There are many ways to interpret finance key performance indicators (KPIs), and what some finance professionals may see as non-negotiable metrics to track and analyze, others might overlook or lack the necessary insight at the moment to produce the indicator. One could conclude that any metric finance tracks that reflect the health of the business are considered a finance KPI.
Although KPIs will vary by industry and company, they measure the efficiency of a business and its use of resources to reach targets. One key distinction between a KPI and a metric is that a KPI should represent the cause of the metric.
For example, gross margin is a necessary metric finance should track to determine profitability and influence future planning, but it does not need to be classified as a KPI. Instead, a KPI should be the inputs or decisions leading to that gross margin percentage. An example of an industry specific KPI would be an agricultural company measuring and forecasting yield per square foot amongst its farms.
“When you think of a KPI, think what are the dials and the trends that the business is managing and using to make decisions off of? Those are the most important things that should be tracked and should be robust so you understand the behavior driving it, not just the metric.” Brian McGrath, COO and co-founder of FutureView Systems
Many organizations structure their departments and business units such that each has operational objectives it aims to achieve. These are carried out by executives, like CFOs and VPs of Finance, and can be interpreted as Finance KPIs, though they are essentially objectives and key results (OKRs) (that is enough acronyms for today). We don’t wish to go down a rabbit hole of debating semantics, but either way, these goals should not be confused with the actual metric KPIs that finance is responsible for measuring and analyzing.
Operational Finance KPIs can be methods and process improvements for the finance team to align its efforts in a meaningful way. The structure of a finance function operates like the human body, where each aspect is necessary for the other to properly perform. When there is a deficiency in one area, it can have a negative impact on the entire operation.
Examples of operational Finance KPIs or OKRs would be:
These items are actionable for members of the finance department from accounting, treasury and financial planning and analysis (FP&A), and processes can be optimized to reach these objectives.
The health of a business is traditionally measured using generally accepted accounting principles (GAAP), which was established for consistency across organizations and enforcing regulatory compliance of publicly traded companies. Opinions on the tangile use and value of GAAP financials depends on who you ask, nonetheless, they are widely used and the SEC requires it on financial statements for publicly traded companies.
A few finance KPIs from GAAP financial statements worth highlighting include:
There are many ideologies on these metrics and KPIs, but for most, cash flow might be the most important metric for stakeholders due to its transparency into operational liquidity, net income, expenses and liabilities. The main takeaway is your metrics should point to the health of the business and paired with analysis, provide insight for budget owners and executives to act on.
Software-as-a-Service (SaaS) metrics and KPIs are essential to measure the performance of a company where traditional GAAP financial statements can’t otherwise reveal. As a growth SaaS company, the future potential of your business to acquire market share and disrupt an industry is what investors like private equity and venture capital firms are banking on.
SaaS companies range across industries and the efficiencies they provide are intertwined with digital transformation. If you’re undertaking a finance transformation, there’s no question that software plays a role in implementing optimized approaches to managing a high-impact finance function.
These companies typically operate on a recurring revenue stream model, where customers pay a monthly or annual fee each period continuously. This stream of revenue compounds with the addition of each new customer, so the incentive is to retain customers, while acquiring new ones at the optimal price.
SaaS metrics to hone in on include:
Now, keep in mind that how you calculate metrics like customer acquisition cost vary by company. For example, some companies will classify sales and marketing team compensation as overhead expenses, not costs to acquire, and will omit it from the calculation. Tweaking the calculation of these SaaS metrics is necessary for your growth companies given circumstances, but the key thing is to remain consistent and do not alter the calculation you report on.
Notice how the SaaS metrics are more specific and offer far greater insight into the overall health of the business and help to explain the why behind the metrics. Your management team can’t act on only knowing that revenue is “X”, they need more granularity into what comprises that revenue to make informed decisions.
