Key Performance Indicators, or KPIs, help determine the condition and sustainability of your current business model. Think of Financial KPIs as your business’ health checkup. Regularly reviewing them will help you spot potential problems before they become serious, allowing you to manage proactively. More specifically, KPIs for CFOs and finance managers help you determine which aspects of your business are underperforming, be they products, departments or something else, and address them before the loss to your business in revenue is substantial.
All Financial KPIs have a common goal: keeping your business fine-tuned for financial success. However, how they go about this can vary dramatically. KPIs can and should track accuracy, speed, and efficiency in all departments, whether they deal with customers, manufacturing, billing, etc. Of course, this is only half the battle. Business leaders must also learn how to read KPIs effectively. In short, it does a manager no good to see sales cold call numbers if he or she doesn’t understand the impact that those numbers have on the overall business.
If you’re a finance manager, getting a full view of your company’s financial landscape is particularly important for increasing your competitive advantage. Finances provide some of the most quantifiable KPIs, making them easier to read and act on. Use financial KPIs to track the processing and reporting of transactions, billing, collections, and more. Then, use the insight you gain from these financial management performance indicators to roll-out changes that address any weaknesses. The more insight and efficiency you bring to this process, the bigger your competitive advantage. If you’re eager to assess your business’s financial health, consider starting with the following twenty essential KPIs for finance directors.
1. Working Capital KPI
Immediately available cash is known as working capital. The Working Capital KPI, calculated by subtracting current liabilities from current assets, includes assets such as on-hand cash, short-term investments, and accounts receivable and liabilities such as loans, accounts payable, and accrued expenses. It creates a picture of your business’s financial health by evaluating available assets that meet short-term financial liabilities. If you were to only choose a sample KPI for your finance manager to use, this one would be easy calculate and be immediately meaningful.
2. Operating Cash Flow KPI
The Operating Cash Flow KPI is another important way to monitor the financial health of your business. In analyzing this financial KPI, it’s crucial to compare it to the total capital employed. This analysis helps you find out if the operational aspect of your business is producing enough cash to sustain the capital investments that you are putting into your business. The operating cash flow to total capital employed ratio analysis allows you to dive a little bit deeper into the financial health of your business to see beyond just your profits, making it an ideal KPI for finance directors.
3. Current Ratio KPI
It’s no mystery that your company needs to meet its financial obligations on time to maintain the positive credit rating that is so crucial for growth and expansion. The Current Ratio KPI weights your assets, such as accounts receivable, against current liabilities, including accounts payable, to help you understand the solvency of your business.
4. Payroll Headcount Ratio KPI
How many of your employees are engaged in payroll processing? The Payroll Headcount Ratio displays the number of employees your company supports per dedicated full-time payroll employee. Obviously, the bigger your company, the bigger your payroll department. However, if you have one employee in payroll processing for every three employees in other parts of the business, you may have a problem with payroll efficiency. More than just a financial management performance indicator, this KPI helps you evaluate whether your human resources in this area are being used to their full advantage and informs future staffing decisions.
5. Return on Equity KPI
Return on Equity (ROE) is a financial KPI that measures your organization’s net income against each unit of shareholder equity (or net worth). ROE tells you if your net income is enough for a company of your size by comparing it to the overall wealth of your business. Basically, it doesn’t matter what you’re worth right now (net worth) if you aren’t generating enough net income, because the latter will determine how much you’ll likely be worth in the future. Therefore, the return on equity ratio not only provides a measure of your organization’s profitability, but also its efficiency. A high or improving ROE demonstrates to your shareholders that you’re optimizing their investments to grow your business.
6. Quick Ratio/Acid Test KPI
The Quick Ratio KPI measures the ability of your organization to use highly liquid assets to immediately satisfy all financial obligations or current liabilities. It can determine your ability to meet short-term financial obligations by measuring both your company’s wealth and financial flexibility. It’s considered a more conservative assessment of your fiscal health than the current ratio because it excludes inventories from your assets. This KPI gets its nickname from the nitric acid tests used for detecting gold. Similar to those tests, it’s considered a quick and easy trick to assess the vitality and wealth of a company. If you’re just getting started with KPIs, this sample KPI for finance managers can give you a quick and easy glimpse of your business’s overall health.
7. Debt to Equity Ratio KPI
The debt to equity ratio measures how your organization is funding its growth and how effectively you are using shareholder investments. Calculated by taking your company’s total liabilities against shareholder equity (net worth), it’s the other side of the coin to the REO KPI mentioned in number five. Only instead of telling your shareholders how profitable you are, it’s telling them how much debt you’ve accrued in trying to become profitable. A high debt-to-equity ratio is evidence of an organization fueling growth by accumulating debt. This financial KPI keeps you accountable.
8. Accounts Payable Turnover KPI
Accounts payable turnover shows the rate at which your company pays off their suppliers. This ratio is calculated by taking total costs of sale during a specified period, costs incurred by your company when supplying goods or services, against average accounts payable during the same period. This ratio is most informative when taken over several periods and compared. A falling accounts payable turnover KPI could mean that the amount of time it takes your company to pay off suppliers is increasing and action should be taken.
