Top 10 metrics for a Finance Team
And how to approach measuring them
Introduction
This article aims to give some ideas of KPIs that you should, if you haven’t already, implement into your finance team's dashboard. However, we know the needs vary from one team to another. Therefore, before giving you our Top 10 KPIs, we want to provide you with a few guidelines to define the metrics that matter the most to your company. When defining these metrics, keep in mind:
- Who will be viewing the dashboard? For example, if financial analysts use the dashboard, you could put more complex ratios than if other employees from non-financial departments use it.
- What are the goals and current state of the business? The needs for KPI will heavily depend on the size of your business and, thus, on the size of your finance team. At the beginning of your business, we recommend focusing mainly on solvability KPIs. Then, once your team grows a bit bigger, we recommend focusing on profitability KPIs. Finally, once you are profitable, we recommend that you include efficiency KPIs within your dashboards.
- How to avoid metrics overload? Putting too many metrics on one dashboard can easily confuse your users. It is of the utmost importance to communicate with the team you are building the dashboard for to build the most effective tool.
When it comes to measuring the performance of a Finance team, our top 10 go-to metrics are the following:
Quick Ratio
Current Ratio
Working Capital
Revenue and Expense trend
Gross Margin
Operating Margin
Net Profit Margin
Inventory Turnover
Account Payable Turnover
Account Receivable Turnover
1. Quick ratio
What is it?
The quick ratio is an indicator of a company's short-term liquidity. It indicates the ability of a company to meet its short-term obligation with its most liquid assets.
Why is it important?
This ratio is essential for any CFO or Financial Manager as it allows to rapidly check a company's financial health. In short, the ratio is the answer to the following interrogation: "Is my company able to cover its short-term obligations?".
How to measure it?
Theoretically, the quick ratio can go from 0 to plus infinity. On the one hand, the greater the Quick ratio is, the better it is. On the other hand, it is bad to have a quick ratio that is well below 1.
What does it look like?
On your dashboard, your ratio should be displayed as a number. You might want us color rules to quickly identify alarming or good situations. For example, the number could be displayed in red if it is below the industry average and in green if equal to or above the industry average.
2. Current ratio
What is it?
The current ratio determines the ability to cover its short-term liability within one year. As you can see, the current ratio is relatively similar to the quick ratio. The main difference between these two KPIs is the time horizon. On the one hand, the quick ratio looks at the solvability in the very short term. On the other hand, the current ratio looks at solvability on a longer-term: 1 year (this is still considered as a short time horizon).
Why is it important?
It tells investors and other stakeholders how a company can maximize current assets on its balance sheet to satisfy its current liabilities. A current ratio equal to or slightly above the industry average is considered good. A current ratio below the industry average might indicate a higher risk of default. Analysts often use both ratios to understand the short-term solvability of a company.
How to measure it?
Example:
Company A has 30,000 $ of current assets and 50,000 $ of current liabilities. Company A’s current ratio is therefore 0.6.
What does it look like?
Like the quick ratio, the current ratio should be displayed as a number on your dashboard. You might want us color rules to quickly identify alarming or good situations. For example, the number could be displayed in red if it is below the industry average and in green if equal to or above the industry average.
3. Working Capital
What is it?
The working capital is the difference between a company's current assets and current liabilities, such as accounts payable and debts.
Why is it important?
This is a crucial KPI for your finance department as it measures your company’s liquidity and short-term financial health. A positive Working Capital indicates that a company can fund its current operations and invest in future activities and growth. Nonetheless, a very high Working Capital isn't always a good thing as the company might have too much inventory or might invest enough cash.
How to measure it?
Company C current working capital is 10,000$ (current asset: 50,000$ & current liabilities: 40,000$). However, Company C's CFO believes that the 10,000$ of Working Capital is not enough and puts the company at risk. Therefore he decides to keep more cash in reserve and deliberately delays trade payables. Thus, the new current asset position is 80,000$, and the Working Capital is now 40,000$.
