CFO KPIs & Metrics for Success

Published on June 4, 2024
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With the economy recovering from a pandemic, lockdowns, runaway inflation, and more — making smart financial decisions is critical for any business, leaving little room for major missteps. Chief financial officers (CFOs) make these decisions while safeguarding an organization’s profitability, financial health, and sustainable growth.

CFOs continuously work to accelerate cash flow, optimize process efficiencies, and simplify compliance. But how can they be sure that these new measures — or existing efforts, for that matter — are successful? In this article, we’ll explore how financial key performance indicators (KPIs) provide CFOs with real-world data to track performance, which metrics are crucial to monitor, and how payment automation is a solution to improve performance quickly.

What are CFO KPIs or CFO metrics? 

A CFO KPI refers to metrics related to the performance of a company’s financials — and, by extension, the performance of its CFO. Typically, these figures are collected into regular reports or surfaced through a CFO-specific dashboard that tracks operations in real time. By leveraging these insights, your financial staff and key decision-makers can identify issues affecting cash flow, profitability, efficiency, or overall risk. These reports and dashboards can also provide insight into the improvements — or lack thereof — resulting from new processes, services, or technologies.

Moreover, by sharing these metrics with others besides your financial team, you can more easily flag larger, company-wide challenges or identify emerging trends to capitalize on.

As a CFO, your challenges are complex, but finding the right support doesn’t have to be. Check out how Invoiced empowers CFOs to achieve financial excellence.

KPIs and metrics every CFO should track to optimize efficiency 

With so many metrics available, it can be difficult to determine which KPIs you should be feeding into your CFO dashboard or performance reports. What you choose to focus on will depend on the structure and nature of your business. For example, a family-owned company likely wouldn’t be concerned with earnings per share. Nor would a firm that requires payment on delivery need to monitor days sales outstanding.

As such, here are some examples of the most commonly used CFO KPIs to help you determine which ones are right for your organization:

Revenue and profit 

These KPIs reveal the trends in a company’s revenue and the profit generated from that revenue.

1. Compound average growth rate (CAGR)

Generally measured quarterly or annually, your CAGR offers a long-term view of your company’s growth beyond comparing closing numbers for each period. It allows you to track compound growth over multiple months or years. Here’s how to calculate it: 

CAGR = ((Ending Balance) / (Beginning Balance))^(1 / Number of Years Where Growth Occurred) – 1

2. Gross profit margin

This KPI highlights your organization’s profitability by comparing the selling price of your goods or services to the cost of producing them. You want this number to be as high as possible. If your gross profit margin approaches zero or becomes negative, address the issue immediately. Note that this figure excludes marketing, sales, and other administrative costs. 

Gross Profit Margin = (Revenue – Cost of Goods Sold) ÷ Revenue

3. Earnings per share (EPS)

Important to investors, your EPS allows for easy comparison of your business’s performance against competitors or companies in completely different industries. This metric indicates how much money is earned per individual share of your business.

EPS = (Net Income – Preferred Dividends) ÷ End of Period Common Shares Outstanding

4. Earnings before interest, tax, depreciation, and amortization (EBITDA)

EBITDA allows you to track your company’s overall profitability, focusing on the success of your operating performance and cash flow. Rather than simply observing your net profit, this metric delivers a more nuanced view that adds back certain expenses—interest, taxes, depreciation, amortization—to better reflect the cash profit generated by your operations.

EBITDA = Net Profit + Interest + Tax + Depreciation + Amortization

or

EBITDA = Operating Income + Depreciation + Amortization

5. Return on equity

Critical for investors, owners, and other interested parties, this KPI documents how efficient your business is at converting initial investment money into profit. CFOs can also use this figure to compare their business’s performance against organizations in the same industry or against the industry as a whole.

Return on Equity = Net Income ÷ Shareholder Equity Value

6. Revenue growth

Want to know how much you’ve increased your revenue over a given period? Check your revenue growth. A positive figure for this aptly-named metric means that your business is likely in a healthy place and capturing more revenue. At the same time, a negative number suggests that your company’s success — and health — may be on a downswing.

Revenue Growth = ((Final Revenue – Initial Revenue) ÷ Initial Revenue) x 100

7. Budget variance

Budget variance reflects the gap between your anticipated budgets and actual financials regarding revenue, expenses, margin, net income, etc. Since predicting the future entirely is impossible, budget variances are inevitable. However, as a CFO, minimizing these variances is a key objective.

