A look into key performance indicators for financial teams that will contribute to the entire companies success.
We have previously blogged about defining KPIs and about the benefits of having the right KPIs. Now, I am taking a deeper dive into specific functional areas of your business to look at how to identify strong KPIs, and what my recommended Top 5 are for each area. For this first post, we’ll examine finances.
When identifying KPIs, always start with the end in mind. Understand that their purpose is to focus your team on asking the right questions to ensure that they are continually moving the numbers in the right direction.
Many businesses fall into the trap of setting purely financial metrics for their finance team. But we need to be clear that while figures such as Revenue Growth and Gross Profit % should be reported, they are most directly affected by your sales and operations teams (not finance). The finance team doesn’t have the best ability to influence these numbers - tracking them isn’t going to make the feel like winners.
We want to ask, “what is the finance function’s biggest opportunity to contribute to improved performance of the business?”. With this in mind, let’s look at our top 5 finance team KPIs:
1) Days to Close Month-End
Measuring the number of working days it takes to close off month-end processes and provide management with accurate financial statements can have an enormous impact for the contribution the finance team can make to business performance. Providing accurate month end accounts to the management teams enables them to make timely decisions with a clear understanding of how the business is performing. Focusing on this ensures the team is always asking good questions:
“How can we refine our processes?”
“What information do we need from the rest of the business to enable us to close earlier?”
“How can we help them provide this information more easily and quickly?”
Month end reporting will include P&L, Balance Sheet and Cash Flow Forecast. In larger organisations days to produce cash forecasts and days to close accounts payable and receivable will be individual level KPIs
Contributing to business performance in this way can lead to highly engaged finance teams who are delivering high value to the business.
2) Accounts Receivable Days (Debtor Days / Days Sales Outstanding)
This is the key financial measure for controlling cash flow. As your business grows, the complexity of your customer base can impact collection procedures. Larger customers may be offered extended terms, and there is a higher likelihood of unique deals. Trends in debtor days are a strong indicator that there may be cash flow trouble ahead. Tracking this enables you to act quickly and prompt the finance team to take action.
3) Aged Debt Beyond Terms
Monitoring the days receivables beyond terms is a leading indicator that we are reducing the risk of bad debt and are on track to deliver the Debtor Days target. The power in this metric is that it focuses on reducing the dollar value that is most meaningful to those performing the receivables role.
This figure can be much more engaging and motivating than the possibly abstract Debtor Days, leading to higher employee satisfaction knowing that their contribution is meaningful. It also has the advantage that we are able to obtain our current position daily rather than waiting until month end, which is more usual with Debtor Days. This is a strong leading indicator we can review and take action on every day ensuring we are more likely to hit our lagging debtor days number each month.
4) Number of Outstanding Disputed Invoices
This is a meaningful metric for both accounts receivable and payable team. Invoices can be disputed for a number of reasons: prices, queries, deliveries not completed, or services not provided. This can have implications for your customer satisfaction rates, and for becoming a preferred supplier.
Identifying and resolving queries and issues earlier can lead to a far more efficient and satisfactory resolution to the problem. We all know older disputes can be harder to resolve because the original reasons become forgotten, positions become entrenched, and we’ve got easier tasks to complete. Rip the plaster off, resolve the problem and save everybody a lot of heartache.
I have also seen businesses have success with tracking the age of the oldest outstanding disputed invoice, which focuses us on the same resolution processes.
It is important to define this metric in a way that Accounts Payable has control over rather than including invoices which are not paid purely for cash management reasons.
5) Actual Expenses % Versus Budget
The finance team have a strong input into preparing accurate and realistic annual budgets. They have responsibility for working through high-level business goals and ensuring that individual department plans are aligned to them.
Throughout the year, the finance team are responsible for reporting the actual performance against these budgets. Though the finance team may not be committing and authorising the expenditure they play an indispensable role in working with other departments to help them keep on track.
This KPI ensures all efforts are made for budgets to be accurate and realistic and encourages cross-functional communication and co-operation during the year. This form of collaborative KPI keeps people on the same page and rowing in the same direction which can have a huge impact on business success.
Making these KPIs visible using a business management platform such as RESULTS.com brings the numbers to life and ensures that you continually discuss ways of hitting the targets and prioritising our time. Regular meetings through daily huddles as well as weekly team meetings where the spotlight is shone on each of our KPIs ensures people are always focussed on where their numbers are and keeps them prepared to answer key questions such as “what is the number one thing you can commit to do to move this number forward each week?”. Learn more about how this laser focus increases the likelihood of hitting your targets and keeping your best people by downloading our Integrated Meetings e-book here.
What KPIs are meaningful to your finance team?
Which KPIs have driven improved performance from your finance team?