Developing KPIs for Finance & Accounts Functions

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.

Suggested Template for 30 identified KPIs -An Illustration

KPI for F&A functions has been broadly categorized under two categories,

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

·?????63% weightage is based on:

a)1st three KPIs, each with weighted score@ of 5 – total score=15

b)Next 12 KPIs, each with a weighted score@ of 4 –total score=48

c)Total weighted score for 15 KPI=63(15+48)

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

·?????37% weightage is based on:

a)7 KPIs, each with a weighted score@ of 3 – total score=21

b)8 KPIs, each with a weighted score@ of 2 –total score=16

c)Total weighted score for 15 KPI=37(21+16)

?Methodology for determining the actual score

The KPI measurement can be either quantitative or qualitative,

a)Quantitative KPIs examples=Profitability, ROI, Cash flow etc. -Scoring methodology is simple: Actual divided by Target as %

b)Both qualitative + quantitative KPI’s examples =IPO/Equity, Long term borrowings, Investments, M&A/JV,Board matters etc

The scoring methodology is proposed below,

The CFO will choose the KPI and fix the target value in consultation with the CEO/MD at the beginning of each financial year according to the indicated unit of measurement.

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

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KPI For direct responsibility areas

Listed below are listed 15 Key performance indicators (abbreviated as A )along with measures of accomplishment (abbreviated as B), for which F&A teams have direct responsibility:

·??????KPI 1, A=IPO/Equity. ? B= Pricing, roadshows,% subscription, costs, equity & preference shares issuance & inflows etc.

·??????KPI 2, A=. Long-term borrowings. ????B= Borrowing rates/cost from banks/FI, covenants, Credit ratings received for Bonds & debenture, % interest rates, Inflows-disbursals, EMI repayments, utilisation

·??????KPI 3, A= Investments.??????????????????????????????B= Risk analysis, % return on investments?choices in Shares, Bonds, debentures, Mutual funds & so on

·??????KPI 4, A=?M&A or JV????????????????????????????????B= Due diligence, Price negotiations, Terms & conditions, statutory approvals, Forex hedging, ownership?control, % Royalty etc,

·??????KPI 5,A=?Board matters ???????????????????????????B= Quarterly/annual results, Dividends, Corporate governance , /Audits & so on

·??????KPI 6,A=??Cash flow from operations????B= Inflow from =customers, interest received, dividends, rentals etc & Outflows to= vendors, employees, taxes etc

·??????KPI 7,A= Cash flow from Investment?????B= Inflow from = Assets, intangibles, co securities, &, divestures, loans repayment by borrowers etc

and ?Outflows to= Assets, securities of other cos, acquisitions, investments made etc

·??????KPI 8,A=??Cash flow from Financing????????B= Inflow from = Equities/stocks, preferred shares, bonds, etc and Outflows = from sale of Equities/stocks, preferred shares, bonds, etc

·??????KPI 9, A=??free cash flow ????????????????????????????B= Cash flow from business operations less Net capital expenditure

·??????KPI 10, A=????cash burn ratio ??????????????????????B= Free cash flow during a specific period Divided by No of days during the period

·??????KPI 11, A=??operating cash flow to CL??????B= Free cash flow during a specific period Divided by Average current liabilities

·??????KPI 12,A=?Debt equity ratio???? B=. Total liabilities?Divided by?Total stockholder equity??????????????????????????????????????????????????????????????????????????????????????????

·??????KPI 13,A=?working capital????????????B= Current Assets-Current liabilities

·??????KPI 14,A=??current ratio???????????????B= Current Assets Divided by?Current liabilities?

·??????KPI 15, A=?Op cash flow to Capex? B= Operating cash flow Divided by?Annual capital expenditure?????????????????

????KPI For indirect responsibility areas

Listed below are listed 15 KPIs (KPI No 16 to 30) along with measures of accomplishment marked as A & B, respectively for which F&A teams may have facilitative role?:

·??????KPI 16, A=???Quick Ratio ?B= Cash + Short-term securities + Accounts receivable Divided by current liabilities ?

·??????KPI 17, A=????Profit margin ?????????????????????B= ?Earnings without interest expense Divided by net sale revenue ?????????????????????????????????????????????????????????????????????????????????????

