Financial METRICS

Five Metrics Every Finance Dashboard Must Include

By Rodd Mann, Adjunct Professor and doctoral candidate, Concordia University, Irvine, CA

Image 29 May 2014

Businesses need to set strategic goals and objectives that form the basis for every aspect of performance that is measured within the organization—most critically, the key ratios and metrics controllers use in finance. A lot of businesses set so many metrics that the most important ones are lost in the mix, but in reality, only five metrics are critical for controllers to include in an effective dashboard for finance.

These metrics are as follows:

#1: Sales. When measuring sales, controllers should keep in mind that all measurements need to be looked at in qualified, not absolute, terms. For example, what is the cumulative annual growth rate (CAGR)? If the market on average is growing at a rate of 20 percent and a company’s sales are growing at only 10 percent, then that company is losing market share.

Controllers need to look at sales in terms of time, trend, and industry. It is impossible to determine a trend without looking at data over at least a three-year period of time. Also it is critical to look at sales data against what is happening in the industry as a whole in order to determine whether this key metric is strengthening or weakening.

#2: Manufacturing costs. These can be expressed as a percentage of revenue, or subtracted from revenue to get the gross profit margin. Manufacturing costs include materials costs along with labor and overhead needed to build the product.

Material costs can comprise up to 90 percent of the total cost of a product. It is vital for controllers to get a handle on these supplier-related costs, as well as their internal labor and manufacturing overhead (utilities, equipment depreciation and supervisory salaries to name a few). It is also important to analyze each of these cost categories separately, looking carefully at variances between the standard or target costs compared to the actual manufacturing costs.

#3. Operating expenses. Controllers that are not manufacturing companies need to take a close look at their operating expenses. They can look at these as a percentage of revenue and also relative to their competitors’ expenditures. Operating expenses include human resources, finance, security, MIS, advertising and marketing, general administrative expenses, as well as salaries of executives.

#4: Profitability. Profitability can be measured in three different ways: as a percentage of revenue, as a percentage of total equity, or if you are a manufacturer, as profitability divided by assets in place. For example, if the company has made a huge investment in machinery and equipment, are those assets generating sufficient profitability?

When calculating profitability, the denominator could be revenue, equity, or assets; this all depends on your perspective. For instance, the COO or general manager would probably track profitability as a percentage of sales. If a manufacturing company has invested heavily in a semiconductor fabrication facility, perhaps upwards of $3 to $5 billion, that company would need to measure the profit-generating capability of those assets in place.

#5: Cash flow. A business can be very profitable and perhaps also growing quickly— yet, somewhat surprisingly, it can run out of cash. Sadly, this has happened to many profitable, fast-growing companies that didn’t see how much cash it takes to increase inventory and accounts receivables.

Why? Businesses can run negative cash flow if they are spending a lot on property and equipment, or have too much revenue tied up in their receivables and inventory, so these are areas that need to be tracked closely. Other areas affecting cash flow that need to be tracked would include total compensation and other people-related costs such as travel.

In addition to tracking these five dashboard items on a predetermined basis, typically monthly, controllers can take the following steps to contribute greater value to their organizations:

  • Help to make sure everyone within the organization is clear about, and on board with, the business’s strategic objectives by translating the goals of the management team into clear, concrete, metrics.(Also make sure the ERP is set up to support measurement and reporting those metrics.)
  • Communicate clearly up and down the management chain how everyone is doing against those performance metrics—for example, by sharing results when the monthly financial statements come out. Controllers can get creative with their dashboard—for example, using a red, green, and yellow light coding system to show areas where metrics are tracking well, where there is trouble, and where remedial action needs to be taken.
  • Focus on finding ways to make employees and suppliers happy (and customer satisfaction and loyalty will naturally follow). For example, work to ensure that employee benefit packages are fair and suppliers are paid in a consistently timely manner.
  • Help design incentive and compensation systems that are set up around performance metrics and goals. This will help ensure that people have the focus and motivation to engage in the right behaviors that will yield the right business results.

While it’s true that controllers have a fiduciary duty to follow U.S. GAAP and close the books in a timely fashion, the modern role of a controller is developing into a person who adds value to the business by helping to establish a sound dashboard and use that dashboard to demonstrate what is and is not working. Controllers need to become an integral part of the business, helping in decision-making about everything from whether to outsource and where to build a new plant to what investments to make. This means being able to pull together a lot of the data that is available now and then converting that data into knowledge and information that will help the business fulfill its current objectives as well as establish effective new goals for the future.

While it’s true that controllers have a fiduciary duty to follow U.S. GAAP and close the books in a timely fashion, the modern role of a controller is developing into a person who adds value to the business by helping to establish a sound dashboard and use that dashboard to demonstrate what is and is not working. Controllers need to become an integral part of the business, helping in decision-making about everything from whether to outsource and where to build a new plant to what investments to make. This means being able to pull together a lot of the data that is available now and then converting that data into knowledge and information that will help the business fulfill its current objectives as well as establish effective new goals for the future.

Editor’s Note: Rodd Mann has many years of experience as a controller, most recently at Kingston Technology. He will be speaking at the IOFM Controller’s Conference and Expo, September 14-16, 2014 in Chicago.

r_mann



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