5 CFO KPIs You Should Be Tracking

Crafting a solid financial strategy is one of the most important CFO duties. Without the right Key Performance Indicators (KPIs), you're flying blind, risking missed opportunities and potentially severe financial mistakes.

But here's the good news — you only need to track a handful of KPIs to stay on top of what really moves the needle.

In this article, we'll cover the top 5 CFO KPIs every CFO or controller should keep on their radar and what their financial role is. Let’s dive into these startup KPIs and make sense of the numbers together.

The Importance Of KPIs For Financial Leadership

Tracking KPIs enhances financial reporting, acting like a high-tech GPS for navigating your company’s finances. That's why almost 80% of companies use KPIs to track their growth, and your startup should be no exception.

This will help your finance teams understand where you are and where you're headed. Knowing these metrics will allow you to make adjustments along the way to meet your goals. If the numbers are booming, then it might be time to hire a CFO, or consider the benefits of a Fractional CFO for expert guidance without the full-time commitment.

Tracking the right finance KPIs can help you:

• Make ​​smart choices: KPIs shed light on your financial health, guiding you to make savvy decisions that keep your business on track.
• Keep score: They help you measure company performance against financial goals. It’s like having a scoreboard that shows you if you’re winning the business game.
• Spot trends: With KPIs, you can catch financial trends early. This means you can celebrate successes or tackle problems before they grow.
• Optimize resources: Knowing which parts of your business are thriving lets you put your money and effort where it counts most.

Key CFO KPIs To Track

There are countless CFO performance metrics, but focusing on the ones that really matter will help you make the biggest impact. Tracking and using each of these five essential CFO metrics, perhaps with the help of a CFO dashboard, will give you clear insights into different parts of your startup's finances.

1. EBITDA

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. This financial metric strips away the costs that can obscure how well your core business activities are performing, like taxes and interest payments. Focusing on the profitability of your everyday operations gives you a snapshot of your company's operational efficiency.

Tracking EBITDA is useful for understanding how well your core operations generate cash, free from the complications of accounting and tax strategies.

2. Operating Cash Flow (OCF)

Operating cash flow (OCF) shows the cash your business generates from regular operations and helps measure your short-term financial health. It reveals how much cash is available to maintain and expand your business with your current assets.

This KPI exclusively tracks cash inflows and outflows from primary business activities, excluding secondary financial and investment operations. Along with the current ratio, it gives you a transparent view of whether your business operations can sustain the company.

Evaluating OCF and understanding cash conversion cycles shows how effectively your business turns investments into cash. Monitoring payable turnover can provide additional insights into cash management strategies. Plus, assessing receivable turnover within this context can help you gauge how efficiently you’re collecting revenue.

3. Return On Equity (ROE)

Return on equity measures how well a company uses equity from shareholders to generate profits. It's a metric where the CFO and investors intersect. A higher ROE indicates that the company is using investor funds effectively to increase profits. This makes it an important metric for investors to evaluate the company's strength and management efficiency.

Plus, ROE helps business owners compare their company's profitability against others in the same industry, serving as a benchmark for financial performance. You can track the success of your company’s financial business strategies by analyzing ROE, leading to better resource allocation, business operations, and growth strategies.

4. Net Profit Margin

The net profit margin shows the percentage of your sales that has turned into profits. It tells you how much profit each dollar of sales generates after all expenses have been paid.

This helps you understand how effectively your company is managing its overall costs and operations. A higher net profit margin means your company is more efficient at turning revenue into actual profit.

Additionally, tracking your payment error rate along with your net profit margin offers insights into operational efficiency and the accuracy of financial transactions. It improves overall profitability and the effectiveness of your business strategy execution.

5. Debt-To-Equity Ratio (D/E)

The debt-to-equity ratio compares your company's total liabilities with its shareholder equity. It shows how much of your company is financed through debt versus its own funds.

A lower ratio suggests a company is using less leverage and has a stronger equity base, which is generally perceived as a safer investment. Conversely, a higher D/E ratio can signal potential risk, as the company relies more heavily on debt to fuel its operations.

Understanding your D/E ratio will help your finance department assess your company's financial health and financing strategies. It impacts how lenders and investors view your company's financial stability and growth potential.

By keeping this ratio at a manageable level, you can make sure that your company's financing remains sustainable. Tracking your D/E will help you make smart choices about combining borrowed and owned funds to sustain operations and fuel growth.

Enhance Your Strategic Financial Management With The Right KPIs

Navigating the financial landscape as a CFO can feel like a constant battle against the unknown. Fortunately, tracking the right KPIs can turn the tide, offering clarity and precision in your financial strategy. These five essential CFO KPIs enhance profitability and optimize operational efficiency for your company.

Take control of your financial strategy. Discover how fractional CFO services can elevate your business by enlisting the help of a part-time CFO or a CFO consultant.

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