How to use the right performance metrics to make business decisions
In part one of this series, I discussed how the limitations of traditional performance metrics might stop your business from reaching its potential.
In part two, I look at the different types of performance metrics you can use to complement traditional KPIs.
Business owners might feel like they’re always putting out fires. But with better insight into their operations and processes, there won’t be any fires for you to fight.
You can do this by complementing traditional financial performance metrics with proactive, indicative, and granular performance metrics.
This will show you how you’re tracking against your goals and what you need to do if you’re off target.
The three main indicative metrics are:
In this article, you’ll discover more about these three metrics and how you can use them to take action across your business.
We’re in the age of the customer, which means key performance indicators (KPIs) should include client metrics.
Often, these metrics are a good indication of revenue performance and cash flow, so it’s important you understand client behaviour.
Take client churn as an example. A high churn rate could signal business contraction – and replacing lost customers costs more than just replacing lost revenue. You also need to factor in marketing costs to attract new customers.
Customer satisfaction surveys are useful but, as a traditional metric, the results come in long after the opportunity to resolve a potential issue has passed.
To identify the clients that are at risk of churn and to turn your focus to client retention, consider these steps:
Identify your top tier clients
Analyse your client revenue, client lifetime value and client profitability. And remember that you’ll get a different value depending on how you group these elements.
Clients that generated the most revenue this month, for example, may not be the clients with the highest lifetime value.
But since they’re regular customers, their loyalty could contribute to factors such as brand awareness and year-on-year growth.
Analyse proactive metrics
What percentage of work has not been invoiced for? What percentage of projects are at risk? How many invoices were rejected?
These behavioural insights are immensely valuable and can inform your response.
The clients that are most likely to churn should get most of your attention. Do you need to prioritise a client project to mitigate risk? Do you need to place an order to keep a client on track?
Share this information with your customer service team and come up with an action plan to change how you service these clients and deliver on the experience you promised them.
Adopt the insights throughout your business
To reduce the risk of churn going forward, you might need to make some changes in your business. Perhaps you need to segment clients into groups in your accounting software, for example, by product or industry.
Data-driven insights show you which clients are at risk of leaving. This allows you and your team to focus on nurturing those relationships.
You’ll also have insight into which team members are serving these clients, what projects are underway, and where clients are in the client lifecycle, so you can respond to potential issues faster.
Poor cash flow management is one of the biggest causes of failure among small to medium-sized businesses.
So, having insights into cash flow is crucial if you want to grow your business.
This means having the ability to predict fluctuations in cash flow in response to shifting dynamics in your business. It means building scenarios around in-progress projects, jobs you still need to start, opportunities that are closing soon, and more.
When you understand how all this impacts your cash flow, you’ll have better visibility into your business’s financial health.
Here are a few steps to help you get those insights:
Measure the right things
A high percentage of credit sales might seem profitable, for example, but the cash hasn’t actually come into your business yet, which could impact free cash flow.
To get a sense of cash coming into your business, look at revenue from in-progress jobs and revenue from jobs that you still need to start.
Know your inventory-to-sales ratio. Are you keeping too much stock on hand relative to sales?
Build cash flow scenarios
How can you improve your accounts receivable with upcoming invoices and payment terms? The more historical and trend data you analyse, the better your predictions will be.
If in-progress jobs are bringing in good revenue, consider prioritising other work. If you have a lot of revenue outstanding, think about renegotiating payment terms with clients.
Encourage your sales team to tie up current opportunities before building the prospect pipeline.
You can also increase cash flow by improving the efficiency ratios that impact your working capital, which gives an overview of your current situation.
Working capital is necessary to help you pay off short-term debt or expenses, but having too much working capital means some of your assets are not being used optimally now or for the long term.
Having a good grasp of your accounts receivable is crucial to monitoring and measuring working capital.
How long do clients take to pay, on average? How quickly do your best clients pay versus your slowest-paying ones? Are your invoices segmented by project type?
When your accounts receivable processes are optimised, it’s easier to improve your working capital using automated billing and invoicing, understanding outstanding payments and how to restructure payment terms, and knowing when to request payment in person.
Follow these steps to avoid working capital issues:
Measure the right things
Decrease your accounts receivable by improving your collection practices, for example. Know how long it takes for an invoice to get paid on average.
And know how long it takes to invoice and process a payment according to your payment terms.
Implement performance goals for the above metrics, based on appropriate values for your business.
For example, you might not want the ‘average days sales outstanding’ to exceed your average payment terms by more than half.
So, if your payment terms are 30 days, and customers pay, on average, within 45 days, this will be within your performance goals.
Identifying trends can also help to prevent issues. For example, you might notice that a certain group of clients are typically late payers.
Or clients become late payers after they order a product that has a more complex onboarding process. There might be internal processes that you can improve to avoid this.
Technology and more efficient processes can improve your accounts receivable, debt collection, and credit management practices. Also consider renegotiating payment terms to optimise your working capital.
Recommended Next Read
How finance teams can say goodbye to manual processes and hello to automation
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