5 KPIs That Every CFO, Controller, and Finance Manager Should Know
Metrics, Key Performance Indicators (KPIs), Benchmarks. All of these terms essentially mean the same thing: here is what you should measure and why. Ultimately, for finance department executives and senior management, it’s always about the bottom line. The metrics that matter most to them always involve money – revenue, expense and net income. They get paid to count and analyze the flow of the mighty dollar through their businesses. This sounds glamorous and sexy --- vanity metrics. In reality, however, the modern finance department more closely resembles a factory – one that produces financial reports with these dollar figures as an output at the end of an assembly line – than a giant money counter with dollar bills raining down from the ceiling.
If you take a step back and look at all the labor required to create these financial report outputs from an operations perspective, much more must be measured than just dollars generated by a company to run an effective and efficient finance group. Headcount metrics, work quality metrics, work volume metrics, cycle times and process-related metrics that measure group productivity as a whole all contribute to the bottom line, just like revenue and sales-related figures do. These operational metrics are additional pieces of the puzzle and are often overlooked by management: they appear tricky to measure and improve upon, especially in an environment that is primarily composed of knowledge work, where work products are “intangible widgets,” so to speak.
Let’s discuss a few operations-related finance metrics that are at the top of the list:
Metric 1: Days to Close
What is it? The number of days required to close the books and create finalized financial reports delivered to management at the end of the accounting period.
Why is it important? This metric defines the cycle time of the entire process from a departmental perspective. These closing periods range from one day for a small mom-and-pop finance shop all the way up to twenty-four days for the largest industry-lagging performers. The range is significant, but best-in-class Fortune 500 performers typically close in about five and a half days. Mid-level performers – the average shops – close the books in thirteen days. Set five days as your target if you want to be among the industry leaders.
If you aren’t familiar with the Financial Close process, you can read more on my post about the subject here: What is the Financial Close Process and What Does 'Breaking Bad' Have to Do with It?"
Metric 2: Total Revenue per Finance Employee
What is it? The amount of total revenue earned by the company per finance full-time equivalent employee.
Why is it important? This metric is used to benchmark headcount of a finance shop against comparable companies based on dollars-reconciled size so that managers can estimate how many people they need to process the work based on the volume of dollars coming through. For Fortune 500 businesses, an average leading finance function employee accounts for $19.6 million in revenue while an average lagging (not so good) performer comes in at around $7 million.
Metric 3: Finance Headcount Ratio
What is it? The number of company-wide employees supported by each finance department employee.
Why is it important? Believe it or not, a lot of the world’s biggest businesses have no idea how many people work in any given department. Entire consulting engagements are undertaken just to figure out an organizational structure and who is allocated to each group. Because finance is a non-revenue generating function, you want to make this ratio as high as possible without suffering performance issues. A low, or lagging, number for this KPI indicates that the finance department is overstaffed. Look to combine redundant job roles and improve process efficiency to remedy this. On average, one finance employee supports 55 firm-wide employees.
Metric 4: Financial Report Error Rate
What is it? The percentage of financial reports produced that require post-production correction of errors.
Why is it important? A low error rate obviously means higher quality work by the finance function. Financial reports riddled with errors create rework for financial analysts and reporting managers and therefore increase the expense of the finance function. Increased finance expense reduces net income for the entire business. More importantly, these errors can lead to misinformation and even problems with the SEC if inaccurate statements are posted. A quick screen grab below from OpsDog’s finance benchmarking section shows what leading and lagging Finance Report Error Rates look like:
Metric 5: Reports Produced per Finance Employee
What is it? The number of reports created or managed by an individual finance employee for a given time period.
Why is it important? This is a classic productivity metric at the individual employee level. Tracking employee output is important because, when coupled with quality metrics like the error rate listed above, it helps to identify high- and low-performing employees. Metrics like this applied to an entire department make annual employee reviews 100% objective rather than relying on subjective measures that can make it nearly impossible to compare the performance of similar employees. When employees are being measured using the same type of report card, they tend to perform better because they know that they are competing fairly with peers for the top spot.
In my upcoming posts, I will discuss the methodology of how to frame a benchmarking initiative focused on corporate finance. Past that, I will further discuss different specific organization structures, business processes, KPIs that relate to each, and then dive into best practices that can help improve these operational areas.
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