Which Key Performance Indicators (KPIs) should be used for your finance organization?
By Clinton Jones on Feb 24, 2014
Becoming more strategic to the business is an increasingly important aspiration for finance organizations. There is a constant need for commercially astute and sound financial analysis of how the business is doing. Better analysis with deeper consideration and qualification helps the business strategically, particularly when times are economically tough. But determining which KPIs the finance department uses is key.
KPIs Benchmark Efficiency
It’s no secret that finance departments rely on KPIs to benchmark their efficiency and effectiveness. KPIs should also prove whether or not the finance department understand, support and help drive the overall business strategy, all while demonstrating commercial acumen. Acumen in this instance is identified as being skillfulness at identifying risks, challenging assumptions, offering alternatives and constantly evolving analysis and execution to perform more effectively.
Cost of Finance as a KPI
The “cost of finance” is regarded as one of the more important metrics when benchmarking the finance function. This is a good benchmark because it can be compared against industry peers and is one that is easily understood.
But as Price Water Cooper’s latest finance effectiveness benchmark study makes clear, it is not the only measure and not necessarily the best. Here’s some examples of KPIs that organizations use:
- Days to Close
- Cost per document
- Days to complete budgeting and forecasting cycle
- Percent of finance full-time equivalent in business partnering
- Percent of time spent on data gathering versus analysis
- Percentage of key controls automated
For some, more subjective assessments are important like “improvement in management satisfaction with the Finance function”. So with such variety, which of these are the best and most effective ones? In some respects the real answers to the best KPIs lie somewhere in between and are dependent on how broad the term “finance function” really is.
Operational targets can be personal KPIs
Individuals within the finance function may furthermore have very specific operational performance targets such as the number or percentage of invoices paid on time, the reduction factor in debtor days etc.
As demonstrated in the recent Winshuttle ACCA budgeting and planning questionnaire, the finance function can’t be held responsible for increasing sales or making sure sales meets their targets. However they can be proactive enough to predict a drop in sales from monitoring order input. Finance can also try to simplify the overall complexity in the process, like Budgeting and Forecasting, by reducing the number of cycles for example. Finance also have the ability to shape the operational cost profile through such insight to protect margins.
Improving working capital cycle is achieved through reducing the value of debtors and this should be a KPI for the AR team. Increases in creditor terms should be a KPI for the procurement or purchasing group either within the finance function in AP or as a separate function.
Companies that sells physical goods should also consider their inventory coverage of sales. The finance function, working closely with production and inventory management, should be able to identify and appropriately constrain this drag on working capital also.
These three working capital measures are just one possible set of KPIs that one could consider. In particular, the combination of AP and AR KPIs and the qualitative assessment on the value of information/reports coming out of the finance department, should measure finance function effectiveness fairly well. Keep in mind that they might not be enough to paint the entire picture.
Speed in closing the books may not be a good KPI
KPIs like “speed of close” may compromise accuracy which erodes confidence in the numbers and so may not be the best of KPIs even though it is a popular one. The good news is that whichever KPIs you consider important, Winshuttle can help on almost any aspect of a KPI.
How? Here’s a few ways Winshuttle can be leveraged to improve the detail and quality of your ERP data:
- Extract key data from your core ERP or SAP System
- Tools to analyze and manipulate large or small datasets
- Improve the way your finance function uses ERP and how it makes decision
- Improve the detail and quality of your ERP data
With Winshuttle Foundation you can improve your approval, governance and collaboration. The key data administration processes affected include credit management, vendor and customer approval and creation and even minimum stock and replenishment levels.
The PwC study, Unlocking Potential: Finance Effectiveness Benchmark Study 2013 cited above, involved more than 200 companies in the UK that have participated in benchmarking projects in the past. A year earlier they undertook a similar study entitled Putting your business on the front foot.
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The Winshuttle blog is written by professional thought leaders who are dedicated to providing content on a variety of topics, including industry news, best practices, software updates, continued education, tips and techniques, and much more.
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