Top 5 Finance KPIs (Metrics)

Top 5 Finance KPIs (Metrics)

I was asked to write some articles on my top 5 Metric/KPI recommendations for various business functions. Here are my “Top 5 Finance KPIs”.

(Note: I use the terms Metrics and KPIs interchangeably – but prefer to use Metrics these days in an effort to reduce the use of 3 letter acronyms).

If you’re new to Metrics, I recommend taking a quick read of some of my previous articles first:

Many businesses fall into the trap of setting purely financial metrics for their finance team. While figures such as Revenue Growth and Profit Margins should absolutely be tracked on your leadership team dashboard, they are most directly influenced by your sales and operations teams, not the finance team. 

Ask yourself, “What are the finance team’s biggest opportunities to contribute to improved performance of the business?”

Every business model is different and you need to choose the right metrics that drive the performance of your Finance team, but here is a list of 5 generic metrics that are commonly used by my clients, and a brief explanation of each:

1. Days to Close Month-End Financials

This measures the number of working days it takes to close off month-end processes and provide the leadership team with accurate financial statements. Month-end reporting will include Profit and Loss Statement, Balance Sheet and Cash Flow Forecast. Timely, accurate financial statements help the leadership team to have a clear understanding of overall performance so they can more effectively govern the business. 

Improving this metric drives improved finance processes and information capture. 

2. Accounts Receivable Days (aka Debtor Days / Days Sales Outstanding)

This is a measure of the average number of days the company takes to collect revenue after a sale has been made. It is a key financial metric for improving cash flow. As your business grows, the complexity of your customer base can negatively impact collection procedures. For example, larger customers may demand extended payment terms or unique deal terms. A deterioration in the AR Days metric is a lead indicator of cash flow problems ahead and prompts the accounts-collection team to take remedial action.

3. Aged Debt Beyond Terms

This is the dollar value of money owed that has exceeded the agreed payment terms. Reducing this number helps to reduce the risk of bad debt, and helps to improve the Accounts Receivable Days target. 

The metric focuses the finance team on reducing the dollar value that is overdue. Reducing this number can be more engaging and motivating than the more abstract Accounts Receivable Days. 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 AR Days. 

4. Number of Disputed Invoices

Invoices can be disputed for a number of reasons: price discrepancies, deliveries not completed, or services not provided. Identifying and resolving these issues quickly has implications on how quickly we receive payment, and ultimately customer satisfaction and retention. 

We need to quickly understand if a customer’s delayed payment is due to a dispute, work to resolve the issues as soon as possible, and get an updated payment plan commitment from the customer.

5. Actual Expenses vs. Budget Expenses

Throughout the year, the finance team are responsible for reporting actual performance against budget. Tracking and discussing this metric, and drilling down to expense line item level helps to ensure budgets are set as accurately as possible at the beginning of the year and encourages cross-functional communication and cooperation during the year. 

Although the finance team may not be committing and authorising the expenditure, they play an indispensable role in working with other departments to keep them on track and raise the alarm if expenditure in an area is getting out of whack.

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Of course, there are many other Finance Metrics that you could consider, but these five common ones should give you a good start point for discussion.

Regardless of which Metrics you choose to measure, it is vital that your team meets every week to discuss performance.

There is a saying, “You can only manage what you measure, and what gets measured, gets done”.

I disagree with this statement. Just measuring the numbers will not deliver the outcomes you are looking for. I see plenty of companies who measure the right things, but they still don’t get the results they want, because they fail to meet to discuss performance every week, and they fail to hold people accountable for achieving the agreed standards.

You need to run effective meetings. Every week. Without fail. And you need to hold people accountable.

I have my own saying which I think captures it better: “Successful Business Execution is 20% giving people clarity about what needs to be done, and 80% following up to make sure it actually gets done”

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Until next time…
Stephen