If you define your line of work as setting the foundation for any major decision made by your enterprise, chances are, you work in FP&A. High performance in this area of finance requires competent leadership, an adaptive team across the board, sound integration of the most effective technologies in FP&A, and proficiency and proper use of KPIs and metrics specific to finance. The latter is particularly critical to this aspect of corporate finance, as many organizations lack a strong KPI framework. You and the rest of your team are likely well versed in financial metrics and KPIs such as Gross and Net Profit Margins, or Working Capital, but you may not be aware of other metrics which are more specific to a particular industry, or metrics which assess more obscure (but equally important) aspects of your organization’s costs and earnings. Through the following 8 descriptions, you’ll discover some of the most effective FP&A metrics you might not be using.
8 Critical FP&A Metrics
1. Customer Attrition Cycle:
In the context of large enterprise sales, the risk-reward profile of attrition is asymmetrical: big revenue can vanish with less than a year of notice, but expanding a newly won customer to that same level often requires multiple years. Ironically, at least in software-as-a-service (SaaS) products for large enterprises, the probability of attrition arguably increases with a customer’s tenure and economic commitment.
This is because people relationships are a driving force for adoption and expansion within the enterprise. When a key stakeholder like a chief marketing officer or a chief technology officer exits a customer’s organization, (which invariably happens over a long-enough time horizon) that single event puts years of revenue expansion at risk.
How does a company track attrition signals? Given the timing differences between when attrition becomes known and when it becomes effective (i.e., reduces revenue), simply tracking actuals is likely to understate the genuine risk. To get ahead of potential attrition events, an “attrition cycle” must be established with the same level of rigor as the traditional sales cycle. An attrition cycle with objectively defined stages of progression, like the product champion left the company or the platform is being underused, is the minimum viable framework to systematically reduce the risk of big revenue attrition.
2. Exit ARR:
For finance to prove itself a critical strategic partner and influencer, it has to provide clear data, communicated effectively, that is up to date and easily accessible. In addition to these data characteristics, finance must also select the correct data; otherwise, misalignment can occur quickly.
Exit Annual Recurring Revenue (Exit ARR) is a KPI which addresses the latter issue. It is the total value of annual recurring revenue for all current, committed contracts. Exit ARR is a 12-month, forward-looking measure that considers bookings that haven’t started yet or been recognized plus the revenue the company is recognizing. This metric best represents forward revenue and cash. If a given company is always growing that number, it’s on track. Exit ARR is a great way to measure progress and track revenue. Many factors influence this number, such as price increases, customer retention, upsells, customer cancellations, and others.
3. Gross Burn Rate:
Generally used as a KPI by loss-generating startups, burn rate measures the rate at which the company uses up its available cash to cover operating expenses. The higher the burn rate, the faster the company will run out of cash unless it can attract more funding or receives additional financing. Investors often examine a company’s gross burn rate when considering whether to provide funding. The gross burn rate formula is:
Gross burn rate = Company cash / Monthly operating expenses
4. Cash Conversion Cycle:
This calculates how long it takes a company to convert a dollar invested in inventory into cash received from customers. It takes into account both the time it takes to sell inventory and the time it takes to collect payment from customers. It’s expressed as a number of days. The formula for operating cycle is:
Operating cycle = Days inventory outstanding + Days sales outstanding
5. Payroll Headcount Ratio:
This KPI is a measure of the productivity and efficiency of the HR team. It shows how many full-time employees are supported by each payroll or HR specialist. The calculation is usually based on full-time equivalent (FTE) headcounts. The formula for payroll headcount ratio is:
Payroll headcount ratio = HR headcount / Total company headcount
6. Fixed Asset Turnover Ratio:
This shows a company’s ability to generate sales from its investment in fixed assets. This KPI is especially relevant to companies that make significant investments in property, plant and equipment (PPE) in order to increase output and sales. A higher ratio indicates that the company is using those fixed assets more effectively. The average fixed asset balance is calculated by dividing total sales by net of accumulated depreciation. The formula for fixed asset turnover is:
Fixed asset turnover = Total sales / Average fixed assets
7. Return on Assets (ROA):
This efficiency metric shows how well an operations management team uses its assets to generate profit. It takes into account all assets, including current assets such as accounts receivable and inventory, as well as fixed assets, such as equipment and real estate. ROA excludes interest expense, as financing decisions are typically not within operating managers’ control. The formula for return on assets is:
Return on assets = Net income / Total assets for period
8. Selling, General and Administrative (SG&A) Ratio:
This efficiency metric indicates what percentage of sales revenue is used to cover SG&A expenses. These expenses can include a broad range of operational costs, including rent, advertising and marketing, office supplies and salaries of administrative staff. Generally, the lower the SG&A ratio, the better.
The formula for SG&A ratio is: SGA = (Selling + General + Administrative expense) / Net sales revenue
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