In the midst of a lingering pandemic with team members working remotely and in-and-out financial expenditure being ever more important to track, it becomes critical for team members to monitor and report key metrics to the head of financial decisions and expenditure, the CFO. From tracking solvency and liquidity ratios to monitoring operating cash flow, the CFO needs to stay on top of overseeing the outgoing short-term expenditure for payroll and regular bills; in addition to making key long-term business decisions and seeking opportunities to strategize on existing capital at the optimal time. That being said, reports should not be delayed until end-of-month reporting but rather done in an intuitive, timely manner using real-time, interactive financial dashboards. Below are the metrics every CFO knows to monitor but will prove to be effective during and after a crisis when visualized for financial operations.
Calculated by subtracting the company’s debts and liabilities from the company’s assets, the working capital is a general measurement that will allow insight into liquidity at hand for executives to understand the money available for business growth in order to make business investment decisions for growth, profitability, and sustainability such as increased production or market expansion. If the ratio of assets to liabilities is less than one, the company has negative working capital, and therefore little to no room for expansion with current capital. Conversely, if the ratio of assets to liabilities is greater than one, there is a strong indication that the company is in good shape for current business operations and investments towards future growth.
Accounts Receivable Turnover vs. Accounts Payable Turnover
- Accounts Receivable Turnover
Also known as the receivables turnover ratio, the accounts receivable turnover quantifies a company’s ability to receive due credit from customers within a certain period of time. It is the ratio of net credit sales over average accounts receivable. To calculate the net credit sales, simply subtract customer refunds from total customer credit sales. To calculate the average accounts receivable, add the value of accounts receivable at the beginning of a certain period with the value of the accounts receivable at the end of that period and divide the sum by 2. A high accounts receivable turnover indicates the company has customers that pay off debt quickly and the company can effectively collect accounts receivable in time. On the contrary, a low accounts receivable turnover indicates the company has customers that do not pay off debt quickly or perhaps low sales volumes overall and therefore should consider changing credit policies and/or the collection process.
- Accounts Payable Turnover
Similar to accounts receivable turnover, the accounts payable turnover measures the rate at which a company pays debts to suppliers during a certain period. It is the ratio of total supply purchases over a period of time over the average accounts payable for that period. To calculate the average accounts payable, add the value of accounts payable at the beginning of a certain period with the value of the accounts receivable at the end of that period and divide the sum by 2. A high accounts payable turnover indicates the company can pay off debt quickly and generally manage finances in a timely manner. An increasing ratio over time can also be detrimental as it may suggest the company is not reinvesting to expand the business which could result in decreased long-term profit and growth. On the other hand, a low accounts payable turnover indicates the company is not able to efficiently pay off the debt in a certain period of time and/or has made a contract with suppliers to pay off credit further down the road.
To view an interactive dashboard example of the two in action, check out our AR and AP financial enterprise reporting.
Something to point out is the necessity for data integration and transparency among the respective employees that drive these various metrics which, when combined, can be used to calculate these KPIs on financial enterprise reporting software to make real-time decisions based on reliable, accurate data. Monitoring metrics such as these also bring light to the specific underlying areas of impact when users are able to drill down into the CFO dashboard KPI and uncover correlated data across various sources that are influencing the results of those metrics. Enterprise reporting software makes that integration more seamless and intuitive for all data stewards and business users so they can better understand the implications of future strategic decisions and continuity plans on the metrics they are viewing first-hand.
Payroll Headcount Ratio
Among these uncertain times, many companies have also had to make challenging decisions in regard to adjusting staffing levels. As variability remains across different factors during moments of unforeseen change, it is absolutely crucial for HR to report the count of employees in a company to the head of financial decisions to be able to evaluate the usage of labor with the organization’s financial performance. The Payroll Headcount ratio compares the number of full-time employees to part-time employees, as well as freelance and contract workers. There are several factors companies may use such as salary and benefits, number of employees, etc. Depending on which metric is tracked, if the payroll headcount ratio is growing, that may mean more full-time employees which would add to labor costs. Likewise, a decreasing ratio may signal a decrease in full-time employees and an increase in the company’s onboarding of part-time, freelance, and contract workers or possibly an overall decline in the total workforce. This transmission of information between Human Resources and the Finance/Accounting departments strengthens the company’s collaborative ability to streamline data processing and diminish redundancy in key analytical efforts.
Using data found on the balance sheet of a company’s financial statement, the debt-to-equity is a type of gearing ratio that compares the sources of a company’s assets (leverage and company-owned funds) and can be calculated by dividing a company’s liabilities by its total shareholder equity. This ratio is a reliable representation of a company’s usage of externally provided funds compared to corporate-owned finances. A higher ratio may indicate a greater risk to stakeholders but beware that the ratio can look different across industries as optimal debt and loan amounts vary.
A useful metric for companies with shareholder equity, the return-on-equity determines a company’s effectiveness to convert company assets to profits by dividing the net income by the shareholders’ equity. Similar to the debt-to-equity, the ideal return-to-equity ratio varies across industries.
The key to effectively utilizing every one of these CFO dashboard KPIs is a database that is constantly updating. Numbers change and so must your dashboard data to keep pace with it. One may go in and manually change each and every number but with TruOI, that’s taken care of with our built-in data ETL tool that will integrate, extract, and connect disparate sources and automate manual data tasks so you can save time, money, and effort for what’s important. This not only empowers the team with a single source of truth, but allows decision-makers to feel confident that the data guiding them is accurate, timely, and complete. Ready to put it all together? Learn more about the types of financial dashboards and how to integrate your finance KPIs here!