What does it look like?
The Working Capital should be displayed as a number on your dashboard. You might want to use color-coding rules to identify risky and safe Working Capital positions.
4. Revenue and expense trend
What is it?
This KPI is vital as it enables you to quickly see if you were profitable during a period of time or not. Moreover, you might be able to identify trends and patterns in the evolution of revenue and expense. Finally, the forecast provided will help you plan future investments and projects (will I have enough money for this project).
Why is it important?
The computation of revenue and expenses is pretty straightforward. The real challenge is to be able to break down the KPI according to a third variable (product, salesperson). This challenge requires having a well-structured and organized data source.
How to measure it?
The computation of revenue and expenses is pretty straightforward. The real challenge is to be able to break down the KPI according to a third variable (product, salesperson). This challenge requires having a well-structured and organized data source.
What does it look like?
The KPI will appear as a line chart on your dashboard. The X-axis will represent the time dimension; the Y-axis will represent the value of expenses and revenues. The users should be able to choose the time granularity (day, week, month) and the forecast length. Finally, users should be able to break down the KPI by a third variable.
5. Gross margin
What is it?
This KPI is defined as the Net sales less the Cost of Goods Sold (COGS). The gross margin represents the money available for the company after subtracting all the costs needed to produce the goods or services.
Why is it important?
Your finance team needs to track the evolution of this KPI. This KPI is used to measure how their production costs relate to their revenues. For example, if a company's gross margin is falling, you might want to find a cheaper supplier or cut other non-essential expenses.
How to measure it?
Example:
Company A’s current Net Sales are 1,000,000 $ and COGS 900,000 $. Thus, Company A's Gross Margin is 100,000 $. Nonetheless, the R&D team has found a new production technique that would reduce the COGS to 800,000$. With this new production technique, the Gross Margin would increase to 200,000 $.
What does it look like?
The KPI will appear as a line chart on your dashboard. The X-axis will represent the time dimension; the Y-axis will represent Gross Margin. The users should be able to choose the time granularity (day, week, month) and the forecast length. Finally, users should be able to break down the KPI by a third variable.
6.Operating margin
What is it?
The operating margin indicates the profit that is made for each dollar of sales after paying the production costs but before paying interests or taxes. The operating margin is computed by dividing the operating income by the net sales. In general, the higher the Operating Margin is, the better it is because it indicates that the company is efficient in turning sales into profits.
Why is it important?
It is important to track your operating margin across time. As a CFO, you should ensure that your operating margin is getting greater over time as it indicates that your business is becoming more efficient. As previously explained, your operating margin can be improved through better measures such as management controls, more efficient use of resources, and improved pricing. Finally, the operating margin also indicates if a company is generating income from its core operations or from other channels like investing.
How to measure it?
Example:
Company A has 1,000,000 $ of revenue, 300,000 $ of COGS and 200,000 $ of administrative expenses. Company’s A Operating Margin will be (1,000,000 – (300,000 + 200,000))/1,000,000 = 50%. This means that for 1$ of sales Company A is able to reinvest 0.5$ in its business.
What does it look like?
The KPI will appear as a line chart on your dashboard. The X-axis will represent the time dimension; the Y-axis will represent Operating Margin. The users should be able to choose the time granularity (day, week, month) and the forecast length. Finally, users should be able to break down the KPI by a third variable.
7. Net Profit Margin
What is it?
The net profit measure how much profit is generated as a percentage of revenue. The net profit margin illustrates how much of each dollar in revenue collected by a company translates into profit.
Why is it important?
First, you may wonder how the operating margin and the net profit margin differ. The main difference is that the Net Profit margin doesn't only remove the COGS from the Net Sales but also the value of interests, taxes, and operating expenses. Similar to the Operating profit Margin, your net profit margins should increase over time as it indicates that your business is becoming more profitable.
How to measure it?
