How Top FP&A Teams Choose Financial KPIs That Drive Value

Finance teams

Optimize your FP&A team by setting powerful KPIs that drive value. Wondering where to start? Keep reading for our informed recommendations.

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Priyaanka Arora
January 27, 2023

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How Top FP&A Teams Choose Financial KPIs That Drive Value


The financial planning and analysis department of any organization can make or break the success of a company. It's a lot of pressure; not only do FP&A teams need to make sure their organization’s financials are accurate and up-to-date, but they're also responsible for directing stakeholders toward the most financially sound decisions. 

If you were to analyze the most successful companies, you'd likely find that their FP&A teams – the analysts at the helm of the financial ship – have a knack for selecting and tracking KPIs that drive value. 

It isn't as simple as measuring profit spikes and dips; the best FP&A teams look for financial KPIs that can help them identify opportunities, predict future trends, and make educated decisions.

What are the characteristics of a financial KPI?

KPIs, or key performance indicators, are used by most businesses to monitor their performance and progress. They're incredibly effective at boosting companies, too – so long as they're leveraged strategically. 

A study by the Aberdeen Group analyzed the KPIs of 350 different entities and found that KPIs have the potential to boost profit, customer acquisition, and decision-making. Financial KPIs can achieve this, too. 

What is a financial KPI?

According to Gartner, "A financial key performance indicator (KPI) is a leading high-level measure of revenue, expenses, profits or other financial outcomes, simplified for gathering and review on a weekly, monthly or quarterly basis."

In essence, a financial KPI is a metric that helps FP&A teams measure their performance in terms of how well they're achieving their team goals. For example, if an organization wants to increase profitability by 10%, one of its KPIs would be the percentage change in net profit. 

Are KPIs the same as metrics?

Unlike general business metrics, KPIs are specific metrics chosen to measure the progress of a specific goal. FP&A teams are incredibly busy; it would be wasteful of time and resources to track and analyze every single metric in the business. Instead, they need to select a subset of metrics that are most relevant to their goals. 

For more information on this, check out our article on CFO goal setting for the New Year

How do FP&A teams shortlist financial KPIs?

A company's financial team consists of more than the FP&As – there are also accounting, tax, corporate registry, and executive functions departments. Each and every department is responsible for its own KPIs, because each has its own goals (albeit contributing to the same overarching business goals). 

In that case, how might an FP&A team go about selecting the right financial KPIs? How can they effectively fill the gaps not covered by other departments?

It's crucial to note that FP&A teams are primarily concerned with forward-thinking, preventative measures meant to stop issues from arising down the track.

They need to select KPIs that are focused on identifying opportunities, predicting future trends and developments, and making decisions based on educated assumptions. These KPIs should be:

  • Forward-focused. What are the KPIs that will help the team identify opportunities and make beneficial decisions? 
  • Early warning signals. What metrics can be analyzed now to prevent future issues from occurring?
  • Lessons learned. What figures reflect negative or detrimental patterns being followed across the company, and what lessons can be learned from them?

Where accounting or exec functions teams may be focused on looking at the past and present, FP&A teams should be looking ahead. They need to select KPIs that will enable them to identify patterns and understand relationships between different metrics – not just numerical figures.

Important financial KPIs for FP&A teams: 2023 and beyond

Perhaps you're a newly instated CFO looking to assign a set of strategic KPIs to your FP&A team; maybe you are a seasoned executive in search of new KPIs to help you better understand the financials. Either way, let's dig into some of the more important financial KPIs that FP&A teams should be tracking into 2023 and beyond. 

Cash flow forecast

A cash flow analysis is a simple measure of where cash comes in and where it flows out. Cash flow forecasting is different from the accrual-based financial statements used to measure profitability. It is a forward-looking indicator of the company's liquidity and ability to meet its short-term obligations.

Return on investment (ROI)

Every company should be tracking how much it earns, in comparison to how much is spent – and you would be hard-pressed to find an organization that does not measure its ROI. It's a crucial metric for assessing the effectiveness of investments and understanding the company's ability to generate returns with those investments.

