Factoring Company KPIs: Churn Rate, Gross Profit & Portfolio Yield Explained

**Welcome and Introduction**

Welcome to sounding board everyone where we be where we
bring clarity, confidence and practical insight into the conversations that
matter most to all of your factory businesses. I’m Claudia Montbano. I am the
owner of Verarity Accounting and I do consulting and um general accounting for
manufacturing companies in the space. I’m Becky Gibbs.

I’m an audit partner at Bloomman Baringer. We’re excited to
dig into today’s topic and share some insights from our unique perspectives.
Today’s topic is going to be around KPIs.

**Choosing Three Key KPIs**

Claudia, first question for you. If a factoring company is
only looking at three KPIs monthly, which three would you choose?

Well, I’m just going to choose my personal favorites that I
would like to talk about today. Um, the churn rate. Um, I’m going to talk about
gross profit and I’m going to talk about um income portfolio yield. So, those
are just going to be not that they’re the most important or the least
important, but um I just feel like they’re a good starting place for um a KPI.

**Churn Rate**

So, what is the definition of turn rate?

So in its simplest form, it’s the amount of clients that you
lose on a monthly basis or an annual basis. So obviously clients are what
drives your business. You can’t have a business, you can’t make money without
your clients. So it’s important to know if you’re losing them at a normal rate,
and an accelerated rate, and why. Um because there can be many reasons. There
can be good reasons. There can be reasons that you need to investigate.

So if you’re tracking this and I like to track my KPIs on a
monthly basis and if you do it from the inception of your business, you’ve got
some historical data to go off of as well. So you can kind of see what’s normal
and what’s not. And with KPIs, obviously, you know, that’s important to see
what’s what’s going up, what’s going down in comparison to how it’s been or
what’s expected.

So, a client lost could mean a contract is up and the client
left. It could mean maybe you have a specific account executive where their
client’s leaving from that account executive. Maybe it’s um a customer service
issue. Maybe it’s a pricing issue. So, you can just I think it’s an important
thing to follow and to understand for your business.

Do you define churn or do you look at it in multiple ways
like whether it’s clients lost versus the lost AR versus volume?

Well, if you lose a client, you’re going to lose all the
above. So, you’re going to lose AR unless you’re putting clients on at the same
rate, but uh yeah, I define it as clients lost.

That’s how I look at it.

**Gross Profit**

Okay, that’s true in a nutshell. So Claudia, the second KPI
that you talked about was gross profit. How do you define gross profit?

Um I define gross profit and it’s a pretty basic formula.
Your revenue minus your cost of goods sold. Um and you can also put this into a
percentage that might be a little bit easier to to view over um if you’re
looking at multiple periods. Um it’s easier to see and to kind of gauge an
increase or decrease I feel like if you’ve got in a percentage value versus
just a dollar value.

Um but it’s important because you need to be yielding a
certain amount of gross profit um in order to keep a healthy in order to keep a
healthy bottom line like net profit bottom line. Um, it it can tell you if you
priced your deals right, if you need to maybe take a look at your cost of
capital a little bit more in depth. Um, so it’s a really nice indicator, I
think, just to just to include in your KPI every month.

What are what are typically the expenses you include in cost
of goods sold?

I like obviously we just talked about interest. I also like
to include commissions that you’re paying out and your lockbox expenses. I kind
of keep it simple with those three. A lot of people I think will also include
due diligence, which I don’t, but those are the three top ones that I like to
have in my dark costs.

Yeah. And do you not consider due diligence one just because
you do that no matter what and they you might not gain them as a point?

I do. I do. And usually it’s a subscription like it’s
usually a flat cost. So it’s not something that’s going to be going up and down
with volume. So I I like to keep that just in the overhead section.

And for gross profit, I know as an auditor, what we
typically look for is that that percentage can stay stays pretty similar from
year to year.

Yeah.

