The Importance of Tracking Nonfinancial KPIs
For management teams today a company’s balance sheets and income statements do not reveal all the key drivers that they need to manage the risks and opportunities in their business.
Indeed, there are nonfinancial key performance indicators (KPIs), such as on-time delivery and employee turnover, that greatly affect financial KPIs. According to Robert Douglas, Europe planning director at Adaptive Insights, by defining and getting the business to collaborate around these nonfinancial metrics, a business can gain a substantial edge over their competition.
An FSN study found chief financial officers (CFOs) that made significant use of nonfinancial data were nearly twice as likely to forecast earnings within five percent than those that did not, and they felt more prepared to respond to market changes. However, improved forecasting is just the beginning. Paying close attention to nonfinancial metrics yields three key benefits.
Counting what counts
Overemphasising the importance of financial data can create an unbalanced view of the business. To ensure businesses have a complete picture, CFO and finance teams should work with leaders from across departments so that they can select metrics to be tracked and avoid KPIs that are vague or require excessive research. Metrics from employee learning and innovation can be used to improve business processes, contributing to customer retention and sales growth, and ultimately increasing the company’s bottom line.
Metrics that track aspects of the company’s sales funnel can be a good starting place. For example, tracking market size helps determine potential customer base, tracking media exposure helps understand target market reach, and tracking customer service data can signal issues with customer satisfaction and retention.
Improved data integrity
Involving multiple departments can also help a company’s data centralisation and thus streamline reporting. According to Adaptive Insights’ CFO Indicator Report, 60% of CFOs said disparate systems continue to house operational and financial data separately, making tracking performance holistically difficult. Plus, more than half exported their data to external applications. As files are analysed, shared, and different departments make edits, it’s tough to keep track of the definitive version.
A single platform that is accessible to all key employees increases the likelihood that the data reviewed and discussed at metrics meetings is high quality and reliable. This is important because KPI data typically does not provide answers but produces questions that might not necessarily be asked without it.
Many finance teams waste a lot of time gathering data, confirming its accuracy and consistency, and formatting reports. The Adaptive Insights CFO survey found finance teams spend just 17% of their time on strategic tasks. Whilst the CFO and their team can remain responsible for the data, they need to be able to rely on other departments to uncover meaning behind the nonfinancial numbers. This gives the finance more time to focus on strategic initiatives, while empowering those closest to the business with the data they need.
Implementing nonfinancial metrics in performance reviews can elevate conversations and encourage leaders to focus on strategic goals—not just profit margins. When KPIs are assigned with target metrics, managers are given greater accountability and their actions, decisions and priorities are better aligned with the executive team’s strategy. It remains: (1) you get what you measure, and (2) if you can’t measure it, you can’t manage it—if you can’t manage it, you can’t improve it.
Nonfinancial KPIs allow companies to look beyond profit margins and see the trends driving results and potentially uncover important business opportunities. Reporting nonfinancial KPIs, especially against their targets, enables companies to monitor their progress towards accomplishing strategic goals. For companies that embrace these metrics, cause-and-effect relationships are revealed, resulting in business-critical insights and early signals of profit margins to come.