terms. However, you must ensure that you chase payments and that all invoices are issued promptly with all relevant details included, including bank details, sitting alongside agreed credit control procedures.
This KPI highlights these issues, and it allows changes to be made quickly to address issues. Credit control should be done daily. Remember, in my view, a sale is not a sale until you collect the cash – make sure you do, as it is your money. Measuring and monitoring debtor days will drive cash inflows and improve liquidity.
Utilize CLV:CAC for Strategic Insights
One of the financial KPIs that is underutilized but provides great insights into business decision-making is the Customer Lifetime Value to Customer Acquisition Cost ratio. Most businesses focus on metrics such as revenue growth or profit margins, but CLV:CAC gives so much more of a differentiated view on the long-term financial health of a company and how relations with customers are managed efficiently. A CLV to CAC ratio of around 3:1 or higher is considered very healthy, and such a value would indicate that growth strategies drive profitability and sustainability. It allows us to understand whether we need to raise acquisition budgets or improve customer retention and monetization. Moreover, using it strategically has allowed us to make more informed decisions about where to invest in marketing. We have been able to see through the metric which channels drive customers with the highest lifetime value, and we have been able to deploy accordingly to maximize the budget. The CLV to CAC ratio induces a holistic perspective of the business in and of itself by putting us into a customer-acquisition strategy and, more generally, the whole trajectory of customers. It becomes not only a matter of attracting customers but also of making sure they will want to stay and grow with us over time. This broadens our strategic perspective. While it does take some more exercise in calculation relative to some traditional metrics, the insights from CLV:CAC have been huge with respect to long-term strategic adjustments in business and overall financial performance.
Analyze Customer Retention Cost
Customer retention cost reveals a company's ability to maintain long-term relationships with their clients. Understanding this cost not only reflects how efficiently a business serves its customers but also impacts overall profitability. Lower retention costs suggest that customers are satisfied and return without heavy marketing expenses.
Conversely, higher costs might indicate issues in service quality or product offerings. By focusing on reducing retention costs, companies can enhance loyalty and drive sustainable growth. Analyze your customer retention costs today to uncover hidden opportunities for improvement.
Track Inventory Turnover Ratio
Inventory turnover ratio highlights how quickly a business can sell and replace its stock. This KPI is crucial for understanding the efficiency of inventory management and ensuring that capital isn't tied up in unsold goods. A high turnover ratio often signifies strong sales and effective stock replenishment, while a low ratio may indicate overstocking or weak sales.
Managing inventory turnover helps businesses optimize stock levels and improve cash flow. Regularly monitor your inventory turnover ratio to better align stock with market demand.
Assess Net Promoter Score
Net promoter score indicates the strength of customer satisfaction and the likelihood of referrals. This score measures how willing customers are to recommend a business to others, reflecting overall happiness with the services or products received. High net promoter scores can lead to organic growth through word of mouth, while low scores may signal dissatisfaction and potential churn.
Focusing on increasing your net promoter score can result in improved customer loyalty and revenue. Assess your net promoter score now to gauge customer sentiment effectively.
Review EBIT for Operational Efficiency
Earnings before interest and taxes (EBIT) shows a company's operational profitability without the influence of financing and tax costs. It provides a clear picture of how well a business is performing based solely on its operations. Monitoring EBIT helps identify trends in operational efficiency and areas where cost management can be improved.
A healthy EBIT indicates strong core business performance, independent of external factors. Review your EBIT regularly to ensure you're maximizing operational efficiency and profitability.
Examine Debt-to-Equity Ratio
Debt-to-equity ratio assesses the health of a company's financing strategy by comparing its total liabilities to shareholders' equity. This ratio is vital for understanding the balance between debt and equity used to finance operations. A high debt-to-equity ratio might suggest over-reliance on borrowed funds, posing higher financial risk, while a lower ratio indicates conservative financing with less leverage.
Keeping an optimal debt-to-equity ratio is essential for long-term financial stability and growth. Examine your debt-to-equity ratio to fine-tune your financing strategy and reduce financial risk.