Budget Variance = (Actual Revenue – Budgeted Revenue) ÷ Budgeted Revenue

Operational 

These KPIs gauge the efficiency of the company’s operations, focusing on how effectively it converts operating activities into cash.

1. Accounts payable turnover ratio

The accounts payable (A/P) turnover ratio shows how quickly your business pays invoices from suppliers and vendors. If this ratio decreases over time, it might indicate that you are facing cash flow challenges. On the other hand, a rapidly increasing ratio may suggest underutilized credit.

A/P Turnover Ratio = Total Supplier Credit Purchases ÷ Average Accounts Payable

2. Accounts receivable turnover ratio

How quickly do your customers pay you back for purchases made on credit? To gauge this, a CFO should monitor the accounts receivable (A/R) turnover ratio, which tracks the average time required to close out these outstanding debts. While too high of a ratio could indicate a need to relax the credit terms you have in place for buyers, a low ratio suggests improving collections oversight and dunning efforts.

A/R Turnover Ratio = Total Credit Sales ÷ Average Accounts Receivable

4. Cash conversion cycle

Useful in cash flow analysis and inventory management, this KPI identifies the time needed to convert your produced goods back into cash. Typically, you’ll want to keep your cash conversion cycle as low as possible, meaning you’re quickly generating revenue while keeping inventory levels low.

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding

5. Operating cash flow

Operating cash flow tracks the cash generated by your day-to-day operations. A CFO commonly leverages this data to make decisions about capital expenditures (CAPEX) and secure external financing for such expenses.

Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital

Financial efficiency 

These key performance indicators gauge the efficiency with which a company utilizes investors’ capital, encompassing cash.

1. Burn multiple

Typically used to track startups’ performance, the burn multiple metric measures a company’s ability to generate new revenue against how quickly it is spending—or burning through—its cash. A multiple of 2x is considered reasonable, but most CFOs target one under 1x.

Burn Multiple = Net Cash Burned ÷ Net New Annual Recurring Revenue

2. Burn rate

Your burn rate identifies the speed at which your business is depleting its cash reserves in a loss-generating scenario. This metric is commonly used by CFOs, investors, and venture capitalists to track the efficiency of newly founded businesses that are not yet profitable. It is expressed either as a gross burn rate (which focuses on the total amount of money spent on expenses) or a net burn rate (which focuses on the amount of money lost each month).

Gross Burn Rate = Cash ÷ Monthly Operating Expenses

Or

Net Burn Rate = Cash ÷ Monthly Operating Losses

3. Cash runway

Use this metric to determine how long your business can continue operating without additional cash investments. It informs CFOs whether a new round of funding or financial loan is necessary to keep the business running.

Cash Runway = Current Cash Balance ÷ Burn Rate

4. Days payable outstanding (DPO)

The Days Payable Outstanding (DPO) is a standard accounts payable KPI that shows how many days, on average, a company takes to pay its suppliers or vendors for purchases made on credit. A high DPO suggests that CFOs should monitor late payment rates closely. At the same time, a low DPO might prompt them to reconsider if they’re unnecessarily limiting cash flows by not taking full advantage of available credit terms.

DPO = (Accounts Payable x Number of Days in the Period) ÷ Costs of Goods Sold

5. Days sales outstanding (DSO)

Sometimes referred to as the average collection period or days receivables, DSO tracks how quickly or slowly your business is being paid by customers who have made credit-based purchases. Typically, you’ll want to target a DSO of 45 or lower. Still, as with most accounts receivable KPIs, it’s wise to evaluate your performance against your competitors and industry leaders.

DSO = (Accounts Receivable ÷ Total Credit Sales) x Number of Days in the period

Liability 

These KPIs gauge companies’ readiness to fulfill their financial commitments, such as debt repayments, employee salaries, and various other cash obligations.

1. Current ratio

Like working capital, this metric evaluates a company’s assets against its liabilities. More specifically, the current ratio exclusively focuses on the ability of your business to pay down its liabilities using only those assets that would be available to convert to cash in the next year.

Current Ratio = Currents Assets ÷ Current Liabilities

2. Debt-to-equity ratio

This CFO performance metric helps to clarify how much of your growth and operations are being funded by existing equity vs. outside loans. As such, a high ratio might indicate that your business has over-extended itself, amassing more debt than is healthy.

