As a CFO, you’ll be at the heart of this process, critical in building and leading your finance team that can provide valuable insights and guidance with the help of reporting.
This article will highlight key metrics you might want to track to create effective financial reports.
We’ll also examine how benchmarking can help you compare the performance of your business with the competition.
Revenue and profitability metrics
Tracking revenue and profitability metrics is critical if you’re looking to make informed financial decisions, measure your performance over time, and identify areas where you can improve.
Here are some examples of revenue and profitability metrics you’ll want to keep a close eye on:
Gross profit margin
Gross profit margin measures the profitability of a company’s products or services after accounting for only the direct cost of producing those products or services.
A low gross profit margin may push you to adjust your pricing strategy or reduce costs to improve profitability.
Net profit margin
Net profit margin measures profitability after accounting for all expenses, including taxes and interest.
Melissa Houston, Certified Public Accountant (CPA) and founder of the business podcast She Means Profit, says: “The higher the net profit margin is, the more profit your business will make. You want to ensure your net profit margin is consistent or higher than your competitors.”
Earnings before interest tax depreciation and amortisation (EBITDA)
Although knowing your net profit margin is useful, Ben Brading, CPA and founder of comparison site AquaSwitch, points out that earnings before interest tax depreciation and amortisation (EBITDA) is a more common profitability metric used in the real world.
Ben says: “EBITDA measures the core profitability of a business by stripping out non-cash accounting expenses like depreciation and amortisation and non-operational expenses of interest and tax.
EBITDA provides the world of finance with a better way of comparing one company’s profitability to another. It’s the key figure used by investors to assess the value of a business and therefore one that should be monitored carefully by all business owners.”
Revenue growth rate
Your revenue growth rate measures the rate at which your revenue increases over time.
A high revenue growth rate may indicate that you are successfully expanding your market share and should consider investing in further growth opportunities.
Customer acquisition cost
Customer acquisition cost (CAC) is a metric you use to determine the cost of acquiring a new customer.
You calculate the CAC by dividing the total amount spent on sales and marketing activities by the number of customers acquired during a specific period.
Your CAC is important because it helps you understand the effectiveness of your sales and marketing and the overall profitability of your customer base.
You can determine your sales and marketing activities’ return on investment (ROI) by comparing the CAC to the average revenue generated per customer.
A high CAC may indicate that you must re-evaluate your sales and marketing strategies.
At the same time, a low CAC may suggest you’re not investing enough in customer acquisition.
Ryan Lei is the founder of PCB manufacturer PadPCB and a former professional trader. While working on a long-term strategy for PadPCB, he realised the significance of tracking metrics to make informed decisions about his company’s growth and investments.
He says: “By keeping an eye on our CAC, we optimised our marketing efforts and improved the overall efficiency of our customer acquisition strategies.”
Efficient sales and marketing processes driven by a strong focus on CAC can increase your profitability and drive sustainable long-term growth.
Customer lifetime value (CLV)
Customer lifetime value (CLV) is a critical metric to determine the total value a customer will bring to your business over their entire relationship.
Simply put, CLV measures the revenue a customer generates for your business over time, considering factors such as repeat purchases, referrals, and customer loyalty.
By understanding CLV, you can better allocate your resources toward retaining valuable customers and acquiring new ones.
The CLV metric is especially important if you have a software as a service (SaaS) subscription-based model, as it helps identify your most profitable customers—so you can optimise marketing and sales strategies accordingly.
A strong focus on CLV can lead to increased customer satisfaction, higher retention rates, and sustainable long-term growth.
Jack Prenter, CEO of Canadian financial website DollarWise, says often people view CLV as a revenue metric, but it’s far better calculated as a gross profit metric. He says: “The CLV allows you to gauge how much profit you can expect to earn after acquiring a new customer over their lifetime. CLV is a fantastic metric for tracking the entire health of your business because it will include information like the strength of competition, your customer service and the quality of your offering.”
Cash flow metrics
Tracking cash flow metrics is crucial for any business to ensure its liquidity and ability to meet short-term obligations.
Melissa Houston says: “Cash flow shortages are high risk to a business, and when falling short, it can cause severe financial damage. Proactively managing cash levels is imperative to your success.”
Here are some cash flow metrics to keep track of.
Operating cash flow
This measures your cash, indicating whether your business generates enough to sustain your operations.
- A negative operating cash flow may indicate you need to increase sales or reduce costs to improve cash generation.
- A positive cash flow means you have more incoming cash than outgoing cash, resulting in a surplus of funds. You can use the surplus to invest in business growth, pay down debt, or increase cash reserves.
Free cash flow
This measures the amount of cash remaining after a company has paid for capital expenditures, indicating whether the company has enough cash to invest in growth opportunities.
Ravi Kaushik is the CFO of Agro.Club, a US-based AgriTech company. He says, “Every CFO worth their salt should know the company’s current cash position. They should also have a keen sense of the cash burn and how that impacts key decision-making.”
Cash conversion cycle
Cash conversion cycle (CCC) measures the time it takes to convert inventory into cash, indicating how efficiently you manage your working capital.
A long cash conversion cycle may indicate that you must improve inventory management to generate cash quickly.
