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Tee Up Advisors - Fractional CFO Services

Track Productive KPIs to build Enduringly Profitable Companies

Writer's picture: Bob WangBob Wang

Updated: Sep 14, 2024

Our mission is to partner with entrepreneurs to build Enduringly Profitable Companies; and Key Performance Indicators (KPIs) are vital tools for measuring the success of a business. For CFOs and Fractional CFOs, understanding, selecting, and implementing the right KPIs can significantly impact an organization’s strategic goals. Let’s explore what KPIs are, how to distinguish useful KPIs from useless ones, the balance between too few and too many KPIs, and how to avoid common pitfalls such as gaming the system. 


What is a KPI?

A Key Performance Indicator (KPI) is a measurable value that demonstrates how effectively a company is achieving key business objectives. KPIs are used by organizations at various levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the business, while department-level KPIs may focus on processes in departments such as sales, marketing, HR, support, and others.


Useful vs. Useless KPIs: The Importance of Relevance

Useful KPIs are those that align closely with the strategic goals of the business. They provide actionable insights and help managers and leaders make informed decisions. For example, a SaaS company might focus on metrics like Net Retention Rate or Customer Acquisition Cost (CAC) because these directly impact growth and profitability.

Useless KPIs, on the other hand, are metrics that either don’t align with the business’s objectives or provide little actionable information. For instance, tracking the number of phone calls made in a sales department without considering the quality or outcome of those calls might be considered a useless KPI.


The usefulness of a KPI depends heavily on the context and the user. Different departments within the same company will need different KPIs that reflect their specific goals and challenges. This diversity ensures that while each team is focused on its metrics, all KPIs collectively drive the company towards a common goal.


The Balance Between Too Few and Too Many KPIs

Too Few KPIs: Having too few KPIs can result in a lack of comprehensive understanding. If the KPIs are too narrow, they may overlook critical aspects of performance. For example, a company that only tracks revenue might miss out on understanding customer satisfaction, employee engagement, or operational efficiency.

Too Many KPIs: Conversely, too many KPIs can overwhelm management and dilute focus. When a company tracks an excessive number of KPIs, it can lead to confusion and make it difficult to identify which metrics truly matter. A common pitfall is focusing on vanity metrics—numbers that look good on paper but don’t impact the business’s bottom line.

Finding the Right Balance: The key is to find a balance that provides a comprehensive view of the business’s performance without overwhelming decision-makers. A CFO or Fractional CFO plays a critical role in this process by identifying and prioritizing the most impactful KPIs. The right number of KPIs ensures that the company stays focused on what truly drives success while maintaining a manageable and actionable set of metrics.

CFOs use KPI

The Danger of “Gaming” KPIs: The Need for Thoughtful Design

When KPIs are poorly designed or implemented without consideration of potential incentives, employees might start “gaming” the system—focusing on improving the metric at the expense of the business’s broader goals. For example, if a sales team is incentivized purely on the number of units sold, they might prioritize quantity over quality, leading to customer dissatisfaction and increased return rates.


CFO’s Role in KPI Design: A CFO or Fractional CFO should consider how each KPI might influence behavior across the organization. This involves thinking critically about potential unintended consequences and designing KPIs that encourage the right behavior. For instance, combining sales volume metrics with customer satisfaction scores can help ensure that employees are incentivized to close quality deals that benefit the company in the long run.


Tying Rewards to KPIs: Aligning Incentives with Goals

Linking employee rewards to KPIs is a powerful way to drive performance. When done correctly, it aligns individual goals with the company’s objectives, motivating employees to focus on what matters most.


KPIs need to drive the RIGHT Behaviors

Best Practices for Aligning Rewards:

Clarity: Ensure that employees understand how their performance is measured and how it ties into their rewards.

Fairness: KPIs used for rewards should be achievable and within the employee’s control. This helps maintain motivation and prevents frustration.

Transparency: The process of linking KPIs to rewards should be transparent, so employees feel confident that their efforts are recognized and fairly rewarded.

CFOs should oversee the design of these incentive structures, ensuring that they are financially sustainable and aligned with the company’s long-term strategy.


Industry-Specific KPIs: Tailoring Metrics to Your Business

Every industry has its unique set of KPIs that reflect its specific challenges and goals. Here’s how KPIs might differ across industries:


Software as a Service (SaaS):

  • Net Retention Rate: Measures the recurring revenue retained from existing customers after accounting for upgrades, downgrades, and churn.

  • Customer Acquisition Cost (CAC) vs. Lifetime Value (LTV): A critical metric for understanding profitability; it compares the cost of acquiring a customer to the revenue generated over the customer’s lifetime.

  • Annual Recurring Revenue (ARR) per Employee: Helps assess the efficiency of the business in generating revenue relative to its workforce size.



Manufacturing:

  • Cost Per Unit: Tracks the cost to produce a single unit, critical for pricing strategies and profitability analysis.

  • Amortized Overhead Cost per Unit: Ensures that fixed costs are properly allocated across production, giving a true picture of unit profitability.


Professional Services:

  • Utilization Rate: Measures the percentage of time employees spend on billable work, critical for maximizing profitability.

  • Pipeline: Tracks upcoming projects or sales that are likely to close, helping manage cash flow and resource allocation.

  • Days to Close: Measures the average time it takes to close a deal, providing insights into the efficiency of the sales process.

  • Collection Days: Tracks the average time it takes to collect payments, impacting cash flow and financial planning.


The Critical Role of a CFO in KPI Management

Hiring a CFO or Fractional CFO is critical in managing KPIs effectively. Their expertise ensures that the company not only has KPIs in place but also that these KPIs are the right ones. Here’s how they contribute:

  • Identifying KPIs: A CFO helps identify KPIs that are most relevant to the company’s strategic goals. They consider both high-level objectives and the specific needs of different departments.

  • Evaluating KPI Relevance: CFOs ensure that the KPIs in use are genuinely driving the company towards its goals. They continuously evaluate the relevance of KPIs, adjusting them as the business evolves.

  • Balancing the Number of KPIs: A CFO ensures that the company tracks an optimal number of KPIs—enough to cover all critical areas without overwhelming the team.

  • Designing Incentive Structures: CFOs design compensation and reward systems that align with KPIs, motivating employees to focus on the right goals while avoiding perverse incentives.


Conclusion

Key Performance Indicators are essential tools for driving business success, but they must be chosen and managed carefully. A CFO or Fractional CFO plays a vital role in ensuring that the right KPIs are in place, that they are driving the company towards its strategic goals, and that they are being used to incentivize the right behaviors. By understanding and applying the principles discussed in this article, businesses can optimize their performance, align their teams, and achieve enduring success.

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