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Top 6 FP&A Metrics Every CFO Should Know

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Top 6 FP&A Metrics Every CFO Should Know

In the present circumstances, businesses face tremendous pressure to succeed and grow. They require professionals who understand the ground situation profoundly and have the grit and the determination to take the organization forward, even in the most uncertain times. The same can be said about the role of the CFO. This is no longer a secondary role for most businesses. Companies require more than active participation from the finance leader. They understand that the CFO needs to contribute their bit to where the business is going, what decisions must be made, and the best possible path ahead.   

The CFO works with the finance team to provide valuable feedback that adds value to the company’s strategy. For this to happen, the finance team must provide metrics to the top management drawn from reliable data.

Additionally, these metrics should be presented in an engaging and refined manner. The metrics presented to top management need to be easily readable and based on sound data. Let us now move to understand which FP&A metrics are the most important that every company must know while making decisions of utmost importance in the financial domain:

  • Revenue: This metric is the backbone of every business. Any company that doesn’t earn enough revenue that it needs is doomed to disappear very soon. Despite the importance of this metric, not many companies have refined the procedure of obtaining this KPI. Several SMEs are unable to tell how much money they earn each month. Thus, revenue is the top line on any financial statement. This metric can be measured in two different ways—annually and monthly.
  • Liquidity Ratio:  This is another important KPI for every business. Liquidity is the difference between a company’s current assets and liabilities. In simple terms, liquidity converts assets into cash quickly and cheaply. There are various liquidity ratios, and the most important are discussed here:
  1.  The Current Ratio: This measure is the company’s ability to pay off its current liabilities that are payable within one year with its total current assets, such as cash, accounts receivable, and inventories.

     

  2. The Quick Ratio (Acid Test Ratio): The Quick Ratio evaluates a company’s capacity to fulfill its short-term liabilities using its most liquid assets, excluding inventories from its current assets.

  3. Days Sales Outstanding (DSO): It represents the average number of days it takes for a company to collect payment after making a sale. A high DSO indicates that the company is taking too long to collect payments, which ties up capital in receivables. DSO is typically calculated on a quarterly or annual basis.0

  •  Profitability: This is the measure of an organization’s profit relative to its expenses. Thus, if organizations are more efficient, they will realize more profit as a percentage of their expenses than a less-efficient organization, which needs to spend more to generate the same profit.
  • Net Profit Margin:  This metric measures how net income or profit is generated as a percentage of its revenue. It is a ratio of net profit to revenue for a company or business segment. Although this is typically expressed as a percentage, it can also be expressed in decimal form. The net profit margin measures how much net income is generated as a percentage of revenue received. It helps investors assess whether the company’s management is generating enough profit from its sales and whether operating and overhead costs are controlled. It is one of the most critical indicators of a company’s overall financial health.
  • Return on Investment: This metric evaluates the efficiency or profitability of an investment. It is also used to compare the efficiency of a number of different investments. It evaluates how well an investment has performed. To calculate ROI, divide an investment’s net profit (or loss) by its initial cost. ROI is popular because it can be used to make apples-to-apples comparisons. Thus, it can rank investments in different projects.
  • Budget Variance: A budget variance is a measure that a company uses to quantify the difference between budgeted and actual figures for a particular accounting category. While a favorable budget variance refers to gains, an unfavorable budget variance describes losses or shortfalls. The reason why budget variances occur is that forecasters are unable to predict future costs and revenue with complete accuracy. Thus, a budget variance is an accounting term that describes instances where actual costs are either higher or lower than the standard or projected costs. Whatever the circumstances are, budget variance is inevitable. It is impossible to predict a business’s future costs or revenues accurately.

Why Opt for a Virtual CFO Service

As you will have noticed, it may be difficult for you as an SME business owner to comprehend specific vital metrics. Opting for a virtual CFO service can benefit those who find this challenging. Virtual CFOs provide expert financial analysis and guidance, helping you make informed decisions to drive your business growth. They offer flexibility and cost savings compared to hiring a full-time CFO, making it an affordable option for smaller enterprises.

Read also: Hiring a Virtual CFO? Here’s The Best Advice!

Additionally, a virtual CFO can help streamline financial operations and improve cash flow management, ensuring your business remains financially healthy. With their expertise, you can focus on core business activities while navigating complex financial landscapes confidently.

Virtual CFO Services from KMK Ventures

KMK Ventures offers businesses the financial expertise necessary for success through virtual CFO services. Their team of seasoned finance and accounting professionals assists businesses in crafting and implementing financial strategies that align with their overall objectives. KMK provides flexible, cost-effective solutions, making them an ideal partner for businesses aiming for economic growth and efficiency.

KMK Ventures stands out as a leading provider of outsourced accounting services, catering to businesses of all sizes. A key component of their offerings is their virtual CFO services, designed to equip businesses with the financial acumen needed for success. Whether your goal is expansion, cost reduction, or enhanced economic performance, KMK’s experts are ready to assist. With extensive experience in finance and accounting, KMK’s virtual CFOs deliver valuable insights and guidance to help you achieve your financial goals.

Services Offered by KMK’s Virtual CFOs:

  • Financial planning and analysis
  • Budgeting and forecasting
  • Cash flow management
  • Risk management
  • Financial reporting and M&A support
  • Accounting and bookkeeping

 Closing Thoughts

 Companies are under immense pressure to grow and succeed in today’s business environment. The role of the CFO has evolved from a secondary position to a central figure in driving a company’s strategic direction. CFOs must provide critical insights and decisions to guide the business through uncertain times. This requires a solid understanding of key financial metrics derived from reliable data and presented in a clear, actionable manner.

The top six FP&A metrics every CFO should know—revenue, liquidity ratio, profitability, net profit margin, return on investment, and budget variance—are crucial for making informed decisions that steer the company toward financial health and success. Understanding these metrics helps CFOs and their finance teams deliver valuable feedback and strategic guidance, ensuring the company’s financial strategies align with its overall goals.

For businesses struggling with these complex financial analyses, virtual CFO services offer an excellent solution. By leveraging the expertise of a virtual CFO, companies can gain the financial insights and guidance needed to navigate challenging financial landscapes, all while maintaining flexibility and cost-effectiveness.

Virtual CFOs, like those from KMK Ventures, provide comprehensive support, from financial planning and analysis to risk management and reporting, ensuring that businesses of all sizes can achieve their financial objectives and thrive in a competitive market.

About KMK

In the outsourced domain, KMK is a beacon of precision and reliability. With a robust team of over 475+ seasoned professionals, KMK ensures meticulousness and adherence to global standards in every task. This commitment to excellence allows CPA firms to navigate intricate landscapes with ease. KMK empowers firms to focus on their core functions by managing complex facets, ensuring optimal growth and efficiency. Their unwavering dedication to quality, timeliness, and accuracy positions them as a preferred partner for CPA firms, underscoring KMK’s significant presence and expertise in the industry.