Once you step into the role of CFO, you quickly realize the weight you carry in the management room. As the ultimate authority on financial reporting, you set the agenda for which reports and KPIs are essential. It’s your responsibility to decide which metrics matter—no one else can argue when you say that report X or metric Y is crucial. However, there’s a common pitfall: as you gain authority, it’s tempting to increase the volume of reporting in an effort to cover every detail. In reality, flooding the management board with excessive data wastes time and drains your team’s energy.
Balancing Efficiency and Comprehensive Reporting
Corporate finance professionals spend countless hours wrestling with trade-offs. The goal is to deliver the fewest reports possible while ensuring that no critical financial metric or insight is overlooked. Remember, management stakeholders have limited time and attention—they can only digest so much information each day. Therefore, your reporting must be concise, focused, and action-oriented.
The Financial Compass for defining Financial Metrics
Is there a simple compass—a guiding principle—for corporate finance professionals that reminds them which direction to take in strategic planning, management reporting, and analysis? The answer is yes. This compass requires both understanding and discipline. It becomes the habit you carry in the back of your mind every day, especially if you aspire to top roles in FP&A, financial management, or even the CFO position.
The Core Mission: Maximizing Company Value
At its heart, corporate finance is about measuring and managing company value and actively communicating strategies to maximize it. The long-term goal is to align the maximization of shareholder value with that of other stakeholders. This alignment is crucial because shareholder value—often represented by market value of equity or enterprise value—can be quantified with formulas, whereas stakeholder value is less tangible. A commonly used formula to determine enterprise value is:
What drives then the value of the company? It boils down to:
Current level of EBIT after tax (also called NOPAT)
Growth rate
Return on invested capital, and
Cost of capital.
Since some elements are predetermined or influenced by external factors, management should primarily focus on driving growth and optimizing ROIC.
Tracking and Managing Growth
Given that EBIT after tax growth is the engine that drives enterprise value, this metric deserves special attention. To make growth actionable, break it down into more granular KPIs that span across the organization. Consider focusing on the following areas:
Volume Growth:
Responsibility: Sales teams
Importance: Monitoring absolute and relative volume increases is crucial—tracking indices, growth rates, and volume shares can reveal both opportunities and risks. Daily tracking and monthly reviews during business meetings are essential.
Net Sales per Volume Unit:
Responsibility: Sales teams
Importance: Growth can be achieved not only by increasing volume but also by raising average prices through added customer value.
Net Sales:
Responsibility: Sales teams
Importance: A core metric often linked to sales incentives. Automated daily reports on volume and net sales can keep the entire organization aligned on performance.
Cost of Goods Sold (COGS):
Responsibility: Production and Procurement
Importance: COGS directly affects profitability. Lower production costs can boost EBIT growth and create competitive advantages.
Raw Materials Cost:
Responsibility: Procurement
Importance: Price optimization here can have a significant impact on the bottom line.
Production Costs:
Responsibility: Production
Importance: Monitoring production labor, maintenance, energy, and depreciation—both fixed and variable—by production line or product category is vital.
Gross Profit and Gross Margin:
Responsibility: Sales and Marketing
Importance: Focusing on improving gross margins at the SKU or product category level can further drive EBIT growth.
Operating Costs:
Responsibility: Finance
Importance: Aggressive cost control (tracking OPEX as a percentage of sales) is key to preserving profitability.
Tax Optimization:
Responsibility: Finance
Importance: While defined by legislation, effective tax planning can positively influence NOPAT.
Managing Return on Invested Capital (ROIC)
ROIC is arguably the most critical KPI in corporate finance. Although many organizations monitor its individual components, understanding the holistic picture is essential. ROIC is calculated as:
Here’s why each element matters:
Invested Capital: The sum of property, plant, equipment, receivables, payables, and inventories drives the company’s capital needs. Reducing this investment while maintaining or increasing EBIT directly boosts ROIC.
Optimization Focus: A higher ROIC means that less capital needs to be reinvested to support a given level of growth, thereby increasing free cash flow and overall valuation.
Key Components to Monitor for ROIC Optimization
CAPEX:
Responsibility: Investment Department
Importance: Lowering CAPEX for any incremental EBIT growth enhances free cash flow. Rigorous approval processes and regular reviews (monthly updates on cash CAPEX, fixed asset increases, and contracted CAPEX) are crucial.
Trade Receivables:
Responsibility: Finance and Sales
Importance: Lower trade receivables—monitored via Days Sales Outstanding (DSO) and aging reports—reduce the working capital burden.
Inventories:
Responsibility: Operational Planning and Finance
Importance: Efficient planning reflected in lower Days in Inventory (DIO) means less capital is tied up.
Trade Payables:
Responsibility: Procurement and Finance
Importance: Maximizing trade payables (without compromising supplier relationships) can reduce net working capital requirements.
Non-Core Assets:
Responsibility: Investment Department and Finance
Importance: Regular review and disposal of non-operating assets can free up capital and boost ROIC.
Financial Assets and Investments:
Responsibility: Finance
Importance: In certain industries, investing in marketable securities might be preferred. However, disposing of non-core financial assets can also enhance ROIC.
Integrating Financial Processes into the Annual Cycle
A robust finance process is best structured around an annual cycle that aligns strategic planning with operational execution. Start by updating your valuation DCF model annually—this sets the stage for adjusting long-term strategic indicators such as growth rates, ROIC, and overall company value in line with your corporate strategy. These strategic insights then feed into the annual budgeting process, where top-down targets are defined. From these targets, bottom-up KPIs are generated to ensure every level of the organization is aligned with the overarching goals. Finally, monthly management business review sessions provide the mechanism to track performance, ensuring that day-to-day operations support the long-term strategy.
Conclusion
Maximizing company value isn’t about tracking every possible metric—it’s about focusing on the few that truly drive growth and efficiency. By using the core valuation formula as your compass, you can determine which KPIs to monitor and discuss with management. The emphasis should be on boosting EBIT growth and optimizing ROIC through disciplined management of CAPEX and working capital, without stifling growth. In doing so, corporate finance teams not only streamline reporting but also deliver actionable insights that ultimately enhance company value.
You can buy our template for preparing overall DCF model annually, modelled in a way that we find is most comprehensive while still providing all the financial metrics and financial projections you need to define your growth and ROIC targets.
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