Debt-to-Equity Ratio = Total Liabilities ÷ Total Shareholder Equity

3. Interest coverage ratio

A highly useful KPI, the interest coverage ratio, can provide a CFO with insight into the company’s debt levels and profitability. Meanwhile, lenders will often leverage this metric when determining the level of risk associated with a given loan—a high ratio representing low risk and vice versa.

Interest Coverage Ratio = Earnings Before Interest and Taxes ÷ Interest Expenses

4. Quick ratio

Commonly used with the current ratio to assess a company’s financial well-being, the quick ratio focuses on a business’s ability to pay down its liabilities using highly liquid assets (e.g., cash, marketable securities, A/R).

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities

5. Working capital

Your working capital represents the cash readily available to cover growth initiatives beyond your day-to-day operations. These efforts might manifest as staffing increases, technology upgrades, or expansion into new markets. CFOs often use this metric alongside operating cash flow to make decisions regarding future growth plans and investments.

Working Capital = Current Assets – Current Liabilities

Sustainability

1. Physical carbon intensity ratio

This metric maps out your company’s carbon emissions against the actual output of your business. Depending on the nature of your work, this output is reflected as several units manufactured, the weight of a crop yield, or even completed work orders for a given service. By monitoring this output, you can track the performance of your sustainability initiatives against the actual work being done by your organization.

Physical Carbon Intensity Ratio = Tons of CO2 Emissions ÷ Production Units (e.g., gallons of fuel)

2. Weighted average carbon intensity (WACI) ratio

Your WACI ratio also tracks your carbon emissions in the context of your overall revenue — particularly in units of $1 million. When tracking this metric, remember that it will fluctuate along with your revenue cycles. So, suppose your finances experience a great deal of variance over a year. In that case, you may be unable to compare performance against other businesses easily, so instead, focus on historical performance under similar revenue conditions.

WACI = Tons of CO2 Emissions ÷ (Revenue for a Given Period ÷ $1 Million)

How payment automation can help CFOs achieve financial KPIs more quickly

In today’s fast-paced financial landscape, juggling numerous metrics and striving for continuous improvement can seem daunting for CFOs. However, the key to achieving KPIs and metrics efficiently lies in utilizing tools that streamline processes and eliminate inefficiencies, particularly payment automation software.  

As of now, countless hours are wasted manually collecting and managing relevant data from incoming invoices. These manual efforts are particularly vulnerable to human-caused errors (e.g., miscalculations or transcription failures) that can slow down A/P and A/R processes. Similarly, unexpected disruptions such as employee absences can further disrupt payment timelines. 

These delays hinder your company’s overall performance and slow down your reporting and analytics efforts. Without current, real-time data readily available, your business might struggle to understand existing liabilities accurately or properly forecast future cash flows.

Conversely, leveraging payment automation can mitigate these challenges by streamlining workflows and minimizing manual interventions. Solutions like our Accounts Receivable Automation software facilitate centralized processes that keep invoices moving efficiently with minimal human oversight. Additionally, our software offers built-in reporting capabilities alongside customizable dashboards that can keep decision-makers well-informed about business health. With tightly controlled payment processes — featuring integrated document validation — you can proactively safeguard against invoice fraud and related risks. 

In essence, embracing payment automation accelerates performance and strengthens financial oversight and risk management, ultimately driving greater success for your organization. 

More accounts receivable automation takeaways

More and more business leaders prioritize A/R automation as technologies and tools evolve. 

With A/R automation, you can improve key metrics, save money, and get paid faster.

Automating accounts receivable can help you measure, manage, and forecast cash flow more effectively.

Automate your payments with Invoiced today 

No matter which KPIs you prioritize, implementing the right Accounts Receivable Automation software can eliminate inefficiencies that might otherwise impede your progress. Our automated approval workflows enhance security by guarding against fraud and errors and significantly reduce the resources and labor needed to manage your payment processes efficiently. The platform’s extensive integration capabilities simplify sharing key metrics with decision-makers, empowering them to make informed decisions based on real-time data.

Our software makes it easy for customers to make payments through a self-service portal and AutoPay capabilities. Our Smart Chasing technology further enhances the success of your collection efforts, ensuring fast invoice closures that bolster your overall cash flow. Our platform also provides users with various reporting tools, including pre-built and customizable options, alongside highly accurate cash collection forecasting. 

 So, whether you’re looking to get paid faster or optimize your cash flow to make the most of every dollar, take a step towards your financial goals and schedule a demo of our automated A/R software today. 

Published on June 4, 2024
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