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Essential financial indicators for a financial director
In the world of corporate finance, a chief financial officer (CFO) can’t just look at their bank account to judge the health of their company! 📊 To effectively manage financial performance, they rely on strategic indicators: margin, ROI, cash flow, sales conversion rate… How can they be interpreted to make the best decisions? We’ll tell you everything! 👇
Why monitor your financial indicators?
A CFO is a strategic co-pilot. Without rigorous KPI monitoring, it’s difficult to optimize cost management, attract investors, or reassure banks. Suffice it to say, good financial monitoring is a key success factor!
Moreover, a Deloitte study highlights that 52% of CFOs place cost management among their top three priorities, followed by financial planning and analysis, which implies a heavy reliance on data to guide strategic decisions 🎯 .
Profitability indicators: measuring financial performance
A good CFO must have a clear vision of the company’s profitability. To achieve this, here are the KPIs to monitor:
Gross margin and net margin
These margins measure the profit generated after deduction of production costs and other expenses.
👉 Gross margin = (Sales revenue – Cost of sales) / Sales revenue
👉 Net margin = Net profit / Turnover
💡 Key takeaway: A high gross margin demonstrates good cost control. A positive net margin indicates that the company is profitable after all expenses.
Return on Investment (ROI) 📊
ROI is one of investors’ favorite metrics! It helps assess the effectiveness of investments made.
👉 ROI = (Gain from investment – Cost of investment) / Cost of investment
🔎 Example: If a company invests €100,000 in a project and generates €150,000, its ROI is 50%.
Cash flow indicators: ensuring the company’s liquidity
A good financial result is not enough: you also need to have a healthy cash flow! A lack of liquidity can jeopardize the company, even if it is profitable on paper.
Operating cash flow
It reflects the company’s ability to generate cash through its activity.
👉 Operating cash flow = Operating profit + depreciation – change in working capital requirement (WCR)
✅ Good to know: A positive cash flow shows that the company is able to finance its current operations without borrowing.
Working capital requirement (WCR)
The WCR is an essential indicator for assessing the need for short-term financing.
👉 WCR = Customer receivables + inventories – supplier payables
📌 To watch out for: Too high a WCR means that the company is tying up too much cash in its inventories or trade receivables.
Debt indicators: measuring solvency
Recourse to debt is sometimes necessary, but it must be controlled.
The debt ratio
It allows us to assess a company’s ability to repay its debts.
👉 Debt ratio = Financial debt / Equity
📢 Note: A ratio greater than 100% means that the company has more debt than equity.
Repayment capacity
A key indicator for banks and investors before granting credit.
👉 Repayment capacity = Net debt / EBITDA
💡 Good to know: A ratio lower than 3 is generally considered healthy.
Operational performance indicators
Beyond accounting figures, a CFO must also monitor indicators related to the company’s efficiency.
Employee productivity
A good CFO must monitor the profitability of human capital.
👉 Productivity = Turnover / Number of employees
💡 Example: If a company generates €10 million in revenue with 100 employees, each employee contributes on average €100,000 in revenue.
Sales conversion rate
A marketing indicator that directly impacts financial performance.
👉 Conversion rate = (Number of customers / Number of prospects) x 100
📈 What to watch for: A declining conversion rate may signal a problem with your offering, pricing, or sales strategy.
How to use these indicators for effective decision-making?
A successful CFO doesn’t just look at these numbers: they must analyze them and make strategic decisions from them.
- Automate KPI tracking: Using tools like Power BI, SAP, or Tableau allows you to centralize data and have a real-time view.
- Compare with industry benchmarks: Each sector has its own benchmarks! An acceptable debt ratio in manufacturing may be excessive in digital.
- Anticipate risks: deteriorating cash flow? Rising debt? These are all warning signs that should prompt adjustments to your financial strategy.
👉 To remember:
✅ Profitability is measured by net margin and ROI.
✅ Cash flow is under control with cash flow and working capital requirement.
✅ Debt should be monitored with the debt ratio.
✅ Operational performance directly impacts financial results.
📢 Need support to structure your company’s financial management? Interim management can be a strategic solution to optimize your performance! 🚀
