Top Management Performance Financial KPIs

Scott:

"Key" Financial Metrics are industry specific. For example, for one industry, Inventory Turns can be so important, it should be the most important metric. In another industry, concentrating on Inventory Turns may not make any financial sense at all. What industry are you in? If more than one, you may have different key metrics for each industry.

Douglas Hare, CPA (Inactive)

Scott,
The prior responses are spot on - the answers are dependent on your industry sector (capital intensity); whether you are a manufacturer, distributor, etc.; and whether your are more focused on treasury metrics or broader. I would also add that whether your organization is public vs. private may also influence the prioritization of those metrics.

There are a few sources to get some answers. Off hand, start with the rating agencies and see which metrics they are tracking. Review SEC filings, IPO documents, and analyst reports for companies in your space. Lastly, some data for private companies can be obtained from RMA (Annual Statement Studies) or Dun & Bradstreet, along with several other credit oriented groups - some of which may be industry specific.

Best of luck.

Following in the comments from Douglas and Richard, the answer lies in your industry and strategy --generic metric will lead to generic performance (at best).

Per Jim Collins' book 'Good To Great', as an executive team you need to get a deep understanding to the question "What Drives Your Economic Engine" then form measurements around that (it may not be obvious nor come quickly). For example, Walgreens chose profit per customer visit and Wells Fargo chose profit for employee. Each was right for their situation.

Two cautions to accompany this discussion:
- Test every measure for potential distortions. Ask: If our folks were determined to hit the targets we set, are there destructive behaviors that would make the numbers look good but doom our long-term performance?
- Take what other companies are reporting with a grain of salt. Those may be perfect for them, but not fit your strategy. There's also the possibility they chose to disclose only metrics that make them look good.

Good Luck

No matter what your industry is, I believe that 3-5 metrics is too few to provide much useful information. If your objective in using metrics is to know what's going on in the business and to keep it on track, you will have to draw on many metrics, most of which are not purely financial, in order to accomplish the goal. Areas such as sales, marketing, customer satisfaction and employee utilization are just as important as knowing inventory turnover. Even more important is having the ability to understand each metric in context of the others. You have to figure out the story the numbers are trying to tell and then be able to use that information to take profitable action.

Good questions/comments above.

I don't think there's a great mystery in compiling the list, and it does indeed depend upon the type of business. At my last company, a software company, we tracked, among other things, backlog and renewals carefully. Inventory turns were relevant in a small portion of the business (non-software) there, but are critical in my current, manufacturing oriented business.

What I would like to add/emphasize, is that you should make sure you develop trend data, benchmark your metrics against other is your space/size range, and try to go all the way to conclusions and recommendations. I have seen way too many charts of numbers and way too few places where Finance not only reports but also analyzes and guides. If you can help your company understand key trends and your financials compared to others who are best-in-class and suggest areas of focus, then you'll be adding real value.

I think David touched on something important. You should start with what you want to achieve at the company and align the metrics to report that. As a SAAS software company we want to drive the value of the business up. For our company this means growing our recurring revenue stream while still remaining profitable (we are past the startup phase). So we have metrics around growing recurring revenue. We also have a metric for working capital created/spent for the month based on cash flow not net income(sales not revenue). Our third critical measure is renewal percentage which really should be customer satisfaction if we had a reliable way to gather the data.

The 3 critical measures are a pretty good overview of the business but it doesn't always give us what we need to properly operate the business. So we also have another level of metrics to help properly allocate funds to areas of the business to help create growth. Here we look at things like cost per qualified lead generated, % of leads converted, support calls opened/closed/# open, etc. You can certainly go overboard but functional areas of the business will have certain things that need to be monitored that have a direct impact on the top level metrics. To me the second level metrics are the why behind the what of the top level.

Now if you can just rally the employees around moving the metrics the right way you will really be on to something....

Many industries have trade organizations that not only discuss which metrics are important, but give you the benchmarks that you should strive for. We find it very helpful in driving each area of the business.

There is a site called KPI Library that lists KPIs by industry, process (finance, sales, etc) and framework (COBIT, SCOR,etc.
http://kpilibrary.com
Regards,
Dan