blogFinance KPI Reporting Best Practices
Strategy is important, plans are great, but in order to answer the day-to-day questions around how a company is doing financially, you need to understand how its Key Performance Indicators (KPIs) are shaping up. There’s a lot that goes into KPI reporting, which is why many companies use a platform like Firmbase to make sure they’re getting a deep yet broad understanding of their business’ financial reality without requiring a lot of heavy lifting every time.
KPI reporting is worth investing time and effort into getting right, and as much as possible getting automated, because once the processes are in place it becomes easy to identify issues like a problematic gap between predictions and reality before they become pressing, and to capitalize on opportunities while they’re available.
Make KPIs Clear and Consistent
One thing a surprising number of companies get wrong when they’re young is ensuring that all departments have a shared understanding of what their financial KPIs should mean, and consistent practices about how to report them. Even some very established companies can go through times when there’s confusion around these foundational facts.
Don’t be one of those!
Clarity Around KPIs
It’s the responsibility of the finance department in an organization to ensure that everyone in their company relies on shared understandings of their KPIs.
Disagreement or lack of consistency can occur anywhere, from the marketing and sales departments using different definitions of what should count as a qualified lead to R&D, operations and finance all using different definitions in practice of what counts as Capex and what doesn’t.
Even though this is something that affects the whole company, in most companies it’s down to finance to ensure that everything and everyone is working together off the same script, because at the end of the day finance will be responsible for working out the company’s financial position and will have to investigate and resolve irregularities.
Embed KPI Reporting in a Process
KPI reporting is not something that should require re-inventing the wheel. While organizations may want to add or remove certain performance indicators from their KPI list from time to time, typically there’s a need to look at the same metrics on a regular basis. In fact being able to compare the metrics from one period to another is part of why KPIs are valuable.
For this reason, KPI reporting works best when it’s embedded in a regular and predictable process to ensure it’s done the right way and has reliable results ready whenever they’re needed. Some factors to consider when building the process include:
- Make sure there’s accountability, and that specific people are responsible for the process as a whole and for each individual part.
- Make sure that the data sources are up to date, accurate, and regularly updated. If more than one team is using a particular data point, make sure they’re taking it from a single source of truth.
- Make sure that the steps of the process are logged and that the data sources are traceable. You don’t want to have to trawl through a maze of possibilities if questions arise.
- Make sure the process is compliant with accounting, privacy, legal etc regulations and standards.
Synthesize Financial and Non-Financial Data for KPI Reporting
Finance teams are always most likely to lean towards a focus on financial data for KPIs, and that’s very natural. It also makes sense, given that the organization’s financial metrics are in many ways the clearest indicator of the current financial health or otherwise of the business.
Financial KPIs are indeed key. But as well as including data like this in your KPI reporting, make sure that you’re looking at non-financial metrics as well. Factors such as headcount, retention of employees, employee engagement, operational efficiency, and many other factors are also vital in building up an accurate picture of how the business is doing. These are key performance indicators too.
Take time to consider whether there are industry-specific data points that you might want to include, either as KPIs themselves or perhaps as data points that you regularly include as part of KPI reports as useful context. For example the finance team of an agricultural company might find that including recent weather patterns and predictions gives valuable information that informs an understanding of the KPIs, even if this is a metric that would be out of place in most other industries.
This illustrates an important point: Even though there are some aspects of KPI reporting that are fairly standard across companies, there’s no one golden way to do it. Think through whether the way you’re doing it is the best way for your company.
KPI Reports Can Be Multi-layered
KPI reporting often feels like it boils down to a handful of vitally important numbers. If you have an executive summary, that may literally be the case. There are also likely to be a small number of metrics that you rely on as a shorthand to check the pulse of the business on a regular basis. This is pragmatic, and makes sense.
However, it’s important not to let too much focus on these shorthand metrics obscure the wider context that gives the numbers meaning over time. For instance, let’s say that you skim your main KPIs and see that you’ve hit your manufacturing expectations, sales goals and gross margins are as expected. Everything looks good.
But when you dig down into things, you realize that in fact there’s been a lot of dynamic activity; some prices of suppliers and resources have gone down, while others have gone up. You’ve been relying on a team of experienced workers, but 5% just quit. Your sales team met their quotas, but not in the areas they were expecting – maybe they upsold much more than expected but didn’t get much new business, or vice versa.
All of these things dramatically impact how things might look next month, and the next, and the quarter after that. New employees take time to find and train, meaning you may need to plan for lower productivity, or think of ways to avoid this. Customer success and perhaps R&D may need to adjust their plans and priorities depending on whether it’s new business or upselling and whether that was according to plan. And so on.
The details matter. High-level KPIs won’t necessarily give that to you.
That’s why many KPI reports have an executive summary, including top metrics, and also include an explanation with context, and more detailed metrics after that.
That might sound like a lot of work, but it doesn’t have to be. Platforms such as Firmbase can make collecting data like this, and generating reports based on it, easy and smooth. You can also explore ways to make the data easily accessible to non-finance folks, such as including visualizations, graphs, or an interactive dashboard, and making sure to use non-technical language.
KPI Reporting is Not Set and Forget
KPI reporting is a process, not an event. Even if you are in an organization which issues detailed reports once a quarter and doesn’t regularly share numbers outside of that, the finance team will still need someone responsible for checking that, broadly speaking, finance KPIs are as expected. If not, you want to find out sooner rather than later.
At least once a year, set time aside to assess your typical KPIs and analyze them critically. Are these still the right KPIs to reflect the health of the business? Do you need to add or remove some? Does the definition used still make sense, or does it need adjusting? Is the way you’re tracking and presenting KPIs still a fit for the needs of the organization as it is today?
It might well be that you conclude this process confident that you don’t need to make any changes. That’s a great result, not because you don’t need to change anything – but because you’re confident, for data-driven analytical reasons, that you’ve got the right answer.
Automate KPI Reporting Where Possible
If you’ve been keeping track of KPIs in Excel spreadsheets, this article might have sounded a little overwhelming. Modern finance teams need to track far more data, both internal and external, in order to have the impact they are expected to provide for the company. At the same time, factors in the wider markets, supply chains and more mean that things change faster than ever.
In this context, accurate, reliable and consistent KPI reporting that happens quickly enough to catch issues before they turn into problems, or to allow companies to grasp opportunities while they’re still open, can sound intimidating.
Teams who incorporate automation into their KPI reporting find that the process can become easy early on. Although setting up automation takes some thought and work, once this is done the metrics become more reliable, since human error is removed, and can be configured to be available in real time or close to that. It’s also possible to have certain changes raise flags for review.
Make KPI Reporting a Means, Not an End
As with other financial reporting processes, KPI reporting runs the risk of turning into an end in itself. But it’s not a checkbox exercise. Just because you have a goal of issuing a detailed KPI report once a quarter (for example) doesn’t mean that this exercise is actually a goal itself.
The best way to think of, and to use, KPI reporting is as a powerful way to take the temperature of the organization’s financial situation on a regular basis, both in comparison to previous quarters and years, and in comparison to where you expected to be at this point in the year.
That’s why it’s so important to ensure that you’re measuring the KPIs that make sense for your organization, in the way and in the most timely fashion that your business needs.
It also highlights an important part of the KPI reporting process for finance teams, which is to help leadership and other departments to make use of the KPI reports you generate. It doesn’t matter how great the reports are if they’re not having the influence they need to have to keep your company on track – or make sure you take action, when it isn’t.
