(This article was last updated on 14 March 2024.)
CFOs are tasked with the difficult job of managing their company's finances. But it's not just about keeping your employees happy and making sure your month-end reports are accurate; it's also about understanding how to use the data you're collecting to make decisions that will help your business grow.
KPIs are a key part of this process. They can tell you how each department is performing and whether or not they need additional resources or training.
They can also help you identify areas where your company is doing well, so that you can double down on those strengths while working on areas that need improvement.
But what exactly are KPIs, how do they work, and how do they benefit your business from a financial standpoint? To assist you, we've put together an easy-to-follow guide to KPIs for Finance teams in 2024.
What is a KPI in Finance?
A KPI, or Key Performance Indicator, is a metric 'used to gauge a company’s overall long-term performance'. It's a way to keep track of how you're doing against your goals.
What Makes a Good Finance KPI?
Finance KPIs should be SMART: Specific, Measurable, Achievable, Relevant, and Time-Bound.
1. Specific:
KPIs should target specific areas of financial performance to guide and measure success accurately.
Example: If you want to check how well you're managing debt, you might use the "debt-to-equity ratio." This looks at the balance between money borrowed and money invested in the company.
2. Measurable:
Finance KPIs need quantifiable evidence of what's being achieved.
Example: "Operating cash flow" measures the cash your company makes from its regular business activities. It’s like checking your wallet to see how much you’ve made after a day’s work. By setting a target, such as using this cash flow to reduce company debt by 15%, you make the metric actionable and measurable.
3. Achievable:
Your KPI should be realistic within the scope of resources and time.
Example: Cutting down your company's running costs (like electricity or supplies) by 10% in the next three months is a practical goal. It’s challenging but doable with a good plan.
4. Relevant:
Your finance KPIs should be directly aligned with your strategic business goals.
Example: If making more profit is the goal, focusing on "gross profit margin" makes sense. It’s all about earning more than what it costs to make your product or service.
5. Time-Bound:
Finance KPIs should include a specific timeframe for achievement.
Example: Setting a goal to reduce overdue invoices by 10% within 12 months provides a clear, time-specific target. It’s like setting a finish line for a race.
Why Does Picking the Right Finance KPIs Matter?
For finance teams, picking the right KPIs helps everyone know where they're heading and how they're doing. It's about setting clear, practical, and relevant targets with a deadline in sight, making it easier for the team to focus and push in the same direction.
Not every KPI will fit every business. It's all about your company's goals, industry, and what you want to achieve.
For example, if you're running a SaaS business, focusing on ARR, MRR, and churn rate might make more sense. On the other hand, if you're in retail, inventory turnover and gross profit margin could be more relevant. We’ll delve into the specifics of these KPIs later in the article.
KPIs for Finance Departments: What Should You Be Measuring?
The answer to this question depends on the industry and goals of your company.
For example, if you work within the Finance department of an e-commerce company that sells products online, you might want to measure revenue per customer or lifetime value.
If you're working for a manufacturing company, you might want to track inventory levels and order fulfilment time.
KPI Examples for Finance Managers & CFOs
As a Finance Manager, figuring out which KPIs you should watch can feel overwhelming. Especially because every business is unique. Whether you’re in a SaaS startup or a traditional manufacturing firm, the KPIs you need might look quite different.
The goal is to focus on the KPIs that give you the clearest picture of how well your business is doing and where you can improve. Whether you’re eyeing growth, efficiency, customer happiness, or all of the above, the right KPIs can light the way.
With that being said, here’s a look at some essential KPIs for finance managers and CFOs, reminding you to pick the ones that truly resonate with your business’s goals and style.
1. Net Income
Your company's total earnings after deducting all expenses from revenue, providing a clear picture of profitability. If you're keen on seeing the bottom line of your financial health, keep this KPI close.
2. Gross Profit Margin
This tells you how much money you have left from sales after covering the cost of making your products or offering your services. It's a good measure of how efficiently you're using your resources to generate profit.
3. Inventory Turnover Ratio
For businesses that sell physical products, this measures how quickly you sell your inventory. It's essential for managing stock levels and understanding how well your products are moving.
4. Revenue Per Employee
This metric shows how much revenue each employee brings in. It helps understand if the team is working efficiently or if there’s room to boost productivity.
5. Profit Margin
The profit margin KPI reveals how much money the company keeps as profit after covering all its costs. It's a clear indicator of the company’s financial health and how well it’s doing in making money.
6. Sales Orders per Employee
This shows how much revenue each member of your sales team generates. It's a helpful way to gauge the productivity and efficiency of your sales force.
7. On-time Completion Rate of Sales Orders
This KPI measures how reliably you deliver orders on time. It's vital for customer satisfaction and can help you spot issues in your supply chain or production process.
