Using Data Points to Quantifiably Drive Financial Performance - Part 1

Written By Justine Lemanowicz

Key performance indicators are measurable and quantifiable metrics for evaluating how a company is performing.  A few of the basic KPIs companies use to track performance are revenue growth, gross profit, net income and EBITDA as a percentage of sales. These KPIs provide insights into a company's financial health and they are essential to ensure that the focus is on top-line growth and increased profitability.

A few other common KPIs companies may use include DSO (days sales outstanding), DPO (days payable outstanding), inventory turnover,  current ratio and debt-to equity ratio to name just a few. These KPIs provide valuable insights into receivables management, liquidity, inventory efficiency, and financial leverage. Effectively managing these ratios is critical for optimizing cash flow and identifying areas for improvement.

 During periods of revenue decline and the resulting strain on profitability, a strategic and comprehensive approach is required. When companies are meeting their growth and profitability goals, it's common to have a more hands-off approach; however, when growth stalls or profits decline, a deeper examination is imperative.

Understanding Revenue Growth Drivers

To assess revenue growth, examine key revenue growth drivers comparing current results with the previous year.  Consider using the KPIs below which provide valuable insights into the success of your growth.

  • Customer Retention (repeat customers vs. lost business).

  • Revenue Rollover by Client (increase vs. decrease).

  • Revenue from New Clients.

  • Number of New Clients.

  • Average Revenue by Client (by lines of business and collectively).

  • Average Transaction.

  • Average Price per Item and/or Average Price by Service Item per Unit.

  • Revenue from New Lines of Business (year-over-year growth if applicable).

Deciphering Underlying Issues

Now that you are armed with the data, let's delve into potential issues that may be impacting your revenue growth.

  • Retention. Explore factors such as customer satisfaction, competitive differentiation or changes in the market such as new technology or products. Implement CSAT surveys and seek client feedback to understand and address issues promptly. When a key client leaves, make sure you know why you lost their business, as well as the name of the competitor who is now servicing the account. If you lost a key account, make sure you are replacing the lost revenue with new business.

  • Rollover. Address the dynamics of client relationships and competitor offerings. Understand if competitors are providing superior products or additional value, prompting your client to consider a switch. Know your competitors.

  • New Business. Evaluate the effectiveness of your sales team and identify areas of improvement. Understand if they are operating at full capacity with the number of accounts they are managing. Take a look at sales compensation plans to determine if you have the right incentives incorporated to drive new business.

  • Average Transaction. Scrutinize pricing strategies, competitive situations and the need for periodic price adjustments. Assess product and service offerings against industry advancements.

  • New Lines of Business. Determine if you need to restructure your income statement to segregate different lines of business, allowing for a more detailed analysis of revenue and costs.

  • Revenue Recognition. Although this is not a metric, in certain industries and especially the professional services industry, align revenue recognition practices with ASC 606 to avoid misleading results. If you bill your clients on a monthly retainer, prepaid blocks of time or on annual contracts, and you haven't accounted for or defined revenue recognition rules, you should notice top-line peaks and valleys, and therefore inflating or deflating net profit.

In conclusion, a proactive approach to analyzing these KPIs and addressing underlying issues is vital for sustaining and optimizing revenue growth. Regular reviews and adjustments to strategies based on these insights will position your company for long-term success.

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Justine Lemanowicz