Example:
Company A has 1,000,000 $ of revenue, 300,000 $ of COGS and 200,000 $ of administrative expenses, 10,000$ of interest, and 100,000 $ of taxes. Company’s A Operating Margin will be (1,000,000 – (300,000 + 200,000+ 10,000+ 100,000))/1,000,000 = 39%. This means that for 1$ of sales Company A is able to reinvest 0.39$ in its business.
What does it look like?
The KPI will appear as a line chart on your dashboard. The X-axis will represent the time dimension; the Y-axis will represent Net Revenue Margin. The users should be able to choose the time granularity (day, week, month) and the forecast length. Finally, users should be able to break down the KPI by a third variable.
8. Inventory Turnover
What is it?
The inventory turnover shows how many times a company has sold and replaced its inventory over a period of time. Thanks to this KPI, a company can know how long it takes to sell the entire inventory.
Why is it important?
On the one hand, a small turnover indicates weak sales and possibly excess inventory. On the other hand, a great ratio implies either strong sales or insufficient inventory. Having many items in your inventory is not a good thing as it induce cost to your business. Therefore, the speed at which a company can sell inventory is a critical measure of business performance.
Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing, and purchasing new inventory.
How to measure it?
Example:
Company A has a Cost of goods sold of 250,000 $ the average inventory is 25,000 $. Thus Company A's inventory turnover is 10. In other words, within one year, company A tends to turn over its inventory ten times. Moreover, the inventory has to be replaced every 36.5 days (365/10).
What does it look like?
The KPI will appear as two numbers on your dashboard. First, you will display the inventory turnover, and then you will display the corresponding number of days needed to sell your inventory. You might want us color rules to easily identify alarming or good situations. For example, the number could be displayed in red if it is below the industry average and in green if equal to or above the industry average.
9. Account payable turnover
What is it?
Account payables are short-term debt that your company owes to its suppliers and creditors. The account payable turnover shows how your company is efficient at paying its account payable. Overall, the account payable turnover is a ratio that shows how many times a company payoff its accounts payable over a defined period of time.
Why is it important?
A CFO should always watch this KPI as both investors and creditors carefully monitor this ratio. On the one hand, investors will use this ratio to determine if the company can meet its short-term obligation. On the other hand, creditors will check the ratio if you want to extend a line of credit for your company.
How to measure it?
Example:
Company A Total Supplier purchase is $100,000,000. Company A average account payable is $40,000,000. Therefore, Company A Account Payable Turnover is 2.5. This means that Company A paid off its account payable 2.5 times within the year (if the beginning and ending date represent 1 year).
What does it look like?
This KPI could appear as a single number. Like other numbers KPI you could use color rules according to the industry average. Additionally, you could add a histogram showing the distribution of account payables. For example, 40% of the account payable are 1-30 days account payable, 30% are 31-60 days, and the remaining 30% are 61+ days account payable.
10. Account receivable turnover
What is it?
Account receivable is money due to a company for the good or service the company delivered. The account receivable turnover shows how your company is efficient at collecting the money owed by its customers. Overall, the account payable turnover is a ratio that shows how many times a company collects its accounts receivable over a defined period of time.
Why is it important?
A CFO should always keep an eye on this KPI because it indicates how quickly you collect your payments. A high ratio may indicate that corporate collection practices are efficient with quality customers who pay their debts quickly. A low ratio could result from inefficient collection processes, inadequate credit policies, or customers who are not financially viable or creditworthy.
How to measure it?
Example:
Company A Net Credit Sales are $800,000. Company A average account receivable is $68,000. Therefore, Company A Account Receivable Turnover is 11.76. This means that Company A got its account receivable paid 11.76 times within the year (if the beginning and ending date represent 1 year).
What does it look like?
This KPI could appear as a single number. Like other numbers KPIs, you could use color rules according to the industry average. Additionally, you could add a histogram showing the distribution of accounts receivable. For example, 10% are 1-30 days account receivable, 20% are 31-60 days, and the remaining 70% are 61+ days account receivable.
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