“The frequency in which you develop those metrics depends upon how frequently you use them for decision making.” John Baule, CEO and co-founder of FutureView Systems
Lifetime value (LTV) should demonstrate the value of your customer base and inform decision makers on where to allocate resources. For example, your lifetime value is a necessary component in determining if your acquisition campaigns produce desired results by comparing the lifetime value customer acquisition costs (CAC) known as the LTV:CAC ratio.
Despite what many will claim, there’s no single LTV or CAC calculation that can be applied to every SaaS business. Some will want to include their sales and marketing teams’ compensation into their CAC, while others will classify the employee expenses as overhead and hone in on the channel costs to create and launch advertising campaigns.
One constant is that once you decide on a calculation, you must stick to it, regardless if the results are positive or negative. You can’t move the goalposts because there are too many stakeholders needing that metric to inform their decisions, including your current and investors.
“My recommendation is always pick a calculation that strikes a good balance, that is defensible and gives you as true a picture of the real value that you’re willing to put your next dollar against.” Brian McGrath, COO and co-founder of FutureView Systems
Payback period can be easily overlooked, but it’s critical to determining the success of acquisition efforts. It is a tool to check against your customer’s lifetime value (LTV) to ensure you are seeing a timely return on your acquisition investment.
For example, a five year lifetime value with a payback period of three years can be far less valuable and unable to scale compared to a three year lifetime value with a six month payback period. Even though you might experience some likely churn, getting back what you initially invested to acquire a customer more rapidly should be the focus.
Customer churn is inevitable, with company’s needs shifting or champion users moving on to other roles, but tracking and containing churn will give you a clear understanding of customer value as well as the stickiness of your product. These insights are not only useful for sales and marketing, but can be decisive for your product roadmap and how you approach new features or expanded partnerships to facilitate customer requests.
When developing an analytical framework for your SaaS metrics, there are three distinct outcomes you must achieve.
1. Measure the health of the business appropriately - What is the overall trend and are my metrics appropriately revealing the state of the company’s successes or roadblocks?
A range of metrics will reveal different results, such is the case with GAAP vs. SaaS metrics. Net income might be deferred in favor of reinvesting into the growth of the business, so it might not be the ideal KPI for a SaaS company with 50% year-over-year growth.
2. Determine your business drivers - What inputs are generating revenue and are they pacing at the projected growth rate?
While your SaaS metrics measure performance, your analysis should do three things: identify, project and recommend. Analyzing variances and identifying the specific drivers at a detailed level allows a budget owner to remain agile and pivot or course correct at a much faster rate. You should also forecast and project the outcomes of certain scenarios using high-level assumptions, and provide the necessary insight and recommendations to best reach a target.
3. Develop a clear analytical framework - Have you defined the most important Company metrics and KPIs and are you consistently measuring them?
Consistency is the most important aspect of your analytical framework. Once you identify the most important metrics to track and measure against, you don’t want to alter the calculation. No matter the outcome, you must align the board, executive team and budget owners to promote accountability and visibility.
The same holds true for your approach to developing your metrics. Remember, venture capital (VC) and private equity (PE) firms that back growth companies have their own reporting structure and framework, and they want their portfolio companies to seamlessly pipe in their metrics for their own reporting and analysis.
With any growing company or evolving finance function, it is important to establish and promote scalable processes across business units so the entire company is operating from the same scoreboard or set of metrics. Finance must have a level of organizational control over their data infrastructure and how information is tracked for Metrics to be easy to calculate and understand across the company.
The optimal cadence of your finance metrics should be in line with the need to make decisions, for most though, monthly forecasting is ideal to promote accountability across business units. If finance can’t align on the KPIs and metrics across the organization, you will spend the majority of your time resolving discrepancies and working towards unity instead of focusing on the high-impact strategic insight finance is tasked with providing.
Managing all of these metrics and manually updating them regularly in Excel is a struggle Finance doesn’t have to endure. The FutureView Platform consolidates your systems, while preserving account-level structure for automated reporting and detailed forecasting capabilities. The KPIs and metrics you wish to track are completely configurable to your organization. Request a demo with one of our finance experts today to learn more.