Today we are going to suggest you think a little about what the most important FP&A metrics are. It is known that we cannot improve what we manage, and that we cannot manage what we do not measure. For this reason, in business finance management, reliably obtaining indicators and KPIs and being able to view and read them easily is an essential part of success.
You can’t improve what you don’t manage. You cannot manage what is not measured.
But, before we get into the seven most important FP&A metrics, we leave you with a reflection. Currently, the CFO is no longer a secondary role for the business that only deals with the support of purely financial issues. Companies require a more active participation from the finance leader in terms of contributing to where the business is going, what decisions must be made and what is the best possible path.
In order to provide professional feedback that adds value to the company’s strategy, the finance team must provide metrics drawn from reliable data, presented in an engaging manner, and with a solid foundation of elicitation and refinement. Whichever metric C-suite chooses to look at the most, it will need to be easily readable and based on sound data.
Now yes, let’s see what are the most important FP&A metrics that every company should seek!
Metric #1: Revenue
Clearly, the backbone of any business. A business that maintains a position of zero income, or income below what is necessary, is a business that is not working and is doomed to disappear.
However, and although we will all agree on the importance of this metric for any organization, there are many companies that have not refined the procedure for obtaining this KPI. This is very common in SMEs, which often cannot clearly answer the question: how much money do you earn each month?
Revenue or sales is the top line on financial statements. It is advisable to measure them annually and monthly, in two separate indicators. It is also a good practice to break down the KPI by product, region, segment, etc.
Metric #2: Liquidity Ratio
Another elementary KPI for every business, whatever its size. Liquidity is, by definition, the difference between current assets and liabilities of a company (you can deepen its definition with our glossary, by clicking here).
Assets are those flows of money income, such as the bank account or invoices that have already been issued and sent to the client. Liabilities are the accounts payable, the commitments that the organization must pay.
You must have the liquidity status of the company updated so as not to be shocked, for example, paying interest for not having the money available when a payment should have been made.
Metric #3: Profitability
Other key KPIs. Profitability is nothing more and nothing less than how much money the company has left after having paid all its commitments in the period. To obtain the profitability of the company we must consider all the income and all the costs necessary for production.
Profitability is often referred to as the bottom line, since it sits at the bottom of financial statements.
This metric correlates strongly with net profit margin, which is profit relative to revenue. This margin is usually considered high when it exceeds 20%, low if it is below 5%, and acceptable when it is around 10%.
Metric #4: Return on Investment
The ROI or Return on Investment is calculated before each project, purchase or new undertaking of the companies. It gives us the possibility to understand in advance whether or not it is worth carrying out that operation.
It is basically defined by a numerical relationship: 5 to 1, for example, implies that for every dollar that we put into this project or purchase, we will recover five.
Every company logically seeks a return on investment as high as possible in each initiative. It is a metric that the finance team must provide to the rest of the areas that require it as accurately as possible, since transcendental decisions for the business are made based on this KPI.
Metric #5: Cost of Goods Sold
We now get into one of the most important FP&A metrics related to the budgeting process: the cost per good sold.
Called in English “cost of goods sold” (abbreviated COGS), this KPI refers to the direct costs involved in producing a certain good that will later be sold by the company. This amount includes the cost of the materials and the labor or work force that is required for that production.
Indirect expenses, such as a distribution cost or marketing cost, are also included here.
During the formation of the budget, the COGS is deducted from the sales (income), which will leave us as a result the gross profits of the business and the gross margin by product.
Metric #6: Sales by Product
Another very important element identified with budgeting. Sales by product shows information about how much of a certain catalog item has been sold.
The sales report by product is useful as soon as it is broken down by region, segmentation, sales channel, among other aspects that can be considered and that will enrich the board for the Management.
It is advisable to consider all these points when making the presentation of the general sales report. For this, the choice of the reporting software tool is very important.
Metric #7: Budget variance
Budget variance is a key metric in management control. Also called “budget variance”, it is a periodic measurement that allows decision makers to identify deviations and quantify them between budgeted and actual figures.
There will be two types of variations: the positive ones, which imply gains between what was supposed to be spent and what was finally spent, and the negative ones (logically the ones that hurt us the most), which are when more than what was spent in the period has been spent. that the finance team assumed.
One truth: budget variance is inevitable. No one can accurately predict the future costs or revenues of a business. In addition, the contexts of high inflation such as the ones we are currently experiencing in most world economies exacerbate this problem, by making forecasting based on estimates even more difficult.
There are many metrics that a CFO must take into account to add value to the organization for which he works. In this list we have only recommended a handful that, in our experience, have shown us that they are the ABC of healthy business financial management.
On the other hand, the recording of the data, its modeling and processing, and the final output in a legible and clear presentation for an audience not specialized in finance are essential. The modern CFO must have a suitable software tool that supports these processes in the best possible way, empowering the company’s finance team, facilitating the task and freeing up time from repetitive tasks so that staff can focus their energy on contributing ideas, creativity and inventiveness.
We invite you to try Plika through a free and non-binding demo to manage the most important FP&A metrics in the most efficient way!