Not all of a company’s assets are found on the balance sheet. Not all sources of profit levels are found in the income statement. Identifying and understanding nonfinancial key performance indicators (KPIs) that contribute to the financial KPIs, such as on-time delivery and employee turnover, can give companies a substantial edge over the competition.
Improved forecasting is just the beginning
A 2016 FSN survey found that CFOs who make better use of nonfinancial data were roughly twice as likely to forecast earnings within 5%. The survey found that tracking nonfinancial KPIs also doubled the odds that a CFO would look confidently beyond the twelve-month time horizon, as well as feeling prepared to respond to market changes.
Our own study reveals that while nonfinancial metrics comprised just 10% of KPIs two years ago, CFOs expect that number to reach up to 30% on average two years from now. In fact, nearly half (41%) of the respondents said they expected nonfinancial KPIs to comprise 30% or more of their metrics by 2018. This increase is understandable because primary financial KPIs are reported at the end of the fiscal month and, in contrast, nonfinancial KPIs are reported during the month providing time to react to them.
Against that backdrop, here are three business benefits gained by keeping a close eye on nonfinancial metrics:
Benefit #1: Counting what counts
Putting too much emphasis on financial data can give you a lopsided and unbalanced view of your business. “One of the best ways for an organization to improve its performance management environment is to have the CFO partner with the rest of the business in the development of more-balanced metrics,” Jason Balogh, a principal in The Hackett Group’s enterprise performance management transformation practice, told CFO.com.
To determine which nonfinancial KPIs will help provide a more complete picture, schedule time to meet with leaders from across departments. Work with them to select metrics that can be tracked and steer clear from KPIs that are vague or require too much effort to measure. Select metrics that lead from employee learning and innovation to influence improvement in business processes that contribute to customer retention and sales growth that ultimately increase the financial results.
Metrics that track aspects of the company’s sales funnel are often a good place to start. For example, you might want to track market size because it determines your potential customer base. Tracking media exposure can help you understand how well you’re reaching your target market. Tracking customer service, again such as on-time delivery performance, can signal potential issues with customer satisfaction and retention.
Benefit #2: Better data integrity
Getting more departments involved can also inspire a company to centralize its data—and streamline reporting. According to Adaptive Insights’ CFO Indicator Report, 60% of CFOs said their companies house operational and financial data separately, which makes it tough to track performance holistically.
Plus, more than half of CFOs (54%) said they generate reports by exporting data out of their ERP systems and into a Microsoft Office® application, which means data has a high chance of being altered while it’s being analyzed and shared. As files are copied and different departments make edits, it can be tough to know which version, if any, is the up-to-date version.
A user-friendly system that’s accessible to all key employees increases the likelihood the data reviewed and discussed at weekly, monthly, or quarterly metrics meetings is high quality data. This is relevant because KPI data typically doesn’t provide answers; it generates needed questions that might not be asked and answered without the KPI reporting.
Benefit #3: Strategic focus
Today, too many CFOs waste a lot of time gathering data, confirming its accuracy and consistency, and formatting reports. According to the Adaptive Insights survey, CFOs report they’re spending just 17% of their time on strategic tasks. While the CFOs and their teams can remain keepers and reporters of the data, they must be able to rely on other departments to uncover the meaning behind the numbers with analysis. This will not only free up the CFO’s time, but also solidify a sense of ownership within each team.
Including nonfinancial metrics in performance reviews can help elevate the conversation, encouraging leaders to focus on strategic goals—not just profit margins. And making reporting a team effort has the added benefit of freeing up CFOs to focus on more strategic initiatives.
A frustration of executives is not with formulating their organization’s strategy. It is with successfully executing their strategy. When KPIs are assigned with target metrics this not only enables accountability by managers, but this also aligns their actions, decisions, and priorities with the executive team’s strategy. The old adages are: (1) You get what you measure, and (2) If you can’t measure it, you can’t manage it; and if you can’t manage it, then you can’t improve it.
Nonfinancial KPIs allow companies to look beyond profit margins to see the trends that are driving those results—and potentially uncover important business opportunities. Reporting nonfinancial KPIs, especially against their targets, enables companies to monitor their progress towards accomplishing those strategic goals that lead to strategy execution. With cause-and-effect relationships among the nonfinancial KPIs, they provide insights as to what to change and serve as early signals of what level those profit margins will be.