Published on the 27/10/2020 | Written by insightsoftware
What is a Finance Department and Manager Level KPI?…
A finance department Key Performance Indicator (KPI) or metric is a clearly defined quantifiable measure used to evaluate a company’s financial performance. From an external perspective, investors compare the financial KPIs of different companies to determine which is a better investment. Internally, companies use financial metrics to evaluate prospective investments and track internal performance from a financial perspective.
Utilising KPIs within your Finance Department
Financial KPIs are a very broad topic. However, there are two common uses for financial KPIs. The first one is financial reporting, where your company is conveying information to shareholders. The other use is for internal auditing and process improvement.
Due to the number of financial performance indicators, a good approach to take is tiering the metrics. High level indicators should be directly reported to the CFO of a company, while higher resolution indicators should be analysed by the finance department. In this post, we will go over some finance manager KPIs, KRAs and KPIs for a finance department, and how financial reporting software is able to enhance this process.
KPIs for Finance Managers and the CFO
As we mentioned above, finance managers and CFOs need high level KPIs readily available to them so they can make decisions that impact the direction a company will take in the future. At insightsoftware, we came up with what we believe are the most important finance manager KPI examples:
- Quick Ratio – As a CFO or financial manager, you want to quickly check the financial health of your company. This ratio does just that. The quick ratio determines a company’s ability to immediately cover its short-term financial obligations.Quick ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
- Current Ratio – Another financial metric commonly used to assess the health of a company is the current ratio. It is like the quick ratio, but rather than checking if a company can immediately cover obligations, it checks to see if a company can meet its obligations within one year.Current Ratio = Current Assets / Current Liabilities
- Working Capital – This key financial metric is used to measure the amount of money a company has available at their disposal, ready to be put to work. This can help a financial manager decide how aggressive a company should be in pursuing growth opportunities.Working Capital = Current Assets – Current Liabilities
- Accounts Payable Turnover – It is good practice to keep the accounts payable turnover metric readily available. This financial KPI measures the amount of time it takes a company to pay its suppliers and is a strong leading indicator of a company’s financial position. If the ratio starts to decrease, it is a sign of potential cash flow problems.Accounts Payable (AP) Turnover = Total Supply Purchases / ((Beginning AP – Ending AP) / 2)
- Cash Conversion Cycle (CCC) – This is a financial performance indicator that measures how many days it takes a company to convert its goods back to cash. To do this, the metric analyses the number of days to sell inventory, collect receivables, and pay its bills. Ideally, a CFO would like to see this value stay the same, or decrease over time.CCC = Days of Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
- Return on Equity (ROE) – For a finance manager or CFO, shareholders are very important. One of the financial metrics that shareholders care most about is ROE, as it can be used to assess how efficiently shareholder’s equity is being utilised. This metric is often used when comparing two companies in the same industry to see which is a better investment.Return on Equity = Net Income / Average Shareholders’ Equity
- Total Debt-to-Equity Ratio – This financial key performance indicator is used to measure a company’s liabilities against its shareholder’s equity. Finance managers should pay attention to this metric as it identifies how much debt is being used to grow a company. A high ratio can be worrying as an economic downturn could spell disaster.Total-Debt-to-Equity = (Short-Term Debt + Long-Term Debt) / Shareholder’s Equity
- Gross Profit Margin – Gross profit margin is every CFO’s go-to metric. It calculates how much money is left from the revenue after removing the cost of goods sold and expresses it as a percentage of revenue. This shows how profitable your products are.Gross Profit Margin = (Net Sales – Cost of Goods Sold) / Net Sales
- Net Profit Margin – This key financial metric is often referred to as the bottom line. At the end of the day, this is what is most important to any CFO, financial manager, or shareholder: how much money the company is making relative to revenue. Ideally, this number is always positive, and the higher, the better.Net Profit Margin = Net Income / Net Sales
- Earnings Per Share (EPS) – This is one of the most important financial KPIs when it comes to reporting. Almost every analyst or news outlet will be touting a company’s EPS when it comes to announcing quarterly results. As such, it is a crucial financial metric that every CFO must pay attention to.EPS = (Net Income – Preferred Dividends) / (End-of-Period Common Shares Outstanding)
- Compound Average Growth Rate (CAGR) – Your shareholders always want to know how much the company is growing, whether it be revenue, profit, or market share. This financial KPI calculates how much a certain aspect of the business has grown on a compound basis. For a CFO, this is a very important figure to be able to report to shareholders.
- Operating cash flow – The operating cash flow financial metric is one of the most basic metrics used by CFOs. It measures how much income is generated from regular business operations. In a healthy company, this number should be positive, and can be used to help determine how much CAPEX a company can afford.Operating Cash Flow = EBIT + Depreciation – Taxes – Change in Working Capital
- Operating expense – Commonly known as OPEX, this financial performance indicator is used to track how much it costs a business to carry on day-to day-operations. These expenses include rent, inventory costs, insurance, payroll, research and development, etc. This is important to financial managers, as the easiest way to increase profits is by cutting costs.
- EBITDA & EBITDA growth – This might be a bit of a mouthful, but it stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. This financial metric is used as an alternative for to net income, as it gives a more precise measure of corporate earnings by leaving out strategic accounting. EBITDA and EBITDA growth are best tracked using financial reporting software as they are very data intensive.
- Employee count – Every good manager knows how many employees they have at any given time. This financial key performance indicator can also be utilised in conjunction with other KPIs to give insightful data on a per employee basis.
Now that you have had a good look through those sample KPIs for finance managers, we should look at the KPIs for the finance department. But just before we do that, we will review what makes an ideal KPI for the finance team.
