Your business reports show you the performance of your business. Financial KPIs show you whether such results are a signal for health or not and what might require change. The KPI (Key Performance Indicator) is a simply measurable number that highlights how a particular unit of your business is doing. A fast-paced business venture might mean a situation of not being clear about which figures need to be monitored. Revenue numbers without context don't tell profitability.
A fractional CFO services is the one who identifies and keeps an eye on the key financial metrics and makes the necessary business decisions upon the change in these numbers.
The Core KPIs Fractional CFO Services Monitor Every Month
It is unlikely that the CFO of the company will have time to scrutinize every financial figure that is being tracked in your accounting database. Yet, what is more important is developing the right set of key indicators.
The idea is to create a dashboard that enables to quickly get a handle on the situation by answering key areas like what comes next:
- Do we make enough money?
- Are we really profitable?
- At what speed do we spend our cash?
- For how many months would our current reserves of money still support the business?
- Do our expenses grow at a higher rate than our earnings?
- Are our clients settling their balances based on the terms agreed upon?
- Will we be financially okay if we decide to hire new workers, increase the scale of the business, or make new investments?
The right combination depends on the business. A service company may prioritize revenue per employee and project margins, while a SaaS company may focus on recurring revenue and customer retention.
Cash Runway, Burn Rate, and Gross Margin Explained
Three KPIs help businesses managing growth, investment, or tight cash positions keep a finger on the pulse.
Cash runway
A business can operate before its available cash runs out, estimated for how.
Example:
- $240,000 - cash available
- $40,000 - monthly cash shortfall
- $6 months - approx. cash runway
A fractional CFO can use this to decide whether the company shall reduce the expenses, increase the revenues, collect receivables, or finance.
Burn rate is the measure of how fast cash is consumed.
If a company is spending $70,000 more than generating cash each week on average, the monthly burn rate is around $70,000.
The financial officer (CFO) should check:
- Monthly burn rate
- Variations in burn rate
- Significant expenses which resulted in a rise
- Anticipated burning
- Spending vs growth
Gross margin is the amount of money that still remains after paying off the direct costs of production of a product or service.
Example: $100,000 - $40,000 (Direct Costs) = $60,000 (Gross Profit)
The gross margin is therefore 60%.
When gross margin declines, a CFO may Investigate:
- Rising supplier costs
- Higher production expenses
- Labour cost increases
- Excessive discounts
- Pricing that is too low
- Changes in the product or service mix
Together, cash runway, burn rate, and gross margin provide a clearer picture of both short-term liquidity and underlying business economics.
How Fractional CFO Services Choose Which Metrics Matter for Your Business
The KPI dashboard that one business may be using another business may not.
Fractional CFO services typically select metrics based on four main factors:
1. Business Model
A company's way of making money will largely dictate the set of KPIs that will suit it the best.
For example:
In professional services businesses, some of the common KPIs could be:
- Billable utilisation
- Revenue per employee-
- Project profitability
- Accounts receivable-
- Gross margin
In subscription-based businesses, some of the KPIs could be:
- Monthly recurring revenue
- Customer retention
- Customer acquisition cost
- Churn
- Gross margin
To be able to track retail KPIs, this KPIs would be a good fit:
- Inventory turnover
- Sales growth
- Gross margin
- Average transaction value-
- Cash conversion
2. Business Stage
A startup will probably prioritize cash runway and burn rate the most because saving cash is really crucial during the first phases of growth.
The seniority stage of a company can have a significant impact on the emphasis of the key financial goals like the management of working capital debt, the accuracy of the forecasts, profit ROI, and new market opportunities.
3. The present issue of finance
We should not forget also that KPIs have to react to internal developments in the company.
When cash is short, the CFO will most likely prioritize:
- Cash balance
- Cash flow
- Cash runway
- Burn rate
- Accounts receivable
However, a declining profitability might lead the focus to shift toward such factors as:
- Gross margin
- Op. expenses
- The net profit margin
- Pricing
- The profitability of products or services.
4. Business Goals
Key Performance Indicators (KPIs) are aligned to enable particular management decisions. Suppose management intends to grow the company, the Chief Financial Officer (CFO) will monitor if the company's current cash flow is sufficient to cover the costs of new employees locations, equipment, and marketing expenditure.
Come up with a dashboard that only contains the critical metrics to monitor. Avoid the trap of getting a cluttered version of your old spreadsheets.
Transforming KPIs into Decisions
The primary reward of monitoring your company's financial key performance indicators (FPS) is the ability to base your business decisions on them.
A part-time CFO might implement what comes next straightforward way:
1. Determine the change
Figure out which of your KPIs have experienced a noteworthy shift.
2. Identify the cause
Look into the financial transactions costs, revenue collections pricing, or operational factors that caused the change.
3. Evaluate the consequences
Make a projection about how the change will affect cash flow, profitability, or future forecasts.
4. Provide a solution
Instead of just flagging a problem, give a suggestion on what to do about it.
5. Monitor the result
Review the KPI again to determine whether the action worked.
Let's say that gross margin drops from 62% to 54%. While a simple explanation would just point-out that profit has become less than that the company can make, maybe the cost a supplier has charged has gotten 15%.
CFO would probably suggest that management might want to:
- Get a better deal with the supplier
- Ask the customers to pay a higher price
- Make the production of the goods less costly
- Look at products having low gross margin
- Sell a different mixture of product
If a business has only a small amount of cash on-hand, the same principles could be applicable. Suppose, a cash runway is 10 months and has dropped to half, i.e. to 6 months. Management might need to change the way they recruit or not spend on the things which are not necessary, collect their accounts receivables more efficiently, or try new ways to raise capital.
How Often These Metrics Should Be Reviewed
The timing of KPI reviews should be based on the rate of financial change.
Weekly Review
Best for indicators that can impact cash flow immediately:
- Bank account
- Payments received
- Large payments
- Cash in and cash out
- How much cash a business can run for
Monthly Review
Many companies should do an in-depth monthly KPI study which would include what comes next:
- Income
- Gross Margin
- Operating Expenses
- Net Profit Margin
- Burn rate
- Accounts receivable
- Cash flow
- Budget vs. actual performance
- Quarterly Review
Making bigger-picture decisions is possible through regular quarterly reviews like:
- Growth trends
- Pricing strategy
- Capital Investment
- Debt level
- Forecasting accuracy
- Long-term profitability
To start you should look at quarterly reviews and then see what numbers you have to look at on a weekly and then on a monthly or quarterly basis, which is what a professional fractional CFO can help with.
At the same time, it is also crucial that Key Performance Indicators are not just numbers, they need to be compared with a target/standard that makes them meaningful, like:
- Previous month
- Previous year
- Budget
- Forecast
- Industry Benchmark
- Business target
Just an individual number seldom paints a picture in whole.
It is only when you see the reason behind the numerical change, which is a trend, that management is able to come up with the best decisions.
If a business owner has appropriate KPIs and is analyzing those KPIs regularly, fractional CFO services in usa can help provide insight into financial risk, identify the causes of improved performance, and more confidently make spending, hiring pricing, financing and growth decisions.
