If you’ve followed me for any length of time, you’ve likely heard me discuss the 8 key areas of business. I’ve literally written books (the second one will be available for pre-order very soon) on the subject. So, we’ve been exploring these 8 key areas and, more specifically, the KPIs, KRIs, and PIs that can be found in each of them. I’d like to continue this look into my own businesses by examining the planning KPIs.
Follow Along With The Financially Simple Experience!
I often tout the need for business owners to relinquish control of their companies. When you remove yourself from the epicenter of your business, you make it a transferable and saleable commodity. However, planning is the one area that I believe business owners need to hold on to. Planning is the means by which you take the vision for your business from your head to fruition. It allows you to think through the steps that you’re taking to reach your goals.
This is why I didn’t consult one of my team members when researching our planning KPIs. Planning is my baby. It’s the one area that I have total control over, in my businesses. Likewise, it’s the one area that I want to be able to focus all of my attention on, at some point in the near future. Planning is that important to the success of your business. So, how do we measure the results of our planning at Heritage?
Some of the 8 key areas that we’ve covered so far have 20, 30, or even 40 different indicators that they track. That’s not true of planning. When it comes to this area, we track fewer than 10 indicators to measure success. Of these indicators, the most important one to our business is the percentage of goals achieved.
Now, you probably know that I am a big advocate for strategic planning. The way that I teach strategic planning is that you choose three objectives that you want to achieve. From there, you outline nine tactics (three for each objective) that will help you to achieve your objectives. Finally, you must detail twenty-seven action steps (three for each tactic) that will be the means by which you accomplish each of your tactics.
The objective is what you want to accomplish. Tactics describe how you plan to accomplish your objectives. The action steps outline who will carry out the plan and when they should have it completed. So, in my own companies, we might say that we want to bring on three new clients in Q3 of 2021. That’s our objective. Our tactic would be to identify the type of client that we want to bring on. This could be anything from comprehensive personal planning to assets under management. One of the action steps for this could be having a team member source business owners through the chamber of commerce.
Not every company can go through the strategic planning process every 90 days, as we do. Some only have the bandwidth to do it once per year. That’s okay. But this is why one of the most important planning indicators that we have is the percentage of goals achieved. We want to know how well we did with our planning and execution each quarter.
All told, we’re only tracking seven indicators in our planning department. I just outlined one of them, but another big indicator for our business is the number of clients that we have. I have a friend who owns a painting business. Recently, he and I were discussing a big job that he had coming up. He told me that he was going to have to hire around 8 or 9 painters to complete the job on time and that he would terminate them when the job was finished.
I don’t have a business that allows me to do that. I can’t just go out and hire a new planner to help me with the clients and then let them go afterward. When a client engages with us, it’s often on a 1-3 year contract, and our average client partnership goes beyond 8 years. So, I have to have a team trained and in place before the clients come. So, tracking the number of clients that we have helps me to know how many planners I need to employ.
Likewise, we track the average household value. Every client that you and I serve has a “value”. What we track is whether that value is increasing or decreasing. For example, we work with several auto repair shops across the country. In order to assess the average household value, we would look at the car count for each shop, as well as the value of each car they service. If we see a decline or atrophy in either of those numbers, we know there’s something that’s not quite working.
The customer acquisition cost (CAC) is the total of the marketing and sales costs involved in acquiring a customer. This KPI gauges the efficiency of your business’ sales and marketing processes. It measures your business’ commercial investment value. The lifetime value (LTV) is the amount of value your customers are individually bringing to your business, on average, over the total period of time that they continue doing business with your company. An LTV/CAC ratio of 2 indicates that your business is profiting 100% on its total sales and marketing investment. Therefore, a ratio of 2 or 3 is considered a good indicator of likely long-term profitability.
Here’s an easy illustration to further simplify this relationship. If a client generates $1,000 per year and stays with us for 8 years, that’s $8,000 in revenues. However, if I’m spending $20,000 to get that client, then that’s not a viable CAC. On the other hand, if I’m spending $200 in total marketing to gain a client whose LTV is $8,000, then I can look back at my return on capital deployed and decide if I should invest my own money into the company to watch it grow. This is why we track CAC/LTV and why it’s one of our most valuable planning KPIs.
Most business owners have very few assets to invest with. It isn’t until they enter into hyper-accumulation mode (when their business begins to operate without them) that most business owners allow their liquid assets to increase enough to sustain their lifestyles when they sell or transfer their companies. This is why we track assets under management. It tells us what our clients’ savings rates are.
I’ve cited this statistic from the Exit Planning Institute several times before, but the average business owner has 80% of their total net worth tied up in their business. We want to see our business owners build assets outside of their business. At Heritage, we teach our clients to continue to grow their businesses but also “de-risk” themselves by diversifying outside of their business. This gives them something to fall back on when something like COVID-19 hits.
Similarly, we track assets under advisement. I can tell you the average net worth of every one of our clients. We might have a client that has $100,000 in assets that we manage in a Roth IRA but also have a business that’s worth $1MM. If we can get a 10% return on that business, making it more sellable, we can see their net worth increase.
One of the critical success factors—an area that is crucial for continued success—at Heritage falls under planning. I’m referring to the number of referrals per review meeting. We serve hundreds of business owners across the country. The Financially Simple educational portal reaches thousands every week. As we continue to serve and to teach, inevitably, we have business owners who say, “Hey, I was telling my friend about the things you’re helping me with and they need your help.”
There is no greater compliment than to have one of your clients tell their friends and family about your products or services. Likewise, there is no greater action that we can track to tell us how we’re doing as a company, than the number of referrals per review meeting. We love helping others to succeed and when they do, we encourage them to help others to succeed by referring them to us.
So, there you have it, folks! That’s the full list of seven indicators that we track amongst our planning KPIs. As a business owner, planning may be the single greatest tool you have to grow your business. With the right list of planning KPIs, you can measure how well you’re communicating your vision and achieving your goals.
I know life is hard. But life is good. Tracking the results of your planning can be frustrating. But with the right planning KPIs, you can at least, make it financially simple. Let’s go out and make it a great day!
Want to know more about planning and creating trackable, measurable metrics to gauge your company’s success? Schedule a meeting with one of our expert business advisors. The team at Financially Simple has helped hundreds of business owners, across the country, improve and grow their businesses.