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  • Writer's pictureArvind Dang

Developing KPIs for Finance & Accounts Functions

Updated: May 27



A KPI for a function is a measurable value that demonstrates how effectively a function is meeting organizational objectives. KPI needs to be specific, measurable, realistic, and communicated to concerned key functional team members to accomplish.








How to develop KPI

For developing a robust KPI system,11 business activities are considered essential in each of the 3 Project design and engineering functions as below.

·1. Sharing of corporate targets like Sales nos, Revenue, and Construction costs & Completion targets with CFO

· 2. Design of format/contents of KPI with inputs from CEO/MD

· 3. Identify important KPIs based on corporate objectives and external influences like customer demand or & competitors’ offerings, or & economy or &statutory considerations

· 4. Proposing initial KPI Targets and Measures by each HOD of F&A function and review with CFO

· 5. Reviewing, modifying, and approving the F&A ‘s KPI by CEO/MD

· 6. Putting up measurement systems in place like reports /dashboards

· 7. Converting each functional KPI into KRA-Key result areas of functional team members at different levels i.e.

i)Higher level: directors-, CFO, HOD, General managers-GM, and so on as applicable

ii)Middle level: senior manager-sr. mgr, manager, and so on as applicable

iii)Lower level: assist. manager/junior mgr., staff, workers so on as applicable

· 8. Monthly capturing of actual accomplishment of KRA by respective teams in templates

· 9. Periodic review of Actual achievement of KPI vs. Target

· 10. In exceptional cases, reviewing, updating, and resubmitting KPI to CEO/MD

· 11. Compile Level-wise Actual vs. Target of KRA and forward updated reports to the HR team for each level's subsequent annual performance appraisal system.


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Suggested Template for 30 identified KPIs -An Illustration


KPI for F&A functions has been broadly categorized under two categories, ie. Direct responsibility area and Indirect responsibility area


· Direct responsibility area. = 15 KPI -with 63% weightage

3 KPI rows have been assigned with weightage score@5 for each KPI with cumulative impact =15 score points as per illustrations below.

12 KPI rows have been assigned with weightage score@4 for each KPI with cumulative impact =48 score points as per illustrations below.

· Indirect responsibility area = 15 KPI with 37% weightage (F&A teams play facilitative roles)

7 KPI rows have been assigned with weightage score@3 for each KPI with cumulative impact =21 score points as per illustrations below.

8 KPI rows have been assigned with weightage score@2 for each KPI with cumulative impact =16 score points as per illustrations below.

Scoring methodology

The KPI measurement can be either quantitative or qualitative, and a few examples of quantitative KPI are as under

Quantitative KPI

· Profitability- In Rs or USD or %

· Cash flows - in Rs or USD

· Receivables - in Days or Rs

· Return on Investments- In %

· Solvency related KPI- In Ratios or %

and so on

In such cases, it is easy to compare performance based on Target vs. Actuals and compute % achievement based on scores earned and illustrations given.

Quantitative KPI

However, there can be many KPIs that may be both qualitative & quantitative in nature, such as below:

· IPO/Equity

· Long term borrowings

· Investments

· M&A/JV

· Board matters

In such cases, the scoring methodology is proposed below, wherein *1 mark has been indicated, highlighting the following.

Note *1=Indicates, the target value to be set up by the CFO in consultation with the CEO/MD at the beginning of each financial year as per the unit of measurement indicated. There can be KPI where it is difficult to quantify performance in Rs terms or % value or any other unit. In such a few cases, a score is given and assessed qualitatively on a 5-point scale, as highlighted below.


· 5 score indicates the highest performance

· 4 score shows very good performance

· 3 score indicates good performance

· 2 scores indicate below-average performance

· 1 score indicates poor performance


Scoring methodology-

In both Qualitative and Quantitative KPIs, the actual performance and score earned will be computed & captured in

Actual performance is to be captured by the appraising person supported by factual data from MIS, Financial books & with ERP/Other software support & measured in terms of UOM indicated earlier, with inputs from the appraisee.

Two columns -7 & 8 need to be inserted in this table by Finance professionals to capture following .

Col.7= Actual Value

Col 8= The score earned to be computed based on the actual value in column 7 divided by the target value in column 6.


Template 1-for capturing KPI w.r.t. Direct responsibility area


S.no Col 1

Suggested KPI Col 2

Measure of accomplishment Col 3

UOM Col 4

Percentage Weight- Age Col 5

Target Col 6

1

IPO/Equity

Pricing, roadshows,, %subscription, costs, equity & preference shares issuance & inflows & so on

Scale

of 5

5

5 see note1

2

Long term borrowings

Borrowing rates/cost from banks/FI, covenants, Credit ratings received for Bonds & debenture, % interest rates Inflows-disbursals, EMI repayments, utilisation

Scale

of 5

5

5 see note1

3

Investments

Risk analysis ,% return on investmentschoices in Shares, Bonds, debentures, Mutual funds & so on

Scale

of 5

5

5 see note1

​4

M&A or JV

Due diligence, Price negotiations, Terms & conditions, statutory approvals, Forex hedging, ownership control Royalty amount etc

Scale

of 5

4

4 see note1

5

Board matters

Quarterly/annual results, Dividends, Corporate governance , /Audits & so on

Scale

of 5

4

4 see note1

6

Cash flows from business operations


Computations duringa perioud based on: Inflow from =customers, interest received, dividends, rentals etc , Outflows to = vendors, employees, taxes etc

Notes: More heads can be added as relevant

Rs

4

?