What Makes a Good Key Performance Indicator for the Finance Department?
Financial managers and CFOs should be concerning themselves with KPIs and metrics that give a holistic view of how the company is performing. This helps them make decisions on a company-wide basis, and it is up to the finance department to implement these changes on a micro scale. With this in mind, we will discuss what kind of characteristics you should look for when assigning KRAs and KPIs to the finance department.
- High resolution. These metrics need to look at the nitty gritty details of the company. They should scrutinise each process and business segment to see where bottlenecks occur, or to see where performance can be increased.
- Project specific. Any time a company is looking at starting a new project or making an investment, the finance department should be analysing all the possible outcomes from a financial perspective and summarising it in a nice report.
- Efficiency oriented. This might seem like a bit of a catch-all characteristic but hear us out. Efficiency oriented KPIs should be used to track different business segments and help develop processes that make the segments more efficient.
You might have noticed something in common with all those characteristics. All of them are low level, almost what you would call ‘hands on’ KPIs. That is because the finance department is meant to be monitoring, analysing, and looking for ways to implement change.
KPIs for the Finance Department
The finance department of any company often works tirelessly in the background to ensure financial operations run smoothly so other departments can focus on their own objectives. To do this, there are specific key performance indicators for the finance department to keep track of. Here are some examples of those financial key performance indicators:
- Net Present Value (NPV) – This financial metric is used on a project by project basis to determine if an endeavor will be profitable. To do this, reconcile future cashflows over a period of time as a present value. This is a perfect example of a KPI for the finance department.Net Present Value = Today’s Value of Expected Cash Flows – Today’s Value of Invested Cash
- Future Value (FV) – The future value financial KPI is also commonly used by finance departments when evaluating the value of prospective projects or endeavors. To do so, this financial performance indicator uses an assumed rate of return to estimate the value of an investment at a future date.Future Value = Present Value * (1 + Interest Rate)Time
- Reports produced per finance employee – This key performance indicator for the finance department is best used for internal audits. While quantity isn’t necessarily better than quality, this financial metric helps measure the performance of the finance team, and potentially identify areas of improvement. The use of a financial reporting solution can often improve this performance metric.
- Finance report error rate – Every finance team would love this metric to read zero. However, that is not always the case. Like the KPI previously mentioned, this is another area where financial reporting solutions can provide finance departments with the proper tools to get the job done.
- Payback period – This is a good KPI for the finance team. The payback period metric is best used on a project-by-project basis to determine the amount of time it takes an investment to pay for itself. This helps the finance department assess which projects seem the most promising.Payback Period = Initial Capital Cost for Project / Annual Savings or Earnings from Project
- Internal Rate of Return (IRR) – The IRR financial KPI calculates the rate of return required for a net present value of zero. If this IRR is above the company’s required rate of return, the investment should be considered by the finance team. This metric is best used when comparing multiple investment opportunities and deciding which is the best, with a higher IRR being more attractive.
- Return on investment (ROI) – It would take way too much time for a CFO or finance manager to review the ROI of every single investment a company made. As such, this falls onto the finance department to keep track of. This task can easily be automated using a financial KPI dashboard. Keeping this data safe and easily accessible on a dashboard helps with comparing past investments to estimate the performance of future investments.Return on Investment = (Current Value of Investment – Cost of Investment) / Cost of Investment
- Total debt-to-asset ratio – As the name implies, this financial KPI measures the total amount of debt a company has and compares it to the company’s assets. This is a ratio that is better kept on the lower side. If the ratio is too high, a company may have difficulties acquiring future loans, as it shows that they have a higher chance of defaulting on their obligations. At the same time, all companies should make use of at least a little bit of debt to help fund expansion.Total-Debt-to-Asset = (Short-Term Debt + Long-Term Debt) / Total Assets
- Interest coverage ratio – When you borrow money from anyone, the minimum amount you must pay is the interest. Is your company in a good position to do that? This KPI indicator for the finance department measures a company’s ability to cover its interest expense with its earnings before interest and taxes (EBIT).Interest Coverage = EBIT / Interest Expense
- Time to conduct budget and planning process – This is one of the top financial KPIs for a finance department. Everyone dreads the budget and planning process. That is why there is a finance metric to measure the amount of time it takes. However, just because there is a metric that tracks time, it doesn’t mean you can slack on quality.
- Time to close – When it comes to the end of the quarter, there never seems to be enough time to close. Everyone is always in a panic, sending out emails to make sure all the expenses get submitted. Being able to close quickly and efficiently is the sign of a company that functions well—or one that uses good financial reporting software.
The finance department has a wide range of objectives that they must meet, with a variety of KPIs that they use to help them reach these objective. However, some of these tasks can easily be streamlined and even automated using high-quality financial reporting software solutions.
Streamline your KPI reporting with Financial Reporting Software
At insightsoftware, we eat, sleep, and breathe financial reporting. It is what we are passionate about. As such, we want to make the reporting process as easy as possible for our clients through the use of KPI dashboards. Here are some of the benefits to using a financial reporting solution:
- Automated data collection. A KPI dashboard is a very powerful data collection tool. Our software is designed to be compatible with your existing ERP, so data extraction is as easy as one-two-three.
- Data consolidation. Since your data is automatically extracted and collected for you, it is now conveniently all in one place. Gone are the days of emailing spreadsheets or passing a thumb drive to your neighbor.
- Prebuilt KPI templates. Our software is out of the box ready. All the KPIs you could possibly think of are ready to go.
- Generate reports instantly. When you couple prebuilt templates with automatic data collection, what do you get? Instant reports. Your finance department doesn’t have to stress about compiling reports for the CFO anymore. This will greatly reduce your time to close.