The need for financial reporting is universally accepted; it’s a great medium for ascertaining the financial health of a business and serves to aid decision-making in terms of devising strategies to avoid banana skins and exploit opportunities.
As a CFO, you’ll invariably be in the cockpit of your organisation and responsible for building and leading a team that provides invaluable insights and guidance through reporting.
In this piece we’ll discuss key metrics you can monitor to create effective financial reports.
In addition to this we’ll look at how you can effectively employ benchmarking to compare the performance of your business with that of the competition.
Here’s what’s we’ll be covering in the article:
- Revenue and profitability metrics
- Cash flow metrics
- Efficiency metrics
- Debt and solvency metrics
- Market metrics
- Think of the metrics relevant to your industry
- Unlocking insights: Benchmarking in metric analysis
- How can technology help with benchmarking?
- Final thoughts on CFO metrics
Revenue and profitability metrics
Making informed financial decisions, measuring performance and identifying opportunities for improvement makes monitoring revenue and profitability metrics crucial, so you’ll need to keep a close eye on the below metrics:
Gross profit margin
Gross profit margin measures the profitability of an organisation’s services and products once the direct costs of provision are considered.
Low gross profit margins could result in the adjustment of your pricing strategy or the reduction in costs to increase profitability.
Net profit margin
Net profit margin measures profitability after accounting for all other expenses.
Melissa Houston, Certified Public Accountant (CPA) and founder of the business podcast She Means Profit, says: “The greater the net profit margin is, the more profit your organisation will make. You’ll want your net profit margin to be consistent or greater than your competitors.”
Earnings before interest tax depreciation and amortisation (EBITDA)
Knowing your net profit margin is useful, although Ben Brading, CPA and founder of comparison site AquaSwitch, states that earnings before interest tax depreciation and amortisation (EBITDA) is a more common measure of profitability.
Ben says: “EBITDA measures the core profitability of a business by stripping out non-cash accounting expenses like depreciation and amortisation and non-operational expenses of interest and tax. EBITDA affords the finance world a better way of comparing one company’s profitability with another. It’s the key figure used by investors to assess the value of a business and therefore one that should be monitored carefully by all business owners.”
Revenue growth rate
Revenue growth rate measures the rate at which your revenue increases over time.
A healthy revenue growth rate may mean you’re successfully growing your market share and should consider investing in more growth opportunities.
Customer acquisition cost
Customer acquisition cost (CAC) is a metric for ascertaining the cost of acquiring a new customer.
CAC is calculated by dividing the total sales and marketing activity spend by the number of customers acquired over a specific period.
Your customer acquisition cost helps you gauge the effectiveness of your sales and marketing efforts as well as your customer base profitability.
You can calculate your return on investment (ROI) of sales and marketing initiatives by comparing the CAC to the average revenue generated per customer.
A healthy CAC could mean that you need to re-evaluate your sales and marketing strategies.
By the same token, a poor CAC may indicate under-investment in acquiring new customers.
Ryan Lei is the founder of PCB manufacturer PadPCB. Whilst engineering a long-term strategy for PadPCB, he saw the importance of tracking metrics to make smart decisions regarding his company’s growth and investments.
He says: “By keeping an eye on our CAC, we optimised our marketing efforts and improved the overall efficiency of our customer acquisition strategies.”
Effective sales and marketing processes facilitated by focusing on CAC can greatly increase profitability and sustainable growth.
Customer lifetime value (CLV)
Customer lifetime value (CLV) is important for calculating the value of a customer during a business relationship.
In a nutshell, CLV measures the turnover generated for your business by your customers, taking into consideration factors like repeat purchases, referrals, and customer loyalty.
Understanding CLV will help with the optimal allocation of resources for the purpose of customer acquisition and retention.
The CLV measure is even more important if your business is a software as a service (SaaS) subscription-based model; it helps identify your most profitable customers and allows you to optimise strategic marketing and sales initiatives.
A good focus on CLV could increase customer satisfaction and rates of retention, leading to sustainable long-term growth.
Jack Prenter, CEO of Canadian financial website DollarWise, says people often see CLV as a revenue metric, but it’s much better calculated as a metric of gross profit.
He says: “The CLV lets you gauge expected profit from a new customer throughout their lifetime. CLV is a very useful metric for evaluating and monitoring the health of your business as it includes information like the strength of competition, your customer service and the quality of your offering.”
Cash flow metrics
Monitoring cash flow metrics is critical for all organisations to ensure liquidity and ability to fulfil short-term obligations.
Melissa Houston says: “Cash flow shortages are very risky to a business and, when short, can do serious financial damage. Proactively managing cash levels is vital to your success.”
Below are some cash flow metrics to monitor.
Operating cash flow
In short, it measures your cash, showing whether your business makes enough to support its operations.
- A negative operating cash flow could mean you have to increase sales or reduce costs to increase cash generation.
- A positive cash flow indicates you have more incoming than outgoing cash, giving the business a funds surplus. This surplus can be invested in initiatives to grow the business, pay debts or bolster reserves of cash.