8. Customer Complaints and Warranty Claims
Tracking complaints and claims gives you insight into product or service quality and customer happiness. It's a direct line to understanding what might be going wrong and where you can improve.
9. Market Share Growth
This measures how your company's sales performance stacks up against competitors. Growing market share indicates your strategies are working well in capturing more of the market.
10. Annual Recurring Revenue (ARR) & Monthly Recurring Revenue (MRR)
For subscription-based businesses like SaaS, these KPIs show how much recurring revenue you can expect each month or year. They're crucial for understanding the stability and growth prospects of your revenue.
11. Customer Acquisition Costs (CAC) & CAC Payback Period
CAC measures how much it costs on average to acquire a new customer. The payback period tells you how long it takes to earn back this cost. Both are key for assessing the efficiency of your marketing and sales efforts.
12. Customer Lifetime Value (CLTV)
This is the total amount of money a customer is expected to spend on your products or services over their lifetime. It helps you understand the value of investing in customer relationships.
13. Churn Rate
Especially important for businesses with subscription models, the churn rate shows how many customers you're losing over a certain period. A lower churn rate means better customer retention.
KPI Examples for Finance Team & Staff
Even if you're not a Finance Manager but work within the Finance department, you may still find yourself needing to track useful KPIs across your company.
While a Finance team member often won’t have as many metrics to track as those in a managerial position, they may still need to keep a close eye on a few KPIs.
For example, if you work as an accounts payable assistant, you might be tracking the following KPIs:
1. Average Days to Collect Accounts Receivable
This KPI measures how long it takes, on average, to collect payments from customers. It's crucial for making sure the business has enough cash on hand for day-to-day operations.
2. Accounts Receivable Turnover Ratio
This ratio shows how often the business collects its outstanding payments within a year. It helps assess if the company is good at collecting what it's owed, which is important for maintaining a healthy cash flow.
3. Bad Debt Percentage
The bad debt percentage KPI looks at the percentage of money owed to the company that likely won’t be collected. It's key for understanding the risks the company faces with its current credit and collection policies.
Why These KPIs Matter for Finance Departments
For anyone in the finance department, these KPIs are your toolkit for gauging the business's performance.
They help paint a clear picture of where the company stands financially, guiding decisions that can improve operations, boost profits, and ensure the company has the cash it needs to thrive.
By keeping an eye on these indicators, you’re playing a vital role in steering the company towards success. They allow you and your team to spot issues before they become problems and seize opportunities to drive growth.
So, dive into these KPIs, understand what they're telling you, and use them to make a positive impact on your company's financial health!
What are the Company-Wide Benefits of Measuring KPIs?
KPIs are a great way to measure the success of any organisation, no matter what industry it belongs to.
Companies can use KPIs to:
Spot weaknesses: Identify areas where the business is struggling or underperforming.
Empower employees: Help employees to know if they're doing their jobs well or if they need to adjust their performance.
Analyse trends: Spot trends in sales and revenue that will help executives plan for future growth or decline.
Gain marketing insights: Measure the effectiveness of new marketing initiatives so successful ones can be replicated.
Set clear expectations: Help create a culture of accountability within a company by clearly defining expectations for everyone involved.
Transition seamlessly: Give a company an idea of what's working well so that when there is a change in leadership or management style, there's already a system in place for success.
Follow data-driven strategies: Provide current analytics that arm executives and team members with the necessary data to make better informed decisions.
Key Takeaway: KPIs are key to understanding your business's performance, guiding employees, planning for the future, and making informed decisions. They're about getting a clear view of where you are and where you need to go, ensuring everyone is working towards the same goals.
Measuring KPIs for Your Finance Team? How Expense Management Software Can Help
Despite the emergence of automated solutions that can manage repetitive daily activities and measure KPIs, many businesses still use manual procedures and spreadsheets to keep track of their performance indicators.
Yes, spreadsheets have their place, but it’s like using a classic manual typewriter in this day in age: familiar, but not anywhere near as fast or versatile as modern technology.
There are many benefits to using cloud-based financial management software, like ExpenseIn, to monitor your KPIs and performance metrics:
Saves time: By automating data entry and calculations, it frees up hours that can be redirected towards more strategic tasks.
Boosts accuracy: Automation reduces the chance of human error, ensuring your data is reliable.
Provides real-time insights: Access to current financial data allows for quicker, more informed decision-making.
ExpenseIn is an expense management solution that lets you track, analyse, and report on your company’s expenses.
It allows you to automatically keep on top of your expense related KPIs, meaning Finance departments can spend less time crunching expenses and more time on other important tasks.
Ready to make the switch? Book a demo today and discover how ExpenseIn can revolutionise your finance team's KPI tracking.
