15 KPIs CFOs should follow

15 KPIs CFOs should follow

To succeed as finance leader and/or CFO in your company you need to keep track of the right key performance indicators (KPIs) to assess your company’s performance and financial health. The KPIs chosen should both help you direct your own efforts to manage the business’ finances and also provide insight to the Board and CEO about the performance of their investments in the company.  Below we will lay out 15 KPIs in five different categories to help you with your job.  

Survival KPIs 

Some of the most important KPIs, especially if you are a young startup finding its footing in the market, are what we call Survival KPIs. These include burn rate, burn multiple and cash runway. 

  1. The burn rate is a measure of the negative cash flow of an unprofitable company, depicting the pace at the company is consuming its cash reserves. There are two types of burn rates: gross burn and net burn. The gross burn rate is simply the total monthly operating costs The net burn rate is the total amount of money a company loses every month. It takes into account revenue generated by the company during the month. It can be less (but not greater) than the gross burn rate. 

If the net burn rate starts to outpace its forecast, or if company revenue fails to meet expectations, it is common for CFOs to seek to reduce the burn rate, regardless of how much money is in the bank. Reducing the burn rate means altering the company’s cost structure and usually means reducing staff and/or other major cost drivers, such as office space, technology expenditure and marketing. 

  1. The burn multiple is Net Burn /Net New Annual Recurring Revenue (ARR). This measures how much the company is spending to generate additional dollar of ARR. For instance, according to David Sacks, former CEO of Yammer and current VC investor, a burn multiple below 1 is an indicator of amazing performance for startups, while a burn multiple over 3 is a bad sign.  
  2. The cash runway is how much time your business can run without an injection of fresh capital. The formula for the cash runway is Total Cash / Burn Rate.  

Liquidity KPIs 

Next comes the closely related Liquidity KPIs. These KPIs represent the continued vitality of a business even amid unfavorable market conditions. If a business is relatively illiquid, it could run into trouble amid a deterioration in market conditions and become unviable.   

  1. The current ratio is a liquidity indicator that shows the company’s ability to pay off its short-term liabilities with its short-term assets. The formula for the current ratio is simply total current assets / total current liabilities. A current ratio greater than one suggests that a company is on solid ground and can withstand a liquidity squeeze. When the current ratio is below one, the company is in danger. In theory, there is no upper limit on how high a current ratio should go, but a very high current ratio relative to industry benchmarks suggests that excess cash is being allowed to accumulate and capital is not being efficiently deployed. 
  2. The quick ratio, also known as the acid test ratio, is another way to track liquidity and avoid cash flow problems. It is equivalent to quick assets/current liabilities, where quick assets are cash and cash equivalents, marketable securities and accounts receivable. More specifically, quick assets are current assets that you can convert into cash within 90 days. Current liabilities are obligations due within 12 months. The difference between the quick ratio and the current ratio, is that the numerator of the current ratio is current assets, which are assets that can be converted to cash within one year.  

A quick ratio below 1 is problematic, while between 1 and 3 is considered good. A quick ratio above 3 may indicate a capital allocation problem, with too much capital being held in cash or cash equivalents leading to missed growth opportunities. 

  1. Accounts payable turnover is a ratio that determines how quickly a business repays creditors and suppliers that extend lines of credit to it. It is a key indicator of liquidity and cash flow management. The formula for the ratio is the Total Cost of Sales in a Period/Average Accounts Payable in a Period. A higher accounts payable turnover ratio means that the company pays its creditors more frequently. A lower account payable turnover ratio often indicates difficulty in paying bills and a greater risk to creditors. 
  2. Last among the liquidity KPIs is the inventory turnover ratio, which measures the rate at which inventory is sold, used or replaced. The formula for the inventory turnover ratio is Cost of Goods Sold/Average Inventory for the Period. A high ratio suggests that sales are strong or inventory being insufficient, while a low ratio reveals sales are weak or the accumulation of excess inventory. 

Operational KPIs 

After ensuring your company can survive a liquidity crisis, it’s important to examine the operational efficiency of the business to verify that it is generating cash effectively. 

  1. Operating cash flow is the amount of cash generated in a given period by the business’ operations. It is calculated a Net Income + Non-Cash Expenses – Net Increase in Working Capital. 
  2. Working capital represents the amount of capital a business has in the specified period to cover day-to-day operations and pay any short-term debt. The formula for working capital is Current Assets – Current Liabilities. Current assets include cash, accounts receivable and inventory. Current liabilities include accounts payable, taxes, wages and interest owed. Having positive working capital means that the company can pay its bills and invest in growing the business. 
  3.  Then there is the cash conversion cycle (CCC), which is the number of days that a company takes to convert money spent on inventory back into cash selling its goods or services. The shorter the CCC, the less time money is locked up in inventory or accounts receivable. In other words, the company benefits the smaller its CCC. 
  4. Account receivables turnover is a ratio that measures the number of times a company's accounts receivable balance is collected in a given period. The higher the ratio the better a company is doing at converting credit sales to cash. Determining a healthy account receivables turnover ratio should be made in reference to industry competitors to take into account market conditions. A low ratio is an indicator of inadequate credit policies, weak collection practices or a reliance on customers who are not creditworthy. The formula for account receivables turnover ratio is Net Credit Sales/ Average Accounts Receivable during the measurement period. 

Growth KPIs 

Below are three KPIs that are good indicators of healthy growth, two for all businesses and one specifically for SaaS-based startups. 

  1. Gross profit margin is the ratio of Gross Profit / Revenue. It measures how successful a company is at generating revenue and keeping expenses low. Following closely a business’ gross margin enables management to make rapid decisions to support growth. A high gross profit margin typically indicates that your business is making money on a product, while a low margin indicates that the sales price is too low. 
  2. EBITDA growth is considered to be a measure of the company’s true operating profitability growth. EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is calculated by adding interest, tax, depreciation and amortization expenses to net income. EBITDA is widely used to reflect the operating performance of a company as it displays the underlying profitability of operations alone. The formula for EBITDA growth is (Current Period EBITDA – Prior Period EBITDA)/Prior Period EBITDA.  

Positive growth in EBITDA indicates an improvement in the efficiency of a company and leads to an increase in the earnings per share (EPS) of a company, propelling the market price of a stock upwards. When comparing EBITDA growth rates, it is important to make the comparison within the same industry for an accurate frame of reference. 

  1. The Magic Number or SaaS Magic Number is a widely use ratio to determine sales efficiency for SaaS companies. One way of thinking about it is as a measure of how many dollars of ARR do you create for every dollar spent on sales and marketing. The ratio formula is as follows: (Current quarter’s revenue – Previous quarter’s revenue) x 4 / Previous quarter’s Sales & Marketing Expense. 

A magic number of 1.0 implies that you paid back your customer acquisition costs in a one-year timeframe and that you may continue investing more money in sales and marketing. According to the SaaS CFO website, a Magic Number below 0.5 means your startup is not ready to invest in sales and marketing. A Magic Number between 0.50 and 0.75 requires clear and careful evaluation. Meanwhile, a Magine Number above 0.75 suggests you should invest in sales and marketing. 

Departmental KPI 

Last but not least is a KPI to measure your own department’s performance. 

  1. Days to close is a measure of how long it takes a finance team to close the books and create financial reports at the end of the month. This tracks your own team’s efficiency and the efficiency of your internal processes. Obviously, the smaller the number of days it takes your team to close the books and create the financial reports, the better. 

Have any KPIs to add?

What KPIs do you consider important for assessing you and your company’s performance? Let us know on social media