When you first begin working with an outsourced CFO, you probably anticipate that they will want to see your financial reporting history, plus your overall business strategy. You should be prepared for them to review your key performance indicators, or KPIs.
If you’re a business owner, you’re probably familiar with the role of KPIs in your business. They are useful for several reasons:
Monitoring Performance: These metrics help you quickly determine the overall health of your business, providing information about profitability, liquidity and efficiency.
Identify Patterns: If you can see how a particular KPI is changing over time, it offers critical information about your business. For instance, if there’s a particular materials expense that has been creeping up over a few months without a corresponding increase in sales for the final product, you would want to investigate. Without KPIs, you may not notice this trend for many more months.
Progress Versus Goals: With the right KPIs, you will have reliable information about whether you will reach your goals for your business. This allows you to make adjustments and change course if you realize you were too conservative in your planning or overly optimistic, or if there are market changes that may be out of your control.
Spot Warnings: Your outsourced CFO will probably include some form of the quick ratio, which is a liquidity measure that determines whether you are able to meet short-term obligations. It includes only those assets that are readily converted to cash. If your quick ratio is trending downward, it’s a good warning sign that there may be trouble ahead.
Risk Management: When you develop KPIs, your outsourced CFO will identify any metrics that represent potential risks. Identifying and monitoring them will help reduce the chance of exposure.
Communicate to Outsiders: When it’s time to secure a loan or attract a new investor, KPIs can serve as valuable proof of your direction as a company. You would provide financial reports in these types of situations but your KPIs will deliver a more complete picture of your company’s health.
Accountability: Getting buy-in from your team is critical to meeting your goals. Working with your outsourced CFO on developing the right KPIs helps every employee see how their work contributes to the company’s success. Equip your employees with ownership of KPIs and reporting responsibilities.
Future-Proofing: Everyone gets into a rut sometimes. As a business owner, it’s helpful to gain the objectivity of an outsourced CFO that can help identify areas where your focus has been too heavy. They will bring balance to your KPIs so that you are always looking ahead and planning for next steps.
Choosing the Right KPIs
Even if you are a small business already utilizing KPIs, you may have identified areas where the identification of a KPI isn’t offering the kinds of results you had hoped. It may be that your objectives and your KPIs aren’t matched as effectively as they could be.
KPIs will differ based on goals, industry and company size, but there are some that tend to be universal for measuring business health:
Return on Investment: This tool is helpful for determining whether an investment was a profitable one. It can be used to evaluate past decisions, but it can also help make better decisions about whether to pursue an investment, equipment purchase or a new customer.
Gross Profit Margin: This is a quickly-calculated metric that demonstrates the company’s profits after subtracting cost of goods sold from the revenue. It provides insight into how the company is utilizing resources like labor and materials.
Quick Ratio: Also called the acid test, this KPI takes a quick measurement of assets to obligations, providing a snapshot of your ability to make your payments. It provides information about liquidity, but since it excludes inventory from your assets, it tends to be a more accurate picture of what you can pay, right now.
Debt to Equity Ratio: This measure is useful for communicating the relative proportion of shareholders’ equity and debt have been used to finance assets. When the D/E ratio is high, it is an indicator that the company has been aggressive in acquiring debt to fund the growth of the business. If the ratio is too high, it could be a warning sign.
Special KPIs for Unique Goals
There are times when your outsourced CFO may want to develop a special set of KPIs to address specific goals. Here are a few examples:
· You are debuting a new product line or set of services. Your CFO may want to develop a KPI to ensure that while you are promoting the new line, you are not “stealing” sales from more-profitable offerings.
· You are rolling out a rebrand, acquisition or merger. In this case, your CFO may help you develop some special KPIs that ensure that you are tracking your ROI on specific new activities, such as the support of a new website.
· The sales team has a history of focusing on profit margin without keeping an eye on volume. Your CFO will develop a KPI that helps keep margin and volume in balance.
Find the Right CFO
It can be hard to keep a close eye on all the factors that can affect the health of your business, especially if you are also the one trying to run the company. That’s where an outsourced CFO comes in. You focus on your company, while the CFO brings in their expertise. There are several reasons why you may want to consider outsourcing, rather than an in-house CFO.
The benefits of an outsourced CFO include costs and flexibility, but you’ll also find that an outsourced CFO brings new insights and perspective that come from working across many industries and different sizes of companies.
At The Power CFO, we offer fractional CFO services, meaning you pay for what you need. You may need financial reporting, but you may realize that you could benefit from our insights around KPIs. Later, when it’s time to consider a new loan or investor, or when you are considering an acquisition, we’re here for that, too. Contact us to talk about where your business is headed and how we can help drive growth.
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