A one to two% variance is understandable. You might have
interest rate creeps, things that drop, things like that. But when it starts
going north of that three, four, five, I think that’s like you had mentioned,
you want to start looking at your pricing. or is there some other way you have
to look at how you’re getting your cost of capital because your rates aren’t
covering your spread?

Yeah, I mean sometimes it’s you just have to deal with what
you’ve got, you know, if you’re not in the a position to negotiate, but you got
to figure it out because you can’t have your gross profit taking up all of your
revenues. Like that’s going to be an issue. Yep. Exactly.

**Portfolio Yield**

Then the third KPI you had mentioned was portfolio yield.
And what in layman’s terms does portfolio yield mean?

Yeah. So portfolio yield is going to be your revenue divided
by your net funds employed. So this is going to tell you the return your
business is generating on the money you’ve got out the door. So for every
dollar tied up in client advances, how much return am I producing?

You’ve got $3 million in revenue. You’ve got $20 million in
net funds employed. 3 million divided by 20 million is 15%. So you’re
generating a 15% revenue yield on the money you’ve got out the door. This is
also a really important metric in my opinion. Um and it can and it can vary
based on your holdback. So, if you’ve got a higher reserve hold back, um you
know that you’re going to generate a higher yield uh because you’ve got less
money out the door. But yeah, so that’s another one I like to track pretty
closely and keep my eye on.

Do you track it based on industry or just total portfolio?

Well, that’s a good point because some industries um are
going to yield a higher rate than others. You know, they’re going to maybe be a
little more risky or um you know, in trucking that advance rate is so high. a
trucking client that’s priced uh at, you know, 3% for 30 versus a client that’s
um got maybe a 20% hold back is going to be a very big different uh yield
sometimes. Yeah.

Yeah. That’s a that’s definitely something we as auditors
look at too is does your yield maintain or is it varying in fluctuation? What
are some indicators that if it’s varying what could be happening?

**Why KPI Trends Matter**

Yeah, and I think that’s the fun part of KPIs is it just
helps you to hone in on where to start digging and maybe asking some questions
why things are happening this way. where if you’re just looking at a balance
sheet or a profit loss statement, you know, without actually calculating out
some of these formulas, you might miss something.

And I think that’s the importance of a KPI is it really just
keeps everything in a nice you can see trends and that’s so important, you
know, in decision making.

Yeah, trends is definitely a key point I like with the KPIs
because when you’re just looking at one month, it doesn’t give you a full
picture of how your business is doing. Even just a month over month or year
over year. I like to look at it at a couple of years or look at it for the
whole year by month to see how things are trending for you.

And it helps you then to be able to make changes quicker
versus at the end of the year and you’re like, “Oh no, our yield was
decreasing throughout the year and we didn’t make any changes.” And it
might be very explainable and expected, but you’re on top of it and you know
why things are happening.

So well then we can answer questions that you have,
[laughter] we have or your bank may have or Yeah.

Right.

**Benchmarking and Industry Comparisons**

Um, also compare it to there are some publicly traded
factoring companies where you can if you’re a newer company um you don’t have
that history there to compare to you, you know, you can kind of gauge it off of
some of the data that’s available to you um online or you know if you start
attending the factoring conferences and you start talking to people and you get
an idea of you want to share information, you can share information. That’s
what I like about the thirst certain conferences.

There’s a lot of information sharing.

No, exactly. I don’t know. Does the IFA put out anything for
those kind of metrics or do studies on that that you can see?

I don’t see a whole lot that the IFA does with that. You
know, Becky, maybe we should um we should come up with some information for the
IFA on it.

Yeah, there you go. [laughter]

**Closing Remarks**

So yeah, I think that’s a wrap on on our discussion here.
And yeah, that was a that was a good discussion on the KPIs.

Claudia, thank you for your insight on that. We hope
everyone found our insights helpful and if it sparked any questions about how
today’s topic applies to your company, we are here as a resource. So feel free
to reach out to either of us and thanks for spending your time with us.