In general, key performance indicators are accepted as a reasonable way to create a baseline for measuring business performance. KPI’s are used to track the efficiency and effectiveness of a particular division, operation or business unit, and an important aspect of any performance management and measurement system.
Business vs operations needs
While your business may track its relative performance based on gross margin, net profit, accounts receivable aging and assets to liabilities ratio, (leveraging or current ratio) KPI’s may be completely different for a business unit. KPI’s should be established to indicate whether the finance department is on-track with servicing the needs of the business, not simply measures for the sake of measurement. Start by considering what the purpose of the finance function is for the business and what its core objectives should be. Depending on whether your finance operations are all in-house, outsourced or a hybrid model will determine the KPI’s that you use, but here are a couple that you might consider for your finance operations scorecard.
All good things come in threes and the three classes of KPI’s that you might want to consider are:
- Critical – outcome based and important to the executive
- Key – measures of business practices that help to support operations such as degree of automation
- General – measures that finance operations consider important.
Since KPI’s are really just a score on a scoreboard, they shouldn’t be interpreted as a complete view of the operation, but they should tie in directly to business objectives. Changing the results in the KPI’s should have a meaningful impact on the business objectives and performance.
KPI’s should evolve as the business changes and as the role of the finance organization evolves in the business. You might consider moving the focus of the finance function from transaction ‘reporting’ to focusing on being more strategic and valuable to the business.
There are several types of finance KPIs to consider, that fall into three categories:
Input – leading indicators that are measured quantitatively and often statistically, input KPI resources used to generate business results such as staffing headcount, sales orders, manual journals and master records.
Process – measures the effectiveness of operations and used to determine whether operations are achieving goals and targets on time and against a schedule. For example, you might look at the time taken to process sales orders per sales order, time taken to prepare and post journals and time taken to enrich, review, prepare and create or update master records.
Output – speaks to the overall results, measuring the financial and non financial results of finance operations activity. This might analyze costs and penalties incurred or avoided or data reworked, as processing results – these indicators measure the success, quality and effectiveness of the finance operations, in relation to previously defined goals.
Reporting frequency monthly should be ideal in order to focus on the significance of trends with periodic smoothing recognized as how finance operations work. Doing this any more frequently can lead to trends that are too granular or less meaningful. For example, spikes at month start and end might be considered abnormal or normal depending on the nature of the finance operations group. Annual summaries of activity may be less useful because after twelve months of review, you can’t meaningfully impact things, and the horse has bolted so to speak.
Best in class
We’ve mentioned this before, but it is worth restating that any KPI’s you choose should have two basic goals:
- Inform – KPI’s should be useful to management and employees in terms of operational efficiency and effectiveness of the finance function
- Impact – a review of the KPI’s should help you understand if you can effectively move the needle of measure on anything and what impact that might have on the end result.
Comparing your finance KPI’s against other organizations in your area may be useful, particularly if you compare similar sized organizations in similar industry segments. Consider selecting companies that can influence meaningful outcomes for your business.
Winshuttle customers have indicated that first-time correct processing of master and transactional data is an important KPI. This is because any errors found in processing master data or transactional data will negatively impact not only business activities and decision making, but also the efficiency and effectiveness of back office operations. For example, a sales order, that is miskeyed at order entry time and mis-shipped in response to the order entry becomes more expensive to address when the error is only discovered at billing or collections time.
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