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 Debtors Days or Days Sales Outstanding. It is a very underutilised 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 31 May 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 sales first and adding prior months until the total outstanding is covered. This metric is underutilised 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.
One of the financial KPIs that is underutilized but provided 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.
One financial KPI that is often underutilized but provides significant insights is Customer Lifetime Value (CLV). CLV measures the total revenue a business can expect from a single customer over the duration of their relationship. By focusing on CLV, businesses can identify their most valuable customer segments and tailor their marketing and retention strategies accordingly. For example, by analyzing CLV, we at Soba New Jersey were able to increase our customer retention rates and allocate resources more efficiently. To apply this in your business, start by calculating the CLV for different customer segments and use this data to guide your marketing spend and customer service efforts. This approach helps ensure that you are investing in the right areas to maximize long-term profitability.
One financial KPI that’s often overlooked but has provided valuable insights is how much profit each employee generates for the company. By measuring this, we found that some teams were contributing more to the company's financial success than others. This led us to re-evaluate how we allocated resources and provided additional training where needed. It was eye-opening to see how focusing on this aspect helped us make better decisions about where to invest and how to boost overall productivity. It’s a great reminder that sometimes looking at simple metrics in a new way can uncover powerful insights.
Monitoring the cash conversion cycle (CCC) has provided significant insights for our business decision-making. By focusing on the time it takes to convert inventory into cash flow, we identified inefficiencies in our operations that were impacting liquidity. For instance, we realized our inventory turnover was slower than industry benchmarks, prompting us to streamline supply chain processes. This adjustment not only improved our cash flow but also enhanced overall operational efficiency. Understanding and optimizing the CCC allowed us to better manage working capital and plan for growth more effectively.
One financial KPI I find often underutilized is the Cash Conversion Cycle (CCC). This metric tracks how quickly a company can convert its investments in inventory and other resources into cash flows from sales. By focusing on CCC, businesses can gain valuable insights into their operational efficiency and liquidity management. It helps identify bottlenecks in the supply chain and areas where working capital might be tied up unnecessarily, allowing for more informed decisions on inventory levels and supplier terms.
One financial KPI that I believe is underutilized but has provided significant insights for business decision-making is the Customer Lifetime Value (CLV). CLV measures the total revenue a business can reasonably expect from a single customer account throughout the business relationship. Focusing on CLV allows businesses to make informed decisions about marketing spend, customer retention strategies, and long-term growth planning. In my experience, understanding CLV has been a game-changer for clients. For instance, while working with an e-commerce client, we shifted our focus from short-term sales metrics to CLV. This change in perspective revealed that investing more in customer service and loyalty programs significantly increased repeat purchases and overall profitability. By concentrating on the long-term value of customers, we were able to allocate resources more effectively, ultimately boosting both customer satisfaction and revenue. My advice to businesses is to start tracking CLV alongside traditional KPIs like revenue and profit margins. This metric provides a clearer picture of a customer’s overall value, helping businesses to strategize better on acquisition and retention efforts. Understanding CLV can lead to more sustainable growth by fostering deeper customer relationships and more efficient use of marketing budgets.