7

Cash flows from investment activities


Computations based on; Inflow from sales of =Assets, intangibles, co securities, & divestures, loans repayment by borrowers etc Outflows for purchase of =Assets, securities of other cos, acquisitions, investments made etc

Rs

4

?

8

Cash flows from finacial activities


Computations based on: Inflow from sale of =Equities/stocks, preferred shares, bonds, etc Outflows for =Dividends, buy of treasury stocks, bonds, short term debts payments etc

Rs

4

?

9

Free cash flows

Cash flows from investment activities


Rs

4

?

10

cash burn ratio

Free cash flow during a specific period Divided by No of days during the period Notes: It indicates daily cash during the period.

(-) Negative indicates company can go into financial distress

Rs + or _

4

?

11

Operating cash flow to current liabilities

OCFCL

Cash flow from operations Divided by Average current liabilities

Notes:It represents the net amount of cash derived from operating activities during the year and ability of the company to generate cash from operations to pay its debts

% or ratio

4

?

12

solvency

Total liabilities Debt/equity ratio =. Divided by

Total stockholders' equity

% or ratio

4

?

13

liquidity

Working capital =Current Assets-Current liabilities

Rs

4

?

14

liquidity ratio

Current asset Divided by Current liabilities

Notes: Current ration expresses working capital as a ratio .Value exceeding 1( one) indicate a positive net working capital

ratio

4

?

15

Operating cash flow to capex

Operating cash flow Divided by

Annual capital expenditure

% or ratio

4

?

Template 2 for capturing KPI w.r.t. Indirect responsibility area


S.no Col 1

Suggested KPI Col 2

Measure of accomplishment Col 3

UOM Col 4

% Age Col 5

Target Col 6

16

Liquidity

-Quick ratio

Cash + Short-term securities + Accounts receivable Divided by Current liabilities Note: The quick ratio reflects on a company's ability to meet its current liabilities without liquidating inventories that could require markdowns.

Quick assets are those which are likely to be converted into cash within a short period of time. Value >1 indicates companies ability to meet its current liabilities without any difficulty

times

3

?

17

Profit Margin

Earnings without interest expense Divided by Net sales revenue

Notes: The higher %, indicates profitable operations

%

3

?

18

Gross Profit margin

Net Sales revenue - Cost of goods sold Divided by Net sales revenue

Notes: % indicates how much every sale Rupee is gross profit. Higher the better

%

3

?

19

PBT

Profit before tax Divided by Net sales

Notes: The higher %, indicates profitable operations

%

3

?

20

EBIDT

Earnings before interest, depreciation and tax Divided by Net Sales value

Notes: The higher %, indicates profitable operations

%

3

?

21

expense to sale ratio ETS

Direct Expenses Divided by . Net sales revenue

Notes: It measures the percentage of each sales Rupee that goes to cover specific expenses..Lower the better

%

3

?

22

return on equity ROE

Net income Divided by Average stock holder’s equity Notes: ROE measures the return on the investment made by the firm's stockholders. It

is one of the primary measures of company performance for a specific period, usually a fiscal year

%

3

?

23

Earning per share

The net profit or loss for the period Divided by weighted average number of equity shares outstanding during the period

Notes: Computation as per accounting standard 20

Rs

2

?

24

Dividend yield

Dividend per share Divided by Market value per share

Notes: Dividend per share is calculated based on the annual dividend declared during the year divided by the number of outstanding common stock

%

2

?

25

Retuen on assetsROA

Net income+ Interest expense net of tax saving Divided by (Beginning total assets +Ending assets)/2 Notes: It measures utilization of assets to earn a profit. ROA measures the return earned on each Rupee that the firm invests in assets.

Interest costs is excluded from the ROA calculation so that return is measured without the effect of debt financing.

%

2

?

26

Return on financial leverage

ROFL= ROE-ROA Notes: Financial leverage refers to the effect that liabilities (including debt financing) have on ROE. A firm's management can increase the return to shareholders (ROE) by effectively using financial leverage.

On the other hand, too much financial leverage can be risky as too much debt increases chances of failureto make timely debt payments

%

2

?

27

accounts receivable turnover

Net Sales revenue Divided by Average accounts receivable

Notes: More turns indicate that accounts receivable are being collected more quickly

Turns

2

?