Jack Prenter says: “For businesses with inventory like retailers or manufacturers, CCC is the metric that dictates whether you live or die. Even for non-inventory businesses like service providers and SaaS companies, monitoring your CCC is critical to understanding how long it takes to get your money back from any investments.”
Ravi Kaushik says, “For B2B companies, the CCC is key, as typically if you are supplying to large corporates, they would pay you on terms, and you could have a working capital gap to finance. Hence, the shorter the cycle, the better financial health your company would be in.”
Oana Marele is the founder and managing director of Marele Accountancy. She wants you to remember that profit and positive cash flow directly relate to productivity—the output you can produce in a given time.
With productivity, you track how much output you generate in a given time or with a given amount of resources.
By increasing productivity, you can produce more output with the same amount of resources or produce the same output with fewer resources, leading to increased profits and positive cash flow.
Oana says: “You can measure productivity for individuals, teams or products, and express this in units or monetary value.
“By comparing the revenue generated by the output to the cost of resources used to produce it, you can determine the productivity level.
“A productivity level of 0.5 is the minimum for survival, and higher levels lead to greater profitability and sustainability.”
Tracking efficiency metrics is vital if you’re looking to improve your operational performance and efficiency.
Note that productivity differs from efficiency:
- Efficiency focuses on minimising waste and maximising output with minimal resources.
- Productivity measures how much output you produce per input unit.
Melissa Houston says: “To be a cost-effective business, you must be efficient. Inefficiencies cost money and reduce your profit; tracking efficiencies and striving for continual improvement will increase your bottom line.”
Keep an eye on efficiency metrics such as the following.
Inventory turnover measures how efficiently you manage your inventory and how quickly you sell your products.
A low inventory turnover may indicate you’re holding too much inventory, leading to excess costs and potentially outdated products.
Days sales outstanding
Days sales outstanding (DSO) measures how long it takes to collect payment from your customers, indicating how efficiently you manage your accounts receivable.
A high DSO may show that you need to improve your collections process to generate cash quickly.
Asset turnover measures how efficiently you use your assets to generate revenue.
Debt and solvency metrics
Tracking debt and solvency metrics is crucial to maintain financial stability and meet your long-term obligations.
Melissa Houston says: “Taking on too much debt for a business is a red flag to investors. You want to lower your debt ratios to ensure your business will be around long term.”
Here are some debt and solvency metrics to focus on.
The debt-to-equity ratio measures how much debt you use to finance your operations relative to your equity, indicating how much risk you take.
A high debt-to-equity ratio may indicate that you have too much debt and need to reduce your leverage.
Interest coverage ratio
The interest coverage ratio measures your ability to pay interest on your debt, indicating whether you have enough earnings to cover your debt payments.
A low-interest coverage ratio may indicate you need to increase earnings to cover your debt payments.
Ravi Kaushik says, “This is one of the most important ratios as it gives a clear picture of your ability to pay your interest payments from the cash you have.”
This measures your ability to meet your short-term obligations, indicating whether you have enough current assets to cover your current liabilities.
Reviewing your debt and solvency metrics
You should monitor debt and solvency metrics to ensure your company can survive financial shocks.
During a financial crisis, businesses with high debt and poor solvency often struggle, while those with strong metrics may be better equipped to weather the situation.
Regularly assess your company’s ability to manage unexpected events by tracking economic indicators.
Riva Jeane May Caburog, PR/media coordinator at Nadrich & Cohen Accident Injury Lawyers, says: “It’s not a secret that Apple managed to grow its market share and continue investing amidst the 2008 financial crisis. The reason is that it has low debt-to-equity and high current ratios. Executing similar measures can help CFOs from other companies navigate economic downturns and maintain their financial stability.”
Tracking market metrics is essential to understand your financial performance relative to competitors and the overall market perception of your value.
Here are some metrics that can help you identify potential issues with your market performance.
The price-to-earnings (P/E) ratio measures your stock price relative to your earnings per share, indicating whether the market perceives your company as undervalued or overvalued.
A low price-to-earnings ratio may indicate that you need to improve your earnings growth to increase your stock price.
Ryan Lei says: “This metric helped me assess the valuation of our business relative to its earnings, allowing us to compare our performance with industry peers and make informed decisions about our growth strategy.”
Earnings per share
Earnings per share (EPS) is a financial metric to measure your profitability and the value you provide to your shareholders (once you have them).
It represents the net income earned per outstanding share of your common stock.
In other words, EPS shows how much profit the company has generated for each share of stock held by its investors.
Investors widely use EPS to evaluate a company’s financial health and potential for growth.
If you have a high EPS, your business may be more profitable and attractive to investors than if you have a lower EPS.
However, it’s important to note that EPS can be affected by several factors, such as stock buybacks, share issuances, and changes in accounting methods.
Market capitalisation measures your total market value, indicating your size relative to others.
You calculate it by multiplying the current market price of a company’s stock by the total number of shares outstanding.
Market capitalisation represents the market’s perception of your value.
Your market share represents your company’s competitive position within your market.
