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FOOD FOR THOUGHT

How to define your CFO KPIs

Posted by Neraj Patel on October 24, 2017

Chief financial officers (CFOs) are valuable to your business; but just how valuable? Measure their performance with the right CFO KPIs: here’s how to get started.

HOW TO DEFINE YOUR CFO KPIS

 

Read more: The Modern CFO: What business leaders need to know 

 

Hard numbers

 

There are better ways to determine the worth of your chief financial officer than hard, quantifiable metrics. These are some of the most common examples:

  • Gross margins
  • Net margins
  • Overhead cost management
  • Financial benchmarking
  • Stock Turnover
  • Operating cashflow
  • Working capital
  • Average debtor days
  • Average creditor days
  • Return on equity

No matter which industry you’re in, these metrics are almost always going to be important for the continued success of your business.

Some will be more important than others, depending on your business model and stage of the business life cycle, but nearly all will tell you something useful about your CFO’s performance.

Perhaps more importantly, it will also inform you where your business needs work; if your cash flow is running tight and your average debtor days is high, then it might be time to direct your CFO to take a closer look at your cash position and implement strategies to speed up the cash flow cycle. After all, cash is king and a lack of it is one the primary reasons that businesses fail.

 

Cash is king and a lack of it is one the primary reasons that businesses fail.

 

However, one thing to note about hard numbers is that you shouldn’t try to measure all of them at the same time. Try to find a handful that are the most pertinent to your business. Your CFO should be able to identify the weak points of your business and determine the most appropriate KPIs to measure performance.

If they can’t, that in itself is a sign of an underperforming CFO.

 

Non-financial CFO KPIs

 

CFOs are no longer only working within the bounds of these hard numbers. They are also responsible for harder-to-quantify metrics, such as talent retention and development, brand reputation and even customer experience.

Everything that they work on affects other parts of the business. This needs to be taken into account when evaluating the performance of your CFO. But defining these measures can be difficult; here are a few examples:

  • Staff turnover and morale
  • Net promoter score
  • Visibility as a leader in the business
  • Efficiency of the business supply chain
  • Talent development
  • Internal & external communications
  • Operational understanding
  • Strategic input

What is clear is that in this day and age the quantifiable metrics and ‘hard’ number KPIs are interlinked with the ‘softer’ non-financial side of the business. It is important that a CFO understands the impact that each metric has on one another, and the impact on business as a whole.

This is when your CFO KPIs will need to be more adaptable and customised. Take talent development for example. Your CFO should be a mentor to a certain extent, but how do you measure their effect on skill development amongst your team? How do you measure their ability to communicate with stakeholders? Can you quantify their input into strategy meetings?

 

It is important that a CFO understands the impact that each metric has on one another, and the impact on business as a whole.

 

There are ways to do this, but because they are specific to your business, you’ll need to discuss these measures with your CFO and come to a mutually-agreed metric for each of the relevant ‘soft’ metrics.

Make no mistake: these are important parts of the CFO role, and should be measured for proper evaluation. Take the time to define and agree on them—you won’t need to cover all of them, only the most pertinent. But knowing that your CFO is working to improve the business, and thus their ability to assist your business, is a valuable metric to have.

 

Summary

 

Hard numbers can quantify the value of your CFO and determine new directions for their operations, but soft skills are just as important; even if they are harder to measure. Take the time to talk to your CFO and determine collaboratively the KPIs they are responsible for.

 

For more tips and tricks on getting the most out of your CFO, check out the free ebook below.

The Modern CFO: What business leaders need to know

Topics: CFOs