Cumbersome, unwieldy management reports have become all too common. A monthly operating update for some companies could be over 200 pages. That’s way too long for any audience — and finance leaders must remedy the situation, recognizing that more information doesn’t equal good information.
The key is to ensure that the finance dashboard can really be used as a management tool — to track all truly relevant finance KPIs, allow for finance objectives such as cash management and cost optimization to be met, and ensure the organization and its business units and functions meet or outperform their financial objectives.
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Gartner Director, Advisory Jake Dunne sat down with clients to discuss how CFOs can revamp their finance dashboards to provide more meaningful insights to business leaders and improve performance management.
This article recaps the transcribed key points, edited for brevity and clarity.
Finance dashboards and performance management
Gartner research shows that CFOs who report the highest return on investment (ROI) on performance management activities focus on reducing the drag on organizational decision making — reducing the obstacles to reaching consensus (e.g., not getting sidetracked by debates about data integrity).
Organizational drag is a consequence of the misalignment between leadership and operations regarding the drivers of business performance.
The question for CFOs is how to remedy organizational drag. Finance dashboards don’t offer a silver bullet; there is no single set of key performance indicators or metrics that will eliminate performance drag. But CFOs can improve outcomes by determining vetting current metrics and identifying which to apply going forward.
Distinguish between metrics and KPIs in your finance dashboard
Metrics are defined as ways to track specific business processes. Things that are very specific to the business such as day-to-day operations (i.e., contract renewal rate, number of customer interactions, number of vendors used, etc.) are very tangible and tied to business-specific activities. Metrics can be obvious to the business — like the number of customers and market penetration rates — but can also be things that are not so obvious, such as gas prices or regulations, or any kind of quantifiable measure that can be tied to business processes.
KPIs, on the other hand, are all metrics, but not all metrics are KPIs. KPIs are measures of high-level processes with direct impact on company valuation or objectives. So, if one of an organization’s objectives is shareholder value, something like contract renewal rate would be a little difficult to extrapolate into shareholder value, while something like “operating margin” is a lot more easily tied to shareholder value.
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Metrics on your finance dashboard need to meet SMART criteria
Metrics are very dependent on the organization — it’s a process-driven action. There’s no one generic list of 10 metrics every company should use or look at.
Metrics need to meet SMART criteria. SMART stands for specific, measurable, attainable/actionable, relevant and timely. Companies should think about whether their metrics are meeting SMART criteria.
Value-map your business model
When you start to value-map your business model, think of high-level objectives, which could be things like shareholder value, customer profitability or cost optimization. Keep in mind what you’re trying to optimize. Next, consider what measures have a direct and proportional impact on these objectives; these are your KPIs.
At a more granular, business-unit level, things like increasing repeat customers, sales volume, raising perceived product value, price realization and attracting the right type of customer are considered metrics.
Metrics cascade for revenue growth
To get started with the metrics development process, organizations should scope a metrics cascade. Metrics can be broken down by business unit, region, sales channel, etc. Metrics cascading involves thinking about larger goals, like growth, and how they’re able to trickle down to the most granular metrics or drivers that are ultimately impacting them.
Metrics selection decision rules
Once you’ve gone through the process of mapping out your metrics cascade, the next step is to vet each of the metrics. Every metric isn’t going to be weighted the same way (for example, the number of products won’t have the same weight as customer interactions or sales lead time.).
So, how do you go about vetting the metrics that you have? First, identify if they are relevant to the audience. Then, ask if you can articulate the problem that a specific metric will address. Third, identify whether that problem is relevant for the audience. Finally, consider if there is a clear connection to being able to solve a problem if this metric or KPI changes one way or the other. If yes, include the metric in the scorecard.
Leading CFOs regularly screen finance dashboard metrics for economic relevance and appropriately update them frequently. A few screening questions to ask are, Can you clearly articulate the issue or assumption this metric addresses? Can you clearly articulate what action you will take in response to a change in this metric? Does this metric either form the basis of a key assumption or allow you to test whether a key assumption is valid? How critical is it that you respond at a given time to a change in this metric?
Another way of screening metrics, or even just a way of getting started, could be to go through a metrics self-assessment. The self-assessment reviews topics such as selection, prioritization, collection, reporting and usage.
Leading indicators help CFOs understand how investments perform
As part of the vetting process, leading finance teams may want to consider which metrics are leading indicators of performance. Those are input-oriented measures of performance that help finance to be more predictive in terms of financial results and can inform better mid-project execution decisions.
Three steps for using leading indicators
The best finance teams need to select, pressure-test and monitor leading indicators. This can be done in three steps.
No. 1. Identify leading indicators
Select potential leading indicators from your finance dashboard by working with business leaders to identify the most relevant performance drivers, then connect them back to financial goals. Use corporate FP&A analysis to clarify which financial performance metrics are material for each business. Reduce errors by dedicating finance partners within each business to isolate true drivers of performance. Combine statistical analysis and operational insight to select the most impactful metrics.
It’s important to select leading indicators only when both finance and the business agree.
No. 2. Pressure-test leading indicator impact
Isolate the leading indicators that truly have an impact on business performance by ensuring they meet predefined criteria and performing correlation analysis.
It’s important to validate which leading indicators are predictive and measurable by using preestablished criteria. Also, make sure that leading indicators used in the business case will allow finance to track project benefits across the life cycle before financial results are determined.
Lastly, don’t overcomplicate the process by looking for the perfect leading indicators. Start with a shortlist of leading indicators based on familiarity, and build it out over time.
No. 3. Consistently act on changing trends
Create consistent guidelines for which actions to take based on how leading indicator trends change over time.
Develop guidelines and triggers to help business leaders read and react to changes in leading indicators. Define thresholds and tolerance levels for each leading indicator to trigger timely performance reviews and action planning as business conditions change.