CFOs have many varied responsibilities. Specifically, the chief financial officer must:
Several new trends have popped up in recent years in the CFO boardroom, and one of these trends is using enhanced reporting techniques. One of the primary techniques is using key performance indicators (KPIs) to provide CFOs with metrics they can use to keep tabs on business performance.
In this article, we’ll discuss the various KPIs that many CFOs use to track financial and operational health, how they are calculated, and why they are important.
The CFO role is responsible for overseeing the financial activities of a company. They are the first to know when the company’s performance is lagging or when adjustments need to be made to accommodate future expenses.
Additional responsibilities include:
The CFO also oversees process improvements to the finance and accounting departments, such as shortening the length of the monthly close process or deciding when a new ERP system may be appropriate.
It’s best to use a dashboard-style of reporting for your KPIs. A dashboard houses all KPIs in one place for easy review and insights. You can have several dashboards related to different functions of the business.
For example, you may have one dashboard for accounts payable and receivable, another for financial performance, and a third for general operations. The CFO can customize how they would like to view and present the KPIs.
Keep in mind that in most cases, a single KPI won’t be viewed on its own. Instead, it will be tracked over time for comparison purposes. This provides the CFO with information on how the financials and business operations have changed.
It also allows them to benchmark when best practices have been achieved and when the least favorable performance occurred.
A CFO can use various KPIs to track business performance, although not all of them will be applicable to every business. When selecting CFO KPIs for reporting and metric tracking, leaders should be mindful of the insight each KPI provides and how the measurement can be used to benefit the business.
Below are the most common CFO KPIs explained, how they are calculated, and the business insights they provide.
The working capital KPI is one of the easiest metrics to track. It consists of simply subtracting all current liabilities from current assets. Current liabilities are defined as accounts payable and any accrued liabilities. Current assets include cash, accounts receivable, and short-term investments.
If the results of this KPI are positive, the company has enough on-hand assets to pay for upcoming liabilities. If it is negative, there may be a problem with meeting debt obligations.
Another useful way to track whether your company is able to meet its debt obligations is the current ratio KPI. The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year.
To calculate the current ratio, divide current assets by current liabilities. A ratio greater than 1 indicates that the business is financially solvent and able to meet its debts, while a ratio less than 1 indicates that the company may have financial difficulty.
The accounts payable turnover shows how often suppliers are paid. To calculate it, you simply divide net credit purchases (or cost of goods sold) by the average accounts payable. The average accounts payable is the sum of accounts payable at the beginning and end of an accounting period divided by 2.
A higher accounts payable turnover is more favorable and indicates that the company is meeting its debt quickly. To obtain the most accurate insights, this KPI should be tracked and compared over time.
The accounts receivable turnover is used to measure the efficiency of the accounts receivable and sales operations. It provides insight as to how often accounts receivable are “turned over” or collected during a particular period.
To measure the accounts receivable turnover, divide net credit sales by the average accounts receivable balance during the period. The higher the accounts receivable turnover, the more often the business is collecting on its outstanding invoices to customers.
If your company keeps inventory on hand, it may prove beneficial to track how often the inventory is sold and replaced during a given period. Tracking this metric gives the CFO information to make decisions on the manufacturing and purchasing of new inventory.
To calculate the inventory turnover, divide the cost of goods sold by the average inventory value during an accounting period. Typically, a higher inventory turnover is what CFOs want to see. A lower inventory turnover may indicate excess inventory on hand or slow-moving sales.
As part of the normal budgeting process, a company sets out a budget for its finances for a certain period, typically a year. The budget may be updated each quarter with new or unexpected expenditures. The budget variance KPI tracks the variances from KPI to actual performance in aggregate.
To find the budget variance KPI, just calculate the differences between the budget and the actual performance over a specific period. The goal is to have a low amount of total variance. If actuals consistently vary significantly from the budget over each accounting period, there may be an issue in the budgeting process that needs to be fixed.
While these are just a handful of the most important KPIs that are useful to CFOs, there are thousands of additional KPIs that can provide insight into business performance.
It’s important for CFOs to have KPI reporting procedures in place so that they are able to make quick adjustments to standard operating procedures (SOPs) of certain areas of the business as soon as problems begin to appear.
Making quick adjustments can enhance business performance and success, which is the universal goal of all CFOs. The success of a CFO is defined by their ability to make strategic decisions, and reviewing KPIs can help them to make informed, efficient decisions.
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