By Dr Admire Maparadza Dube
HARARE – The chief finance officers (CFOs) strategically manage their companies’ finances by utilizing leading and lagging indicators, such as key performance indicators (KPIs), and other financial tools to drive performance and ensure sustainable growth.
Here are some options of my top 10 indicators:
Leading Indicators
These are predictive metrics that provide insights into likely future performance as well as potential challenges.
1, Sales Pipeline Value
Description: Represents the total potential revenue from all qualified sales opportunities currently in the pipeline. This metric helps forecast future sales and assess the effectiveness of the sales process.
Calculation:
Sales Pipeline Value = sum (Potential Value of Qualified Opportunities)
2, Accounts Receivables Aging
Description: Analyses the age distribution of outstanding receivables to identify potential cash flow issues and assess credit management efficiency.
Calculation:
Categorise accounts receivable into age brackets (e.g., 0-30 days, 31-60 days) and calculate the outstanding balance within each bracket.
3, Expense Trends
Description: Tracks spending patterns over time to identify cost drivers, inefficiencies, and opportunities for cost optimisation.
Calculation:
Analyse expense data over multiple periods to identify trends and variances from historical averages.
4, Cash Flow Forecast
Description: Projects future cash inflows and outflows to ensure liquidity and financial stability. This forecast helps in planning for investments, debt repayments, and operational expenses.
Calculation:
Develop a detailed projection of anticipated cash flows over a specific period, considering historical data, upcoming expenses, and expected revenue.
5, Budget Variance Analysis
Description: Evaluates differences between budgeted figures and actual financial outcomes to assess performance against financial plans.
Calculation:
Budget Variance = Actual Results – Budgeted Figures
LAGGING INDICATORS
Lagging indicators, on the other hand, reflect past performance, from history of transactions. They are equally critical for assessing the overall financial health of the company.
1, Net Profit Margin
Description: This is one arguably the most watched metric of all KPIs even by non-financial managers. It measures profitability after all expenses have been deducted from revenue, indicating overall efficiency.
Calculation:
Net Profit Margin = (Net Profit/Total Revenue) X 100
2, Return on Investment (ROI)
Description: Assesses the profitability of investments relative to their costs, providing insight into investment efficiency (and give a chance for opportunity costs assessments).
Calculation:
ROI = (Net Profit/Cost of Investment) X 100
3, Debt-to-Equity Ratio
Description: Compares total debt to shareholders’ equity, indicating financial leverage and risk.
Calculation:
Debt-to-Equity Ratio = Total Debt/Total Equity
4, Days Sales Outstanding (DSO)
Description: Measures the average number of days it takes to collect payment after a sale, reflecting credit terms and collection efficiency.
Calculation:
DSO = (Average Accounts Receivable/Average Daily Sales) X Number of Days
5, Earnings Per Share (EPS)
Description: Indicates the portion of a company’s profit allocated to each outstanding share of common stock, reflecting shareholder value.
Calculation:
EPS = Net Earnings/Number of Outstanding Shares
Additional Considerations
These are my shortlist of 10 but your own selection of KPIs should be tailored to align with your company’s industry dynamics and stage in its life cycle. By focusing on relevant indicators as a CFOs you can effectively drive strategic decisions that enhance corporate performance.
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