Why track finance KPIs?
Organizations track financial KPIs in business to get insights into their financial health and make better-informed decisions. KPIs, or Key Performance Indicators, are measurable values that show how well a company is achieving its key business objectives. So, what are KPIs in finance? They’re a set of metrics that focus specifically on evaluating the performance of a company’s finance department.
Key performance indicators (KPIs) are metrics that help an organization measure progress toward a strategic or operational goal. Implementing a robust system to track KPIs across all areas of your finance department can provide numerous benefits and allow your business to operate more efficiently and profitably. In this very long and in-depth article, we will explore the multitude of reasons why tracking KPIs in finance is a critical practice.
Improved Decision Making
One of the most significant benefits of monitoring KPIs in finance is that it enables data-driven decision making. By consistently tracking metrics like revenue growth, operating costs, liquidity ratios, and more, you generate the data needed to make informed choices about resource allocation, budgeting, investments, and strategy. Finance teams often have access to vast amounts of data, but unless this is synthesized into readable and actionable KPIs, it does little to guide important decisions. A strong KPI tracking framework ensures you can translate data into actionable insights for smarter decision making at both an operational and leadership level.
Tracking the right KPIs also helps streamline processes and improve workflows in your finance department. Metrics around invoicing, collections, payroll, expense reporting, audits, and month-end close provide visibility into what areas need refinement. For example, a rising accounts receivable balance indicates slow collections and potential process issues in invoicing or customer credit management. KPIs help you pinpoint where to focus process improvement initiatives to drive greater efficiency. This leads to cost savings from eliminating redundant work and better utilization of your finance team's time and talents.
Better Goal Setting
KPIs are inherently linked to goals, which is another reason robust tracking is essential. As a finance leader, you likely set annual goals around profitability, cost management, risk reduction, and more. Consistently monitoring performance metrics keeps these goals front and center for your entire team while also providing feedback on progress made. Goal setting without routine KPI measurement often leads to misalignment across finance departments. When all teams have clarity into metrics tied to overarching goals, it ensures better focus and accountability. Tracking fosters results-oriented thinking and performance.
Enhanced Strategic Planning
In addition to operational improvements, monitoring KPIs aids long-term strategic planning for your finance function and wider business. Observing trends over time through metrics provides key inputs into strategy development. For example, KPIs around customer profitability, product line revenue, market share, and brand growth help shape your company's evolving business strategy. Ongoing tracking of net income, earnings per share, and R&D spending informs capital allocation decisions. And metrics on talent management, employee satisfaction, and turnover guide HR strategy. KPI data gives finance leaders valuable perspective and context for planning the strategic direction.
Improved Risk Management
Tracking leading and lagging indicators through KPIs also bolsters risk management. Metrics around liquidity, leverage, cash flow, and creditworthiness provide insight into financial risks. KPIs on controls, process compliance, vendor management, and cybersecurity address operational risks. Leading indicators in particular allow you to mitigate risks proactively before issues arise. While finance teams conduct various forms of risk management, having the metrics to identify emerging risks quickly enables you to respond and protect organizational value. Amid economic uncertainty, monitoring key risk indicators is more important than ever.
Better Stakeholder Communication
Regularly sharing key performance metrics with stakeholders across the organization also fosters alignment and accountability. When other business unit leaders have clarity into finance KPIs, it helps them connect day-to-day activities to overarching performance. Finance can also provide KPI dashboards to external stakeholders like investors, lenders, and board members to build trust and transparency. This level of communication ensures everyone is on the same page about progress made and obstacles encountered. Tracking KPIs provides an invaluable storytelling tool for finance to engage stakeholders through data.
Boosted Team Performance
Within the finance department itself, KPI monitoring and reporting boosts team performance. Setting targets for finance team members aligned to key department metrics motivates staff and encourages competencies development. Publicly displaying KPI tracking dashboards can spur friendly competition and collective ownership of hitting performance targets. When the team has clarity into metrics being measured, they gain insight into how their work ladders up to influence the numbers. This drives greater productivity, collaboration, and innovation to positively impact KPIs. Tracking also helps managers identify low performers addressing gaps through coaching, training or staffing changes.
Increased Analysis Capabilities
Monitoring a wide variety of KPIs expands the analytics capabilities of your finance team. The ability to synthesize data, identify trends, gain insights, and translate this into projections and scenarios is a vital skillset. Building out a comprehensive KPI tracking framework provides continuous opportunities to enhance data literacy and analytical thinking. The more metrics you monitor, the better your finance team will become at analyzing what drives performance. These enhanced analytics skills can then be applied to many other areas of management beyond the finance department.
Finally, tracking and recording performance metrics consistently over time enables valuable benchmarking. You gain perspective on typical ranges for key indicators and can set seasonal benchmarks as you build up years of trend data. Benchmarks help you evaluate current performance against past results to ascertain improvement and outliers. Comparing your KPIs to industry standards and best practices also illuminates areas of competitive advantage versus gaps. Furthermore, KPI benchmarks foster continuous improvement. By establishing the benchmark, you have a baseline against which to set new targets. Monitoring metrics versus benchmarks provides invaluable context for performance evaluation and improvement.
In summary, implementing robust KPI tracking across your finance department delivers numerous benefits for decision-making, planning, risk management, team performance, and more. Consistently monitoring the right financial and operational metrics is critical for driving efficiency, alignment, accountability, and results. The insights unlocked from properly tracking KPIs enable both operational excellence and strategic growth. Any modern finance team looking to elevate performance should prioritize building capabilities to effectively select, measure, analyze and communicate key performance indicators.