The finance world is not what it used to be. New technologies, competition and even customer demands have changed its outlook. There has been a shift, and there will continue to be changes in how a company’s finances are processed.
In this article, we’ll focus on five fresh metrics that can help provide CFOs and finance leaders with both financial and non-financial metrics around people, partnership and performance that are critical during times of uncertainty.
These metrics allow CFOs to keep a pulse on the people and profits which, as the CFO role continues to evolve, have direct bottom line results.
1. Employee NPS
Employee NPS means “Employee Net Promoter Score." It is a way to measure employee engagement, happiness and insights around employee experience. Many businesses measure NPS for customers or external partners, but leveraging it for employees has many advantages. Employees can make or break a business, so finance leaders must know how inspired their employees are.
Are they willing to promote the company as a place to work or promote the company to their network? These are questions that finance leaders need to answer. And it is a metric to measure periodically, best case is semi-annually. CFOs must be current with their employees’ willingness to recommend their role, team or company to others.
You can do this by sending out surveys with questions like:
- How likely would you recommend your team to your friends and family?
- How likely would you recommend this company as a place to work?
- How likely would you recommend your role to your friends, family or network?
Note that to get honest answers, make the survey anonymous. Once you get your answers, measure your Employee NPS by subtracting the percentage of detractors from that of promoters and that is your Employee NPS score.
A company’s growth is commensurate with the commitment of the employees to its growth. You can use Employee NPS to determine how dedicated the employees are to the growth of the company and overall, getting a great pulse around your most valuable asset which is your people.
2. Costs of Attrition
Besides Employee NPS, you also need to measure employee turnover, which is basically what attrition is. As you likely already know, the higher the employee turnover, the higher the company’s costs. This is because — unless the position becomes redundant — you would have to hire to fill the position, and hiring costs for a new employee in the current labor market could be significant.
Every company needs to know how much that’s costing them and calculate this at least semi-annually — preferably in the middle and end of the year.
To calculate the cost of attrition, you need to first calculate the attrition rate, which is done by dividing the number of employees by the number that leaves within a specific period and then multiplying that number by 100.
After that, you can calculate the cost. To get the final cost, calculate all direct costs associated with hiring a single employee, including the salary, the salary of the HR officer or recruitment agency, training cost, benefits, variable compensation, job placement and so on. Then multiply the total cost of hiring a single employee by the attrition rate, and you’d get your organization’s attrition cost.
Knowing the attrition cost will help you understand how much your company might be losing with employee turnover.
However, you must also consider other factors such as what kind of employees are leaving, industry standard turnover rates, competitors or if the business downsizing would automatically result in a high turnover rate.
Cost of attrition helps you see one area where financial leakage can be blocked. It can also give you an idea of the Employee NPS. This is because, usually — except in certain cases mentioned above — a high turnover rate could mean that there is something wrong in the employee experience, which most definitely has a bottom-line impact that CFOs need to know.
3. EBITDA Margin
EBITDA is short for “Earnings Before Interest, Tax, Depreciation and Amortization,” and it has been popularly used to measure profit. However, to measure a company’s profitability, you must measure the EBITDA margin. This metric helps a company realize its real performance compared to other companies in its industry.
EBITDA margin is important for CFOs to know because it can help them:
- Measure business performance
- Buy/lease/invest/finance decision-making
- Identify under or over business performance
EBITDA margin is a true representation of a company’s financial health as it focuses on its operational portability and cash flow without considering the costs of depreciation and amortization, taxation and interest on debts. It calculates a company’s operational cost in relation to its revenue. So, it helps you, as the CFO, determine the operating expenses.
EBITDA margin is calculated by EBITDA/Revenue and depending upon your forecasting, planning and other requirements you should at least be measuring this quarterly.
EBITDA margin can be used to compare the profitability of different companies. As the CFO, you can use it to measure the profitability of your client’s company in relation to other companies.
4. Net Operating Cash Flow
Net Operating Cash Flow (NOCF) is simply the cash flow a company has left after expenses. It is an indicator of whether a company can generate cash flow from its operations or not. It also helps a company realize their ability to pay vendors, employees and cover other operational expenses. NOCF is a good indicator of a company’s financial health and a leading indicator for measuring future cashflows.
The NOCF helps CFOs decide on what cash decisions to take, such as the kind of investment to make or the areas they might need to cut down on costs. NOCF is an important metric for CFOs to know because it can help them:
- Evaluate the company’s financial health
- Make better cash decisions
- Provide visibility into future problems or opportunities (NOCF is calculated by subtracting the all-operating expenses — including interest, depreciation and amortization — from income. Given the economic climate, you should measure this at least quarterly, and sometimes more frequently.)
As the CFO, you can use NOCF to determine how financially healthy a company is — how much cash reserves can be utilized to either invest, grow or scale the business.
5. Cash Runway
Cash runway is a metric that measures the number of months a company has before it runs out of cash. Cash runway is more important for startups to check because they are in the building stage and may be running on saved cash without making much to offset it.
Therefore, if you can help guide the business by providing actionable insights to bring clarity to operations, you can position your business as a trusted partner.
This metric is usually estimated by determining the burn rate, which is how much cash the company is burning in relation to how much it is making. Cash runway is important for CFOs to know because it can help them:
- Identify cash problems early
- Make better short and long cash decisions
- Proactively communicate with investors, leadership and financing partners earlier
For instance, if a company is burning approximately $5,000 every month and has $50,000 available to spend, the cash runway would be estimated to be 10 months. In terms of frequency, you should be measuring this quarterly at a minimum, while for high growth businesses you should measure monthly.
Cash runway can be used to determine how likely a business will fail or succeed, and the gold standard is 24-30 months of cash runway for most high growth businesses.
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