9. Accounts Receivable Turnover KPI
If the accounts payable turnover KPI shows you the rate at which your company is paying its dues, then the accounts receivable turnover KPI shows you the rate at which your company is collecting what’s due to it. Calculate this KPI by taking your total earnings through sales in a given time period against your average accounts receivable in the same time period. This KPI for finance directors can alert you to outstanding payments and help you maximize the efficiency of your payment collections.
10. Inventory Turnover KPI
Obviously, to meet demand, companies must keep inventory flowing in and out seamlessly. Thus, it can sometimes seem like you’re never fully selling off your inventory because you always have more coming in. The inventory turnover KPI helps you see how much of your average inventory you’ve effectively sold off in a given time period regardless of what your storage rooms may look like. This KPI is calculated by dividing sales within a given time period over average inventory in the same time period. It can help you determine the strength or weakness of your sales. Just one data sample of this KPI can tell you quite a bit.
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11. Net Profit Margin KPI
The Net Profit Margin KPI calculates your business’s effectiveness at generating profit on each dollar of revenue made. This financial management performance indicator is calculated by dividing the net profit of your company within a certain timeframe by your company’s total revenue in the same timeframe. This net profit considers not only costs of sale, but also other more nuanced expenses, like administration. This financial KPI is an excellent snapshot of the profitability of your business, and it is useful for making both long-term and immediate financial decisions.
12. Gross Profit Margin KPI
The gross profit margin is like the net profit margin. However, it only factors in the costs of sale when calculating the gross profit. The gross profit for a certain timeframe is then divided by the revenue for that same timeframe. The gross profit margin is easier to calculate than the net profit margin, but it’s less accurate. Still, it can be a great snapshot of data for finance managers and directors.
13. Finance Error Report KPI
The Finance Error Report is the tattletale of financial KPIs, calling out finance reports that require clarification or contain obvious errors. This helps build confidence in the validity of your company’s reporting. It also indicates a need for improvement, be it in software, employee training or other aspects of financial report generation.
14. Payment Error Rate KPI
The Payment Error Rate is a percentage of incoming or outgoing payments that were not completed due to a processing error. This could mean no purchase order was referenced, no approval was given, documentation is missing, etc.
15. Budget Variance KPI
How realistic are your budget projections? The budget variance KPI compares projected budget totals to actual operating budget totals. This financial KPI can help businesses more effectively predict budget needs by calculating and analyzing the differences between their projections and actual data.
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16. Line Items in Budget KPI
This KPI gives you the total number of line Items in your budget and illustrates its relative complexity and depth.
17. Budget Creation Cycle Time KPI
While taking time to plan your annual budget is important, it is also important to remember that time spent on budget creation is also money spent on budget creation. The Budget Creating Cycle Time KPI includes the number of days needed to research, produce and publish the firm’s budget. It provides an important benchmark for year-to-year improvement. Of all the KPIs for finance directors, this one may be one of the hardest to calculate, but it’s value is without question.
18. Expense Management KPI
Employee expenses can make up a significant chunk of your overall expenses. It benefits you to look closely at how these expenses are managed. The percentages of travel and expense vouchers submitted by employees that contain errors – such as insufficient documentation, wrong charge codes, or no receipts – are tracked through Expense Management KPI. This financial management performance indicator is a particularly helpful KPI for finance directors in that it measures processes that can easily be modified.
19. Internal Audit Cycle Time KPI
Management and stakeholders can view the amount of time required to perform a full internal audit on Internal Audit Cycle Time reports.
20. Customer Satisfaction KPI
CFOs often consider budget and time targets as benchmarks for successful project delivery. While those KPIs are important, the ultimate test is customer satisfaction. The Net Promoter Score is a simple and effective measurement of how well you are serving your clientele. This score is calculated from responses on a scale of 1-10 given to a single question: How likely is it that you would recommend our company/product/service to a friend or colleague? More than just a financial KPI, this widely applicable measure is informative for many different departments.
What You Want To Avoid
There is no specific KPI that you need to steer clear from. While some KPIs are more informative than others, all Financial KPIs provide insights that can prove beneficial. What you really want to avoid is KPI misuse. In other words, if you do not calculate a KPI correctly or interpret the information in the wrong way, you’ll do your business more harm than good.
KPI failures can happen for a variety of reasons. However, they are most noticeably the result of human error or poor planning; overworked or undertrained employees are significantly more likely to make mathematical errors. Customized KPIs that have not been thoroughly vetted for their value to the business can distract from true KPIs and send a business down the wrong path. Finally, KPIs can also be misused when too much emphasis is placed on the result, the magic KPI number, and not enough attention is paid to how those numbers are made and what business strategies would have the most impact on improving them.
How CompuData Can Help You Track And Manage Financial KPIs
Major business decisions can have significant and longstanding impacts on your company’s future, which is why the accuracy and completeness of your data used for calculating financial KPIs is so critical. CompuData’s ERP solutions, like the highly-rated Intacct accounting service software, are specially designed to help businesses manage their financial needs. This includes end-to-end tracking and managing of data needed for the essential financial KPIs discussed in this post.
Contact CompuData to learn more about ERP solutions that can make tracking and reporting of KPIs for CFOs and finance managers simpler and more accurate.