We are thinking how to set up KPIs for assessment of financial statements in the process of business planning and business
What are KPIs for business management in Financial area?
Answers
Hi Le Mai,
My first KPI for any Financial area is the number of the days to close the financial statements.
If it is too big, the company does not have a clear view of the results in a timely manner resulting in a slow reaction time.
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Eric
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Dear Eric,
Thank you very much for your kind comments.
Can I make clear understandings on your opinions like that:
- timing of closing financial statement is important KPI for timely managment decision in necessary cases
- timing is as short as a good KPI?
Best regards.
Mai.
After defining an OBJECTIVE, next step would be to understand what needs to be done to meet that Objective, these are the CRITICAL SUCCESS FACTORS (CSFs). To measure these CSI you need to set-up the KPIs. So I think that if you are clear on Objectives and the CSI, the work of determining the KPI is simple and you can do it quickly in any situation.
For example:
Objective: Increase profitability by 10%
CSI : Sales + 15%, Gross Profit +12%, Overheads +2%
sub CSI for Sales : Distribution +10%, Prices +1%, Volume +2%, etc.
the KPIs: Sales, Gross Profit / Sales, Overheads/ Sales.
Hope this helps!
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Dear Micrea Stanciu.
You are very kind to provide clear example on your comments. It's easy to understand for me.
You are right that it's very important to set up objectives for business.
Normally, I think that every Company sets objectives for sales volume and production volume in accordingly. That objectives is normally in comparison with previous fiscal year or previous budgeting event.
The matter is how to set up profit objectives based on that sales and/or production volume in balancing between sales price and costs.
During discussion with you, one concern is coming up in my mind "Is determination of balancing indicator between sales price and cost - KPI to set up profit objectives?"
How do you think, Micrea?
Thank you very much for your kind recommendations!
Looking for hearing from you!
Best regards.
Mai.
Le Mai,
I am not sure if you are looking for company performance KPI's or strictly
I hope this adds a little more to what you were looking for.
Dave
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Dear David.
Currently, we are looking for both Company performance KPI's and Accounting/Financial management KPI's for consideration of way to set up specific KPI.
Thank you for your kind recommendations.
Best regards.
Mai.
Bear in mind that KPIs are first and foremost for the benefit of the users/management. I would recommend that you list ALL the ratios and information that you think you can produce/analyze and let your CEO or Board determine what is important to them. Or if that is not possible, present them with a set of KPIs (that YOU think is important to them) and let the information/presentation evolve. Bear in mind that dashboards and KPIs are an evolving/ever changing thing and what is important now (what they want to see/know) may not be important in a few months time.
Second, KPIs are worthless in my opinion if you do not have anything to compare it to. Example, you may consistently show a receivables turnover of 4 months and you think you are doing great....till you find out that your competitors or companies in your sector/size are doing 2 months.
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Dear Emerson Galfo.
Thank you very much for your kind recommendations.
It's very pratical based on business view point.
Best regards.
Mai.
KPI are effective only if supported by proper measurement criteria and incentive plan to improve.Many times,DSO are set for sales and collection is the responsibility of Accounts.If there is no incentive for Accts person,he/she will not take proactive action to reduce DSO
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Thank you very much, Mr./ Ms. Gurunathan, for your kind recommendations!
Besr regards.
Mai.
Regardless of which area you're looking to develop KPI's for (i.e., company performance or financial department performance) I suggest you develop forward looking metrics with predictive capabilities that alert if you're off plan. It is easy to create metrics that report on past performance, but then you're reporting on events that have happened and you'll still need to figure out corrective actions if performance is off. By focusing on predictive KPIs you'll create an early warning system that alerts you to start taking action to keep the business on plan. Think about leading activities which impact results that can measured prospectively and then link the causality back to the business goals.
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Thank you very much for your kind recommendations! It seems practical!
Best regards.
Mai.
In addition to what has already been suggested here, I like to consider certain financial ratios as KPIs in financial management. Of these many possible ratios the most important in financial management might be the current ratio (implying working capital), quick ratio and perhaps debt to equity ratio. Many other ratios can also be considered. If your company is able to forecast its balance sheet accurately, in addition to its income statement, any of your financial ratios can also be easily calculated from these forecasted statements and analyzing these ratios against your actual achieved ratios becomes a very powerful financial management tool.
Financial KPIs should also include debt covenant ratios.
Hi Le Mai,
You stated clearly what I would like to say.
As fast as you close your financial statements, fast will be available to the management take decisions.
My last objective was to close until day 8 of each month. Only in exceptional cases when holidays and weekend are consecutive I postponed to day 10.
When you set this kind of objective, KPI, etc, you create a sense of teamwork responsibility and everyone is engaged to improve the performance of the whole process.
Regards,
Eric
Dear Le Mai,
I understand the question has taken a new and holistic dimension now. To try answer to your question:
The KPIs are established to measure the completion stage of Objectives.
1) Define objectives: probably Survival, then Growth then Supremacy in other words:
a. SALES large enough to cover fixed costs and therefore generate Profit
b. PROFIT needs to became large enough to ensure proper balance between EQUITY (Shareholder funds + accumulated profits) and DEBT
c. The Profit + other sources need to ensure enough CASH to keep the
2) KPIs selected would need to measure all this 3 key components: SALES, PROFIT / EQUITY and CASH
3) There you have the Profitability KPIs, Liquidity, Gearing, Working Capital, and Full CASHFLOW KPIs. (google it and will see them). And you will have sub-KPIs to monitor prices, costs, whatever sub-component of the BIG THREE.
4) you have to plan the KPI to make sure they ensure the reaching of the objectives.
5) compare actual KPI with planned values and last years and even with the normal values in your industry, and if case improve your planning or your actual results
6) you can be sure KPIs will not be achieved consistently if people are not motivated. Therefore company goals and individual goals need to be aligned:
***what gets measured and rewarded --> GETS DONE***
Hope this helps.
Mircea
For financial ratios etc, you can get a list from
http://www.smart-it.co.za/help/dashboard.htm. The challenge will be to get a program that will incorporate it as an integral part of the program.
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