·??????KPI 18, A=????Gross profit margin??????????B= Net Sales revenue - Cost of goods sold Divided by net sales revenue

·??????KPI 19, A=??????PBT?????????????????????????????????????B= Profit before tax Divided by net sales revenue

·??????KPI 20, A=??????EBIDT???????????????????????????????B= Earnings?before interest, depreciation, and tax Divided by net sales revenue

·??????KPI 21, A=???Expense to sales ratio??????B= Direct Expense Divided by net sales revenue

·??????KPI 22, A=??Return on Equity?????????????????B= Net income ?Divided by Average stockholders equity?????????

·??????KPI 23, A=???Earnings per share?????????????B= The net profit or loss for the period Divided by?The net profit or loss for the period

·??????KPI 24, A=???Dividend yield?????????????????????B= Dividend per share Divided by Market value per share

·??????KPI 25, A=????Return on assets????????????????B= Net income+ Interest expense net of tax saving Divided by (Beginning total assets +Ending assets)/2

·??????KPI 26, A=??Return on Financial leverage?B=Return on equity less Return on asset

·??????KPI 27, A=??Accounts receivable Turnover??B= Net?Sales revenue?Divided by?Average accounts receivable?????????????????????????????????????

·??????KPI 28, A= Days sales outstanding ??????????B= 365 Divided by?Accounts receivable Turnover

·??????KPI 29, A= Average vendor credit days??B= Value of Accounts payable Divided by ?Cost of goods sold X 365?

·??????KPI 30, A=?Inventory turnover ????????????????B= Cost of goods sold Divided by Average inventory

In both Qualitative and Quantitative KPIs, the actual performance and score earned are to be computed & captured in a table of 8 columns as below:

·?????col 1=Sr no,

·?????col 2=suggested KPI,

·?????col 3=Measure of accomplishment,

·?????col 4=unit of measurement,

·?????col 5=% weightage,

·?????col 6=Target,

·?????col 7=Actual,

·?????col 8=Score earned based on col 7/col 6 x 5

Actual performance in col 7 to be populated by the appraising person supported by factual data from MIS, Financial books & with ?ERP/Other software support

The score earned (in Col 8) to be computed based on the actual value in Col 7 divided by the target value in col 6 and the result multiplied by weightage in col 5.

How to populate the KPI template

·?????The template will be populated by the HOD of each sub-function within the F&A team and reviewed by the CFO.

·?????Col 1,2: KPI parameters (col 2) 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:

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

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

·?????Col ?3,4 -simple and self-explanatory

Col 5 - Weightage of 5,4,3,2, proposed for different KPIs based on likely impact. CFO can Change the proposed weightage of 5 or 4 or 3, or 2?to any other number, but total weightages for all KPIs?must be= 100

·?????Col 6 -The values here are hypothetical & to be decided by the CFO at the beginning of each FY

·?????Col 7 -The values indicated are hypothetical

·?????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 within ?F&A.

·?????CFO can evolve any number of KPIs?for F&A functions,add or delete the anyone based on a similar approach?with a focus only on relevant KPIs for ?F&A and decide which one has direct responsibility and which one has indirect responsibility

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

?Illustration for populating 4 random KPI, each ?with different weightage

(Illustration given below is in narration form as unable to tabulate due to the limitation of the software...you can see the table at the web site

1)?KPI no 1 IPO/Equity: Assume kpi weightage =5%, Target-5 points on the scale, Actual= 4 points on the scale, Score earned will be = 4 % based on 4 /5 multiplied by weightage of 5%

2)KPI no 6 Cash flow from operations: Assume kpi weightage =4%, Target-Rs 80L, Actual= Rs 60L, Score earned will be = 3% based on 60L/80 L multiplied by weightage of 4%

3)KPI no 16 Quick ratio: Assume kpi weightage =3%, Target-1.1 times, Actual= 0.93 times, Score earned will be =2.54 % based on 0.93/1.1 multiplied by weightage of 3%

4)KPI no 27 Acct receivable turn over: Assume kpi weightage =2%, Target-9 turns Actual= 6.6 turns, Score earned will be =1.46 % based on 6.6/9 multiplied by weightage of 2%

Total for 4 KPIs : Weightage ?Score =14% ?,Actual score earned =11%

·??????Values of weightage %, targets, and actual in the above illustration are hypothetical and only for enhancing readers' understanding, ?

·??????A similar methodology can be applied for the remaining?applicable/chosen KPIs with a target weightage score of 100

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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