How's your business doing? Is it growing like you'd hoped, making the profits you expected and delighting the customers you serve? For a business owner to answer questions like these confidently and accurately when stakeholders ask, measuring the appropriate finance key performance indicators (KPIs) are essential.
KPIs allow you to check the financial health of your business, identify opportunities to improve, and track progress toward strategic goals and objectives. When it comes to how to evaluate the financial performance of a company, you need to have the right measurements in place.
This brings us to another question: are you measuring the right finance KPIs? How do you know? We're breaking it all down here in this post: why financial KPIs are important, what they look like and how to choose the right ones for your unique business objectives.
Focusing on the Most Important Financial KPIs
While accounting teams report on all kinds of data (revenue, profit, debt, margins and cashflow), it can begin to feel like reporting is all you have time for. At some point, especially with a limited staff, financial leaders have to focus only on the KPIs that really matter to the business.
What a company chooses to measure varies widely, depending on everything from the industry they're in, what products or services they offer and how they deliver it to the end user. So, the most important KPIs will vary from business to business based on these, and other, questions: are you selling a product or service? What are the costs involved in operations? How often are you comparing each metric to the past? A media company's most significant metrics likely mean very little to an equipment manufacturer. What both — and every company — has in common is that it's time consuming to measure it all, and oftentimes, finance leaders must make a choice in which KPIs to focus on, and which ones to leave behind. Here's why choosing the right KPIs can make a big impact.
Why Choosing the Right Finance KPIs Matters
Today's ERPs let organizations configure extensive, customized KPI dashboards. You can measure almost anything, which leaves a lot of finance leaders feeling like they ought to measure everything. But when it comes to contextualizing financial performance within your overall business strategy, you must focus your attention on what will be most impactful. Here's why:
1. You'll Spot Potential Problems Earlier and Easier
When you measure the right accounting KPIs you increase the chance of finding and flagging potential challenges, snags and expensive rework that would have flown under the radar in a blind approach. More importantly, you'll have insight into what contributes to the problem so you can reduce the time between knowing it exists and making sure it doesn't.
For instance, a higher-than-usual DSO (days sales outstanding) metric in accounts receivable raises a red flag indicating a struggle for strong cash flow and point to a need for strategic intervention. That's an intervention you may not have known to make if you were only tracking the amount of money coming and not the amount of time required to get it.
2. Focusing Helps Identify Patterns You Should Know About
The thing about the accounting function is that it tends to be the one department that has the most insight into every other. Marketing, sales, IT and HR all have operating expenses that depend on accurate bookkeeping and a strong operating cash flow.
Measuring the right finance KPIs over time means that patterns will eventually come to the surface: inventory turnover rates that cause a fulfillment bottleneck; a dip in profits revenue during the sales cycle; or a certain type of investment that contributes most to a company's return on assets. Finance leaders that know how to use financial key performance indicators to your advantage often start with patterns like these to set strategic goals.
3. The Right KPIs Track Progress Toward Strategic Goals
Speaking of which, when it comes to progress visibility, there's nothing quite like a well-thought-out approach to finance KPIs for knowing where you, your team and your organization stand. When it comes to how to incorporate KPIs in finance and accounting teams, progress-tracking is a common use case. Regularly measuring accounting KPIs like on-time critical path will give you an idea of whether you're on track to meet the annual goal you set for close quality.
4. You can Make Goal and Strategy Adjustments with Confidence
At some point, every finance leader will need to secure buy-in from stakeholders to enact change that benefits the financial performance they're charged with stewarding. Knowing how to use financial key performance indicators to your benefit helps you make the case for operational change confidently and adjust your strategy accordingly.
Having numbers on hand that show why adjustments are necessary, how they're working and the impact they might have on everything from debt-to-equity ratio and working capital to customer satisfaction and employee retention makes it less likely that you'll have to jump through flaming hoops to enact change. It also means you can spend less time wondering if you're making the right decision and free yourself from analysis paralysis. If your adjustment requires further refinement, you'll know — relatively quickly, in many cases.
5. KPI's Drive Process Efficiency and Optimization
If you're an optimization-minded business leader, finance and accounting KPIs can function as a key to unlocking process efficiency and improvement. There's a KPI measurement for evaluating the efficiency of practically everything in the accounting function.
Staying aware of changes related to time-to-close, issue management, on time reconciliations and journal entry quality (to name a very scant few) means you'll know what improvements to focus on and plan a more effective approach. You may find you'll need to hire more resources, implement universal process documentation or update legacy tech — choosing the right finance KPIs ensures you know where to look.
Still looking for a good start of which KPIs to keep and which to dump? Read more from Paul Barnhurst, The FP&A Guy and watch the recorded webinar right here.
A Good Example of Finance KPIs in Action
So, how does all of this look in practice? To understand that, it's useful to look to successful examples of finance KPI tracking. You're likely familiar with Salesforce CRM, a software company that managed to thrive during the pandemic when they purchased chat platform Slack.
On their Q1 2023 earnings call, they had a lot of good news to share with investors, including an 18 percent year-over-year sales growth increase a 20 percent increase in operating margins heading into 2023. Executives on the call credited these successes to incremental changes made based on what they found when they measured efficiency KPIs.
Read more about what they measured and how they used what they found in the call transcript posted on fool.com.
Dive Deeper into Finance KPIs & Improve Your Accounting Process
Using finance KPIs to monitor performance, measure progress and make the decisions that benefit your organization's bottom line is just the beginning. Once you're equipped to take a data-driven approach to finance and accounting strategy, you'll need to hit the ground running with the resources that make implementing it all. You know why finance KPIs are important to your business — where will you go from here?
Personiv can work with you to provide a virtual accounting solution that's tailored to your company's unique needs and challenges. We unlock efficiency so you can focus on making an impact.
Take the next steps:
Watch the recorded webinar: KPIs Every Financial Controller & FP&A Should Master, led by Paul Barnhurst, and presented in partnership with Beebole
Learn how a virtual accounting solution from Personiv decreased cash posting times for a major North American premiere provider in logistics with our case study: Outsourced Accounting Efficiency In The Logistics Industry
Start measuring relevant KPIs for maximum impact when you revisit your business critical core competencies with our Finance & Accounting Decision Matrix
Contact us to talk to one of our process improvement experts