Net present value (NPV)

Hubspot defines net present value as, "the value of projected cash flows, discounted to the present." It's essentially a measure of how much a company stands to gain or lose based on an investment. Warren Buffet uses NPV himself when evaluating potential investment opportunities; FP&A teams suit the metric well, being future-focused and opportunistic. 

Break-even analysis

Break-even analysis is a tool for FP&A teams to measure the performance of their budget and analyze the impact of any changes made. The break-even point – or "BEP" – is the Sales Volume at which Total Revenue equals Total Cost, meaning that no further losses or profits are incurred. 

Earnings before interest and taxes (EBIT)

Your EBIT, as described by Investopedia, is a measure of the profits that you make before deducting any interest or taxes. EBIT is a highly, highly useful metric because it indicates how much value your operations are directly generating. It isolates the financial performance of your core business and can help you identify inefficiencies or areas for improvement.

Cost of goods sold (COGS) ratio

The cost of goods sold (COGS) measures the direct costs associated with producing a product or delivering a service, helping you gain insights into pricing decisions and overall margins. 

It’s also useful in understanding how much cash you need to have on hand at any given time – since inventory must be purchased before it is sold, having the right amount of stock can make all the difference when trying to maximize profitability.

Operating cash flow margins

Operating cash flow margins calculate the amount of cash that’s generated by each dollar in sales. The metric is typically used to determine how well your operations turn sales into cash, and can help you identify areas of concern that may require more immediate attention.

Economic value added (EVA)

Have you ever needed to quantify the value of a company’s capital investments? You can with the economic value added (EVA) metric. It measures performance by subtracting the cost of capital from net operating profits and then dividing that number by total assets, giving you a picture of how well your business is creating shareholder value through its investments.

Revenue growth rate

To determine whether your company's financial health is on the right upward trajectory, you need to measure your revenue growth rate. It's a simple calculation of the increase in revenue year-over-year or quarter-over-quarter and can tell you how well the company is faring against its competition and other industry benchmarks.

Debt to equity (D/E) ratio

Can your company cover its debt? To what extent? The debt to equity (D/E) ratio can help you answer these questions by measuring the amount of debt a company has relative to its equity. 

A high D/E ratio indicates that a company is highly leveraged, while a low one suggests that it’s doing well in terms of debt repayment and cash flow management.

Average collection period (ACP)

A company’s cash flow depends largely on the amount of time it takes customers to settle accounts. The average collection period (ACP) helps you understand how long it takes customers to pay their invoices; from there, you can suggest a more efficient payment structure or explore other strategies to reduce the time it takes for customers to settle their accounts.

Gross profit margins

To determine how well your business is meeting its goals and objectives in terms of pricing strategies, production costs, and overall profitability, you need to measure your gross profit margins. 

It’s a simple calculation of sales revenue minus cost of goods sold, which tells you the amount of money that is left over after accounting for expenses associated with production. 

Operating expense ratio

The final KPI we'll discuss is the operating expense ratio, which measures the amount of money that a company spends to cover its operating costs. Most companies will want to keep this ratio as low as possible since it indicates how efficiently the company is using its resources.

Setting your KPIs means going through each of these metrics and determining which ones make the most sense for your financial performance. You'll then set specific goals and objectives around those KPIs, which will help you track progress and measure success. 

Why it's important to track and improve financial KPIs

The way in which your FP&A team aligns with your organization and tracks financial KPIs can mean the difference between a good financial year and an exceptional one. It doesn't take long to set goals at the beginning of each year – but it takes effort and dedication to ensure that each KPI is being tracked and improved upon throughout the year.

The beauty of an FP&A team is that their efforts can completely transform not just the financial performance of a company, but its overall success. By tracking the right KPIs and setting attainable goals which are monitored, they can help ensure that a business is making decisions which will drive value and profitability.

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