Free cash flow
This measures cash left after capital expenditures and indicates whether the company has sufficient cash for growth opportunities investment.
Ravi Kaushik is the CFO of Agro.Club, a US-based AgriTech company. He says, “Every CFO should know the cash position of the company. They must also have a good sense of the cash burn and how key decision-making is affected by it.”
Cash conversion cycle
Cash conversion cycle (CCC) measures the time it takes to convert stock into cash and provides a good indication of how efficient a business is at managing its working capital.
A long CCC could mean that stock management needs to improve to generate cash faster.
Jack Prenter says: “For businesses with stock such as retailers or manufacturers, CCC is the metric that dictates your survival or demise. Even for non-stock businesses such as service providers and SaaS companies, tracking your CCC is vital for understanding the length of time it takes to recoup your money from investments.”
Ravi Kaushik says, “For B2B businesses, the CCC is key, as if you’re supplying large corporates, they’d pay you on terms, and you may have a working capital gap to finance. So, a shorter cycle means better financial health for your company.”
Oana Marele is the founder and managing director of Marele Accountancy. She says profit and positive cash flow directly relate to productivity.
With productivity, generated output is tracked over a given time with a given number of resources.
Increased productivity leads to increased output with the same amount of resources or can enable you to produce the same output with fewer resources, leading to increased profits and positive cash flow.
Oana says: “You can measure productivity for individuals, teams or products, and express this in units or monetary value. By comparing the revenue generated by the output to the cost of resources used to produce it, you can work out the productivity level. A productivity level of 0.5 is the minimum for survival, and higher levels lead to greater profitability and sustainability.”
Tracking efficiency metrics is vital if you’re seeking to optimise operational performance and efficiency.
Productivity is different to efficiency:
- Efficiency is about waste minimisation and output maximisation output minimal resources.
- Productivity measures the output producer per unit of input.
Melissa Houston says: “A cost-effective business must be an efficient business. Inefficiencies are costly and profit-reducing; monitoring efficiencies and pushing for improvement will increase your bottom line.”
Monitor efficiency metrics like the following.
Inventory turnover measures how efficiently stock is managed and how fast your products get sold.
A low inventory turnover could mean you’re carrying too much stock, leading to higher costs and potentially outdated products.
Days sales outstanding
Days sales outstanding (DSO) measures how long it takes to get paid by your customers, showing how efficiently you manage your accounts receivable.
A high DSO could indicate that you need to improve your collections process to get cash faster.
Asset turnover measures how efficiently you utilise your assets to generate revenue.
Debt and solvency metrics
Monitoring debt and solvency metrics is important to maintain financial stability and fulfil long-term obligations.
Melissa Houston says: “Amassing too much debt is a red flag to investors. Lower your debt ratios to ensure your business will be around long term.”
Below are some debt and solvency metrics to focus on.
The debt-to-equity ratio measures the amount of debt you use to finance your operations relative to your equity, showing how much risk you’re taking.
A high debt-to-equity ratio could mean you have too much debt and must lower your leverage.
Interest coverage ratio
The interest coverage ratio measures your ability to service the interest on your debt, showing if you have adequate earnings to cover your debt payments.
A low-interest coverage ratio might mean you have to increase earnings to cover your debt payments.
Ravi Kaushik says, “This is one of the most critical ratios as it gives a clear picture of your ability to pay your interest payments from the cash you have.”
This measures your ability to fulfil short-term obligations, showing if your current assets are sufficient to cover your current liabilities.
Reviewing debt and solvency metrics
You must track debt and solvency metrics to ensure the organisation can survive financial shocks.
During a financial crisis, organisations with high debt and poor solvency often struggle, while businesses with healthy metrics are better equipped to weather the storm.
Frequently evaluate the ability of the business to manage unexpected events by monitoring economic indicators.
Riva Jeane May Caburog, PR/media coordinator at Nadrich & Cohen Accident Injury Lawyers, says: “It’s no secret that Apple managed to increase market share and continue investing through the financial crisis of 2008. The reason is that it has low debt-to-equity and high current ratios. Executing similar measures can enable CFOs to navigate economic downturns and maintain their financial stability.”
Monitoring market metrics is crucial to understand your financial performance compared to competitors and the overall market perception of your value.
Below are some metrics that can help you identify potential problems with your performance in the market.
The price-to-earnings (P/E) ratio measures your stock price relative to your earnings per share, showing whether the market perceives your company as undervalued or overvalued.
A low price-to-earnings ratio could mean you have to improve your earnings growth to increase the price of your stock.
Earnings per share
Earnings per share (EPS) is a financial metric that enables you to measure your profitability and the value you provide to your shareholders.
It’s the net income earned per outstanding share of your common stock.
In other words, EPS shows the profit the business has generated for each share of stock held by its investors.
Investors widely use EPS to evaluate the financial health and growth potential of a company.
Your business may be more profitable and attractive to investors than if it has a high EPS.
It must, however, be noted that EPS can be affected by several factors, such as stock buybacks, share issuances, and changes in accounting methods.
Market capitalisation measures your total market value, showing your company’s size relative to competitors.
