5 Cash Flow Performance KPIs Every CFO Needs to Track

Different Types of Accounts Receivable Management Services

Key performance indicators (KPIs) are the standards by which CFOs measure company health and performance. These KPIs are used in nearly every financial function, including accounts receivable, payable, cash flow reporting, and more. CFO KPIs should offer high-level overviews of financial performance that detail how the company performs relative to past periods and against similar competitors.

In this blog, you’ll learn about the top five most important KPIs for CFO performance and their relationship with overall financial planning.

1. Average Days Delinquent (ADD)

ADD is an essential cash flow KPI. It offers data on the effectiveness of your collection efforts by measuring the average number of days it takes to collect overdue payments. A high ADD score for a particular client may simply mean financial issues on their end. But continually high ADD scores across clients may indicate poor collection efficiency on your side.

Here’s the formula for Average Days Delinquent:

ADD = Days Sales Outstanding (DSO) – Best Possible Days Sales Outstanding (BPDSO)

Note the role of the DSO metric in this calculation. Many companies evaluate these two KPIs in tandem because it offers a broader understanding of how long it takes to convert invoices to cash.

If you need help with this, check out how to calculate DSO.

2. Collection Effectiveness Index (CEI)

CEI compares receives collected in a given time period against the receivables available in that same period. Similar to DSO, this offers a broad measure of how effective your collection efforts are. But note that CEI is more accurate when measuring collections in shorter periods.

(DSO alone may account for receivables that don’t directly correlate with credit sales figures in the measured time period, reducing its accuracy when compared with shorter-term CEI calculations.)

Here’s the formula for Collection Effectiveness Index:

CEI = [(Beginning Receivables + Monthly Credit Sales – Ending Total Receivables) / (Beginning Receivables + Monthly Credit Sales – Ending Current Receivables)] x 100

Run your collection effectiveness index for shorter, specific durations where collections efficiency should be measured as a complement to your DSO calculations.

3. Current Accounts Payable (CAP)

Current accounts payable is another vital cash flow KPI that details the sum of all money your company owes at a given time. Compared with the other CFO financial metrics, this measurement involves your own company’s ability to pay off your creditors. Marketing costs, utilities, rent, credit payments; all of these contribute to your accounts payable total. Like CEI, current accounts payable is generally run as a short-term financial planning tool, often on a month-by-month basis.

The Current Accounts Payable calculation is simple:

CAP = [Incoming Bill 1] + [Bill 2] + [Bill 3]

Though not overly complex, this is an essential KPI for accounts payable and should be run regularly.

4. Current Accounts Receivable (CAR)

CAR is our primary KPI for accounts receivable. This metric complements your current accounts payable calculation by detailing how much money is owed to your company in a given timeframe. These are listed as assets on your balance sheet (just as current accounts payable lists your liabilities), and reports are generally run in the same manner/periods.

Here’s the basic Current Accounts Receivable calculation:

CAR = [Outgoing Bill 1] + [Bill 2] + [Bill 3]

CFOs should keep their accounts receivable and accounts payable key performance metrics nearby and run the calculations on a regular schedule to keep things on track.

5. Operating Cash Flow (OCF)

The last of our CFO performance measures is operating cash flow, a KPI detailing the total amount of money generated by daily operations, revealing either a positive or negative cash flow. Like the other KPIs, operating cash flow is usually run for short periods as part of a broader, scheduled financial analysis.

Here’s your Operating Cash Flow calculation:

OCF = Net Income + Non-Cash Expenses – Increase in Working Capital

As this metric involves slightly more complicated calculations than simply totalling bills, it offers a better understanding of how various business activities, investments, and financing will affect cash flow. This makes it useful among CFO performance measures, but it also means small changes to your operation may drastically affect the outcome of the calculation. 

We recommend all CFOs make sure they have the right accounting software tools behind them to digitize the A/R collection process.

Getting More Mileage Out of Your Cash Flow KPIs

Although KPIs are essential tools for evaluating financial performance, their usefulness depends on how well embedded they are in your business strategy. This is the only way to ensure they’re providing actionable advice to move your business forward.

The best way to ensure this is to deploy accounting software solutions that keep everything organized. These tools provide a centralized hub for data collection and analysis, along with handy tools for reporting and automation to simplify long standing manual processes. For CFOs hoping to make regular accounting a core part of their process, there’s nothing better.

Contact Gaviti to see how these accounting solutions can work for you!