28

days sales outstanding

365 Divided by

Accounts receivable Turnover

Days

2

?

29

Avg vendor credit days

Value of Accounts payable Divided by x 365 Cost of goods sold

Notes: No of days payable to vendors

Days

2

?

30

Inventory turnover

Cost of goods sold Divided by Average inventory Notes: It measures the number of times during a period that total inventory is turned (sold). Higher no of times indicates that inventory is managed efficiently

no of times

2

?


How to populate the KPI template

· As is evident from the above table, a template (with 8 columns and 30 rows) has been proposed for the F&A function, which can be populated by the HOD of each function within the F&A team and reviewed by the CFO.

Each row represents a KPI parameter (along with the unit of measurement) with different weightages for each KPI.

For an easy-to-understand model, in column 5, the total of all the weightages of KPIs' must add up to 100,

· Essential inputs for computing actual accomplishment vis a vis each KPI are given in column 3.

· The values for the “Target” KPI and “Actual” vis a vis each KRA are populated in columns 6 & 7, respectively.

· After that score earned is to be determined as follows:

The actual value in column 7

Divided by X weightage score in column 5

Target value in column 6

The computation of the score earned is illustrated below for four random KPIs, each with different weightage of 5,4,3,2, respectively, in column 5. The values or numbers in cols 6 & 7 ,indicated in the illustration, are hypothetical.


· KPI parameters will undoubtedly vary from organisation to organisation, and weightages can be decided by CFO in consultation with CEO/MD.

· Therefore, at the absolute discretion, CFO can do the following:

i) Change the character/narration of each KPI and its measurement unit.

ii) Add or delete or edit the KPI in consultation with CEO/MD

iii)Change the proposed weightage @ 5 or 4 or 3, or 2 for KPI to any other number,

·However, for simplicity and to develop a Robust quantifiable model, the amended KPI's, overall weightage must add up to 100.

· In large organisations with multi-plants/offices in different countries/states/locations or companies with multiple end products or services, separate KPIs must be identified for each sub-functions of F&A.

· CFO can evolve KPIs for the above functions based on a similar approach with a focus only on relevant KPIs for each function

· For the service industry, KPI related to inventory will not be relevant, and end products will get replaced by “Services“ and cost of goods sold will get replaced by the cost of rendering services.

Template 3-Illustration table for 4 KPIs

# indicates values considered in these cells are hypothetical and only for enhancing readers' understanding.

The score earned for 4 KPI’s=11 out of the target weightage of 14 (reflected in Col 5 and Col 8, respectively) and a similar methodology is to be applied for all 30 KPIs with a target weightage of 100 .

KPI S.no

Suggested KPI

Measure of accomplishment of KPI

UOM

% Weight- age

Target

Actua

Score earned

Computation of score based on values in

col 7/col 6 x col 5

Col 1

col 2

col 3

col 4

col 5

col 6

col 7

col 8

col 9

1

IPO/Equity

Description same as in template 1

scale of 5

5

5

4

4

This KPI Measure is qualitative

6

Cash flows from business operations

during a perioud

Description same as in template 1

Rs

4

80Lac #

60Lac #

3

(60/80) x4

=3

16

Liquidity -Quick ratio

For a perioud

Description same as in template 2

Times

3

1.1 #

6.2L+4.1L+8.6L Divided by 20.2L. #=0.93

2.54

(0.93/1.10).x 3=2.54

27

Accounts receivable Turnover

For a perioud

Description same as in template 2

turns

2

9#

6820L-sales Divided by (915L+1125L)/2 Avg

Receivables =6.6

1.46

6.6/9 x 2

=1.46

Score earned for above 4KPI’s=11 out of 14 (in col 5 and Col 8 respectively)

14

11

Activities that can adversely impact the business



  • Providing incorrect inputs to senior management -CFO/CEO/MD with malice intent of assigning easy targets/goals for KPI parameters.

  • In the workflow/embedded software (that enables accessing of KPI), incorporating incorrect parameters vis-à-vis management-approved parameters by not exercising prudence leads to inaccurate capturing of KPIs

  • Making changes in the KPI Targets or actuals before the performance review period with ulterior motives

  • Measures of accomplishment are deliberately kept vague and not merit-based, leading to the scope of manipulation.

  • Percent weightages assigned to each KPI are biased with ulterior objectives of influencing outcome vis-à-vis performance perspective.

  • Targets Set are biased (too stretched or loose) to reprimand or favour specific team levels /employees, leading to demotivation/dissatisfaction.

  • The actual measurement carried out is captured inaccurately or manipulated.

  • Through the back end of software, making circular changes in the KPI Targets or actuals during the performance review period, with ulterior motives and turning off the audit trail to prevent detection.

  • Not ensuring restricted access rights to KPI values in the appraisal software in HR, thus enabling unauthorised persons to make unauthorised changes in targets vis a vis approved KPI.


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