It is calculated by multiplying the current market price of an organisation’s stock by the total number of shares outstanding.
Market capitalisation is the market’s perception of the value of your business.
Your market share indicates your organisation’s competitive position within the market.
Your market share is the percentage of total sales in a market held by a particular company or product. This is calculated by dividing your sales revenue by the total sales revenue of all companies in your market.
Shareholder return measures the return on investment for shareholders, including dividends and stock price appreciation.
A low shareholder return could mean you need to increase dividends or share buybacks to improve shareholder value.
Think about the metrics relevant to your industry
This isn’t an exhaustive list, and certain metrics relevant to your industry will be missing here.
Hannah Munro, managing director of financial transformation consultancy Itas and host of the CFO 4.0 Podcast, says, “Every industry will have its own set of measures and benchmarks. For instance, a SaaS business will focus on subscription-based metrics such as ARR [annual recurring revenue], MRR [monthly recurring revenue], new customers, and both revenue and customer churn. A stock-focused business will look at things like delivered in full, on time [DIFOT] or on time in full [OTIF], which measures how well you are delivering to customers. A project or consultancy-based business will look at utilisation percentage, number of chargeable days/hours, etc.”
Unlocking insights: Benchmarking in metric analysis
Monitoring key financial metrics is only part of effective financial reporting.
Whilst important, how data is analysed and interpreted is also crucial for making good decisions, and it is essential to understand how the metrics relate and how changes in one metric can impact others.
Hannah says: “It’s important that you not only track your performance but benchmark yourself against others in your industry. Always try to ensure you think through the metrics that matter to your business and focus on those. Don’t overdo it with too many as it’s easy for people to get number or KPI blind.”
With benchmarking tools, you can better understand your financial position, compare it to industry norms, and make informed decisions to drive business success.
Benchmarking can also help you stay competitive by identifying best practices and areas for improvement.
Sam Tabak, a board member at Rabbi Meir Baal Haness Charities, says: “When you monitor factors like inventory turnover, gross margin, and customer acquisition cost, you can understand how your organisation performs relative to your competitors. This empowers you to devise strategies to improve financial performance and steer your organisation to success. It also helps reduce excess inventory, cut costs, and increase profitability in your company.”
Various benchmarking tools exist, including:
- Industry benchmarks that compare your financial performance to industry peers.
- Publicly available financial statements to provide insights into the financial performance of your competitors.
- Third-party benchmarking services that provide more detailed analysis and insights.
It must be noted that benchmarking against competitors has its limitations, such as differences in accounting policies, business models, and company strategies, which may affect the comparability of financial metrics.
In addition, you need to ensure stakeholders understand the reports you’re furnishing them with.
Hannah says: “Make sure you explain the metrics to stakeholders—how you calculate them and why they are important. Part of being a good finance partner to a business is increasing the financial and reporting literacy of your stakeholders and colleagues.
How can technology help with benchmarking?
Advancements in business intelligence, artificial intelligence (AI) and machine learning are changing the benchmarking and financial analysis landscape.
As a former tech venture capitalist turned operator/CFO, Ravi Kaushik says: “The modern CFO will not only be defined by their financial acumen and a keen understanding of their business, but also by their ability to build a state-of-the-art tech stack for the finance function.”
These tools can help you use data to gain a sustainable competitive advantage in your industry.
For example, AI-powered algorithms can analyse financial data to identify patterns and trends, while machine learning can help you make more accurate predictions about future financial performance.
Below are some examples:
Business intelligence (BI) tools
BI tools can help CFOs collect and analyse huge amounts of data from various sources, including competitors’ financial statements, industry reports, and internal financial data.
These tools can offer insights into your financial performance and help highlight areas where you’re outperforming or underperforming compared to your competitors.
Artificial intelligence (AI) and machine learning
AI and machine learning algorithms can be used to analyse copious amounts of financial data to identify patterns and trends that may not be apparent through manual analysis.
These technologies can help you identify growth opportunities, optimise pricing strategies, and forecast future financial performance.
Robotic process automation (RPA)
RPA can be used to automate repetitive and time-consuming tasks, such as data collection and entry, allowing finance teams to focus on more strategic tasks, such as analysis and decision-making.
You can use RPA to gather and process competitor financial data more efficiently and accurately.
Cloud-based financial software can provide you with access to real-time financial data and tools for data visualisation and analysis.
This could enable you to benchmark your financial performance against competitors faster and easier.
Final thoughts on CFO metrics
Don’t rely solely on financial metrics for success measurement. Other important factors, such as customer satisfaction, employee engagement and social responsibility, should also be included when evaluating your performance.
it’s still fair to say that monitoring key financial metrics and benchmarking against industry standards and competitors is crucial for effective financial reporting and strategic decision-making.
By frequently reviewing and analysing metrics such as revenue growth, profit margins and ROI, you can better understand your company’s financial performance and identify areas for improvement.
Today’s benchmarking tools may offer valuable insights and help inform strategic decision-making.
As technology evolves, you may also want to look at emerging tools like business intelligence, AI and machine learning to gain a sustainable competitive advantage and drive business success.