Strategic business planning aims to set the overall objectives for your company and designs a plan to achieve them. The fastest and most effective way to initiate strategic business planning is to use Key Performance Indicators (KPIs). KPIs calculate your company’s capacity to assist you in recognizing areas in your operations needing improvement.  

 

KPIs evidently show your company’s financial health, bankability, position in venturing into growth enterprises, its charm to financiers, and its investment value – all you require to perform on strategic plans to achieve your objectives.

 

There are several KPIs for different departments that must be traced, including sales, marketing, accounts receivable, accounts payable, operations, financial management, production, customer services, and others. As there are many indicators, which ones matter when it comes to your company’s strategic planning?

 

The initial plan of action is to execute any required corrective measures that KPIs have made you detect in systems, policies, service protocols, quality processes, and production that jeopardize your strategic business planning viability. Here are accounting tips that show vital KPIs that you should carefully trace, assess, and apply to your strategic business planning process.

 

Current Ratio

 

This is the ratio of your company’s financial assets to its liabilities. This key performance indicator discloses the scale your company can regularly meet its financial obligations in time and maintain the required credit rating to receive financing from working towards strategic growth projects.

 

The adjustments that can be made regarding this KPI to ensure the success of your strategic plans may include decreasing the amount of financial liabilities to bring it to a ratio appealing to potential investors and acceptable to financiers.

 

Your company should have a company ratio of between 1.5 and 3. However, it is not unusual for a company to have periods where the current ratio is less than 1, primarily if the company has invested in accumulating debt or growth. A company with a high current ratio indicates it has lots of cash and assets but fails to invest in growth and innovation.

 

It is calculated by dividing your company’s total assets and liabilities.

 

Working Capital

 

This KPI evaluates your company’s readily accessible cash to fulfill short-term financial commitments. Working capital consists of assets such as cash at hand, accounts receivable, and short term investments that demonstrate your company’s liquidity.

 

A low sum of working capital can indicate a need for corrective measures to fix problems in various financial sectors. For instance, an over-leveraging issue may be replicated in an increased sum of loan payments. Working capital is calculated by subtracting existing financial liabilities from its existing assets.

 

Debt to Equity Ratio

 

This KPI evaluates your company’s profitability. It points out whether you are successful in managing the financing of your company’s growth by utilizing stockholders’ investments. The ratio discloses the sum of debt you have accumulated in your efforts to create a profitable initiative. A high debt ratio shows reliance on accrued debt to finance growth.

 

To attain a debt-to-equity ratio that is suitably aligned with stockholders’ anticipations and financier’s criteria, emphasize firmer financial accountability. For instance, you may need to temporarily stop acquiring loans as a means of funding during subsequent financial periods until the debt ratio reduces.

 

It is calculated by dividing the company’s liabilities by its stockholders’ equity.  

 

Customer Acquisition Cost to Lifetime Value

 

The Customer Acquisition Cost is the total sum of sales and marketing expenses involved in gaining a customer. This KPI measures the effectiveness of your company’s marketing and sales procedures. It gauges your company’s commercial investment value.

 

The lifetime value is the total value your customers are separately bringing to your company averagely; during the total period, you will be in business with them. A CAC/LTV ratio of 2 shows that your company is enjoying 100% profits on its total marketing and sales investment. Therefore, a ratio of 2 or 3 is a good sign of long-term profitability.

 

Corrections to customer services, pricing, operations management, sales, and quality processes can be made to increase this ratio. It is calculated by dividing the total marketing and sales cost for an accounting period by the total amount of customers the company gained during that accounting period.

 

Operating Cash Flow

 

This KPI shows your company’s ability to meet its daily expenses, such as supply deliveries and materials. It shows your company’s performance in generating sufficient money to cover capital investments to facilitate its growth. When you are making decisions regarding new capital investments, you should carefully consider the fraction of your employed capital that is running cash.

 

Knowing the effects of this ratio gives you extra insight into your company’s financial strength. To correct your operating cash flow to support your strategic plans, tighten control on running expenses, and make budget alterations.  

 

The OCF is calculated by determining the total running income by subtracting taxes and not including depreciation. OCF should be changed for any alterations to the total working capital.

 

Return on Equity

 

This KPI shows your company’s wealth in comparison to the net income it is creating for stockholders. This ratio discloses if the net income is sufficient in relation to the total investment stockholders have put into the initiative.  

 

To increase ROE ratio, changes that can be made include; adding revenue channels, pricing, removing channels making low margins, increasing training, and cutting spending. ROE is calculated by dividing your company’s net income by the full stockholders’ equity.  

 

Inventory Turnover

 

This ratio shows the average amount of stock your company sold during an accounting period. Therefore, it shows your company’s ability to make sales and re-stock quickly.

 

To make changes that ensure strategic growth plans based on this KPI are successful, look at order processing issues, causes of sales order cancellation, and production workflow issues. It is calculated by dividing the total sales by the average number of stocks in the same accounting period.

 

Recommendations For Using KPIs in Strategic Business Planning

 

Here are accounting tips Carmel accountant recommends for getting the best out of KPIs.

  • Keep KPIs relevant and linked to specific strategic goals.
  • Integrate KPIs into your strategic planning framework.
  • Apply strict criteria for choosing your KPIs.
  • Do not overload your employees with too many KPIs to track.
  • Use performance dashboards to track KPIs.

 

Savage Accountancy, APC is a tax accountant Carmel committed to providing high-quality tax advisory services that will surpass your expectations. We provide the best business tax planning in Carmel by serving your best interests and acting with integrity.

 

We are the right Carmel business appraiser to ensure your business planning and tax management goes smoothly. If you are looking for a Carmel accountant, contact us today.