Gone are the days when finance activities involved only punching numbers and reporting on historical data.
But unfortunately finance teams appear overly reliant on outdated KPIs.
Michael Schrage, a research fellow at the MIT Sloan School of Management’s Initiative on the Digital Economy has argued: “A fundamental challenge to CFOs is legacy KPIs from 30 years ago. The idea that the amount of data we have, and the quality of algorithmic tools that we have in 2022, remotely compares to what we had in 1992 is ridiculous.”
Schrage says “smart CFOs” understand their position is evolving and gradually incorporating aspects of the chief operating officer role. “It’s just not our financial capital; it’s our human capital, as well.”
That’s why a new vision for finance KPIs needs to be realized.
Here are 5 powerful changes in perspective to change outdated finance KPIs.
1. Business finance partners combine historical data and forward-looking insights.
This compares favorably to an old perspective of Finance KPIs focused solely on historical data and reporting.
True, finance professionals track KPIs by reporting on historical performance. However, a further step involves comparing past performances with business plans and identifying variances.
A new perspective to measuring KPIs requires financial experts to create models that factor in internal and external factors and assumptions to forecast business performance and KPIs for short-term and long-term periods.
For example, businesses can analyze new investment ventures with extensive financial modeling and highlight KPIs such as net present value (NPV), internal rate of return (IRR), and other cost-benefit measures.
2. Adopting a company-wide approach to goal-setting.
This contrasts with the old Perspective of Top to Bottom management approach.
This can be replaced with a more innovative model where executive management creates the business vision, but operational teams actualize them. A strictly top-to-bottom goal-setting approach may sideline operational teams. A more strategic and tactical approach to setting KPIs involves liaising with various departments, such as sales, marketing, commercial, and operational, to communicate and determine realistic company goals and objectives.
A collaborative approach ensures that important stakeholders are on board with measurable finance KPIs and work jointly to achieve or surpass them efficiently.
For example, when setting sales KPIs, such as customer conversion rate (CCR), Customer Lifetime Value (CLV), sales managers should align overall company goals with individual targets.
3. Deploying next gen reporting tools and technology
The deployment on new reporting tools enables finance KPIs to be realized providing broader financial reporting, in stark contrast to outdated technology and Enterprise Reporting Systems (ERPs).
In the new world, financial reports need to be more visual and dynamic while clearly presenting insights. Business finance professionals can now use next -generation reporting software to conduct planning and scenario analysis and what-ifs simulations for business forecasts and reporting.
Modern finance tools allow for data integration, making it possible for reporting systems to create better data visualization. KPIs can be calculated using data analysis tools and presented in various formats with data visualization software.
Examples of data visualization tools that finance professionals can utilize to report results include tables, graphs, charts, and dashboards.
Effective visualization tools allow financial experts to create better reports on finance KPIs, such as gross profit, contribution margin, operating profit, inventory turnover, receivables days, and return on assets (ROA).
4. Streamlined performance indicators
Adopting streamlined performance indicators prevents the analysis paralysis of the past, or use of KPIs that do not align with overall organizational goals.
This may involve a balanced scorecard approach. A balanced scorecard evaluation shifts away from solely financial performance and captures important KPIs on innovation, process improvements, efficiency, and customer satisfaction. For instance, Prudential Financial has been undergoing an enterprise-wide transformation since 2019. CFO Ken Tanji told Fortune how he approaches KPIs. “As we go through transformation, our focus has been on improving the customer experience. “Establishing clear KPIs is critical to track our progress. And that includes analyzing customer experience metrics.”
Organizations need to know how customer experience and retention impact sales, revenue, and profitability. KPIs that measure churn rate and customer satisfaction are as important as those that measure profitability.
For example, a software as a service (SAAS) business needs balanced scorecard KPIs that calculate the churn rate of customers. Executives need to understand what percentage of customers end their subscriptions and identify possible causes and solutions. Discussing using Net Retention as a KPI, CJ Gustafson CFO at PartsTech who has previously led FP&A at rocketship SaaS startups, says: “A net retention is a vital KPI involving “How much does a customer grow after you acquire them?” He says a net retention of 130% essentially tells you that you could go on vacation for a year and still grow at 30% year on year. And so I say that kind of half in jest because you do need to take care of your existing customers and make them successful, but still, when you can keep customers around and expand them through either more licenses, more usage, or more products, that’s going to free up so many resources for you to invest in other parts of the business for growth.”
5. Clean data to provide a foundation for financial analysis
Poor data governance also belongs in the past. Accessibility to clean data provides a good foundation for financial analyses, which yield actionable insights and recommendations.
Measuring KPIs can go wrong when finance teams find it difficult to access data. Manual data manipulation is prone to errors and accuracies. Data quality is also crucial for calculating KPIs. Organizations need efficient processes to capture and transform large data.
Many businesses are adopting high-end business reporting tools that help finance professionals clean and transform data for reporting and analysis.
A good KPI that measures efficient processes will calculate the percentage of data errors and inconsistency. This KPI allows senior management to identify areas for process improvement.
When finance KPIs go wrong, this can lead to organizational costs such as decreased sales, loss of customers, inaccurate analyses, poor insights and recommendations, and operational inefficiencies. It is important that finance professionals shift from the old ways of doing doings to more efficient methods of measuring and reporting on key performance indicators.
Join a free 60-minute webinar that delves deeper into KPIs Every Financial Controller & FP&A Should Master, taking place on October 19th, 2022, 12pm, EST, with Paul Barnhurst, CEO & Founder – The FP&A Guy (and host of FP&A Today)
Discover
- Which finance KPIs make the most sense to track and why
- Which finance KPIs make the most sense to track and why
- How the right KPIs can help you create a data-informed strategy
- How the right KPIs can help you create a data-informed strategy
- The “math” behind the metrics
- The “math” behind the metrics
- The necessary groundwork to create a financial dashboard
- The necessary groundwork to create a financial dashboard
Register here, and even if you cannot make it, you will receive the recording.