Your market share is the percentage of total sales in a market held by a particular company or product. Calculate it by dividing your sales revenue by the total sales revenue of all companies in your market.
Ryan Lei says: “Monitoring our market share allowed us to evaluate our competitive position in the industry and identify areas where we could expand or improve.”
Shareholder return measures the return on investment for shareholders, including dividends and stock price appreciation.
A low shareholder return may indicate that you must increase dividends or share buybacks to increase shareholder value.
Think about the metrics relevant to your industry
This isn’t an exhaustive list—certain metrics relevant to your industry will be missing here.
Hannah Munro, managing director of financial transformation consultancy Itas and host of the CFO 4.0 Podcast, says, “Each industry tends to have its own set of measures and benchmarks.
“For instance, a SaaS business will focus on subscription-based metrics such as ARR [annual recurring revenue], MRR [monthly recurring revenue], new customers, and both revenue and customer churn.
“A stock-focused business will look at things like delivered In full, on time [DIFOT] or on time in full [OTIF], which measures how well you are delivering to customers.
“A project or consultancy-based business will look at utilisation percentage, number of chargeable days/hours, etc.”
Unlocking insights: Benchmarking in metric analysis
Remember that tracking key financial metrics is only part of effective financial reporting.
While doing that is important, how you analyse and interpret the data is also crucial to make informed decisions. It’s essential to understand how the metrics relate and how changes in one metric can affect others.
Hannah says: “It’s important that you not only track your performance but benchmark yourself against others in your industry. Always try to ensure you think through the metrics that matter to your organisation and focus on those. Don’t overdo it with too many as it’s easy for people to get number or KPI blind.”
With benchmarking tools, you can better understand your financial position, compare it to industry norms, and make informed decisions to drive business success.
Benchmarking can also help you stay competitive by identifying best practices and areas for improvement.
Sam Tabak, a board member at Rabbi Meir Baal Haness Charities, says: “When you monitor factors like inventory turnover, gross margin, and customer acquisition cost, you can understand how your organisation performs relative to your competitors. This empowers you to devise strategies to improve financial performance and steer your organisation to success. It also helps reduce excess inventory, cut costs, and increase profitability in your company.”
Various benchmarking tools are available, including:
- Industry benchmarks that can compare your financial performance to industry peers
- Publicly available financial statements to provide insights into your competitors’ financial performance.
- Third-party benchmarking services that offer more detailed analysis and insights.
However, it’s important to note that benchmarking against competitors may have limitations, such as differences in accounting policies, business models, and company strategies, which may affect the comparability of financial metrics.
In addition, you must ensure that stakeholders understand the reports you’re sharing with them.
Hannah says: “Make sure you sit down with your stakeholders (1-2-1 if possible) and explain the metrics—how you calculate them and why they are important.
“Part of being a good finance partner to a business is increasing the financial and reporting literacy of your stakeholders and colleagues.
“Don’t assume they know what you are talking about. Often, they will not want to look ignorant by asking.”
How can technology help with benchmarking?
Technological advancements in business intelligence, artificial intelligence (AI) and machine learning are changing the benchmarking and financial analysis landscape.
As a former tech venture capitalist turned operator/CFO, Ravi Kaushik says: “The modern CFO will not only be defined by their financial acumen and a keen understanding of their business, but also by their ability to build a state-of-the-art tech stack for the finance function.”
These tools can help you use data to gain a competitive advantage in your industry.
For example, AI-powered algorithms can analyse financial data to identify patterns and trends, while machine learning can help you make more accurate predictions about future financial performance.
Here are some examples:
Business intelligence (BI) tools
BI tools can help CFOs collect and analyse large amounts of data from different sources, including competitors’ financial statements, industry reports, and internal financial data.
These tools can provide real-time insights into your financial performance and help identify areas where you’re outperforming or underperforming compared to your competitors.
Artificial intelligence (AI) and machine learning
You can use AI and machine learning algorithms to analyse large amounts of financial data to identify patterns and trends that may not be apparent through manual analysis.
These technologies can help you identify growth opportunities, optimise pricing strategies, and forecast future financial performance.
Robotic process automation (RPA)
You can use RPA to automate repetitive and time-consuming tasks, such as data collection and entry, allowing your finance team to focus on more strategic tasks, such as analysis and decision-making.
You can potentially use RPA to gather and process competitor financial data more efficiently and accurately.
Cloud-based financial software can provide you with access to real-time financial data and tools for data visualisation and analysis.
This may help you benchmark your financial performance against competitors more quickly and easily.
Final thoughts on CFO metrics
Don’t rely solely on financial metrics to measure success.
Other important factors, such as customer satisfaction, employee engagement and social responsibility, should also be considered when evaluating your performance.
Yet it’s still fair to say that tracking key financial metrics and benchmarking against industry standards and competitors is crucial for effective financial reporting and strategic decision-making.
By regularly reviewing and analysing metrics such as revenue growth, profit margins and ROI, you can better understand your company’s financial performance and identify areas for improvement.
Today’s benchmarking tools could provide valuable insights and help inform strategic decision-making.
But as technology evolves, you may also want to look at emerging tools such as business intelligence, AI and machine learning to gain a competitive advantage and drive business success.