Chief Financial Officers can have a great deal of influence over the success or failure of a company. They’re responsible for financial planning, managing financial risk and reporting on the financial health of the organization to higher management levels. It can be a challenge keeping up with the status of all of those processes.
The best way to support a CFO’s efforts is to develop Key Performance Indicators (KPIs) that succinctly indicate how well each of the processes the CFO is responsible for is operating. KPIs for a CFO need to measure things beyond the bottom line to help the CFO set future goals and identify opportunities for improvement.
1. Current Ratio
The Formula: Current assets divided by current liabilities
The current ratio measures liquidity and helps to identify the company’s ability to pay its financial liabilities. Pick a goal ratio that makes sense based on the industry, how risk-averse the company is and any other factors that are company-specific.
In general, the ratio should fall somewhere between 1.5 and 3. Naturally, if the ratio is below 1, quick action may be required because the company is operating at a loss. Work toward a ratio higher than three if plans for the company call for cash investment.
2. Working Capital
The Formula: Current assets minus current liabilities
Working capital is a good addition to the current ratio KPI. It identifies how prepared the company is to meet short-term financial commitments.
3. Current Accounts Receivable and Average Debtor Days
Tracking current accounts receivable identifies the value of the money customers owe the company. Average debtor days monitors the number of days customers are taking to make payment. A CFO should monitor these statistics to determine if payment turnaround is optimized to increase the flow of cash into the organization and improve liquidity.
If payments aren’t being received on a timely basis, that’s a problem that needs to be addressed. One way to decrease current accounts receivable and average debtor days is to make it easy for customers to pay quickly. Setting up an e-payments process is an excellent solution to get payments moving through the system more quickly. It can also provide a benefit to customers in terms of reduced costs for making payment.
4. Current Accounts Payable and Average Creditor Days
These two figures track the amount of money the company owes to vendors and an average of how long it takes to pay those vendors. Using this information, it’s easy to determine if contractual requirements are being met and if the company is taking advantage of early pay discounts.
A CFO needs to review the figures in number three and number four above together to ensure there are no cash flow issues. Managing cash flow can be simplified with electronic accounts payable systems that use virtual credit cards (V-Cards). These one-time use payment cards not only offer the most secure form of commercial payments, they can reduce the accounting burden for vendors and result in faster payment. In addition, their credit account status allows the CFO to hold on to cash longer.
5. Total Cost of the Finance Function as a Percent of Revenue
The Formula: The total of finance cost divided by company revenue, multiplied by 100
When calculating finance cost, include payroll and benefits, technology and other operating expenses. Typically, the most well-run companies spend 0.6 percent or less. The lowest performers spend 2 percent or more. Reducing finance costs is most easily accomplished by streamlining the accounts payable process with automated systems.
A CFO using these five KPIs will have much greater insight into how well financial operations are running. In addition, the CFO can identify opportunities for using best practices to improve results.
To learn more about reducing costs, contact the experts at Acom Solutions by calling 800-347-3638 or contacting us online.