The Top FP&A KPIs And How To Choose Yours

You know this by now. You can only improve an area of your business if you measure its health and performance. Yet, rather than collecting every general finance metric possible, you’ll want to plan, collect, and analyze the Key Performance Indicators (KPIs) that’ll drive strategic decision-making.

That means KPIs are a subset of metrics that are most relevant to your goals as a team. Here’s how to leverage the right KPIs as an FP&A team.

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What Are KPIs In Finance?

Gartner defines a financial key performance indicator (KPI) as an essential measure of revenue, profits, expenses, and other financial results, designed for collecting and reviewing weekly, monthly, or quarterly.

Common examples of finance KPIs include gross profit margin, total revenue per employee, and operating cash flow.

For finance planning and analysis teams, the best FP&A KPIs help them identify opportunities, track lessons learned from past risks, power profitable innovation, and predict future trends.

Yet, determining which metrics to prioritize, how to gather and monitor them continuously, and how to use them for intelligence can be challenging. So, is it worth it?

Why Is It Important To Track And Improve FP&A KPIs?

Measuring KPIs has several powerful benefits, including:

Educating and collaborating with your team is essential to building trust. By leveraging FP&A KPIs, you can become more of a strategic advisor to your company rather than a human calculator. So, what are some of the most important KPIs in financial planning and analysis?

What Are The Most Important KPIs For FP&A?

Examples of the most important FP&A key performance indicators include Cost of Goods Sold (COGS), Return on Investment (ROI), and leverage. Here’s more about those and other leading FP&A indicators to consider.

1. COGS cloud cost as a percent of revenue

COGS is your cost of sales; it measures your direct costs of building and running subscription-based software services. Check out this COGS guide to learn what specific indicators to measure.

Example of Cost of Goods Sold (COGS) dashboard by CloudZero

The Cost of Goods Sold grows in line with your revenue. It’s a great indicator of when something’s not right. Yet, an increase in COGS doesn’t always translate to revenue growth. It may indicate that you are overspending.

If your COGS percentage keeps increasing significantly month over month, it may be because the product isn’t working as it should.

Or, it may be a clue that a customer is using the service in an odd way. That happens. We recently dodged a $70,000 increase in annual cloud costs driven by a single customer. That would have cut into our profit for sure.

Without an increase in revenue to match, an increase in COGS hurts your profit margins. Similarly, over-reporting COGS can hurt your bottom line.

2. Return on investment

The return on investment is a financial performance metric that compares how much an investment has gained or lost in relation to the cost poured into it.

In the context of FP&A, the ROI, used with other approaches, helps develop a business case for a given proposal, calculate Net Present Value (NPV), determine whether to continue investing in a given product or service, etc.

For example, your FP&A team can determine that a particular product feature consumes more in cloud costs than it returns in revenue, making it unsustainable.

After closer analysis, your team can decide whether to repurpose the feature or retire it to save money. If it proves to be popular, another option would be to move the feature to a higher-priced tier so that it pays for itself. Or, if it’s a free feature, you may consider charging for it as part of a paid plan.

3. Profitability

Profitability is the ability of your company to generate more revenue than you spend on expenses. It is often measured as a percentage, such as net profit margin or net income.

Financial planning and analysis professionals use a variety of methods to measure profitability, including financial statements, ratio analysis, and break-even analysis.

Profitability is a crucial FP&A KPI because it reflects financial health. For example, a profitable company is able to generate enough cash flow to fund its growth, pay down debt, and return money to shareholders.

Some factors that can affect your profitability include your pricing strategy, cost structure, and marketing and sales efforts. For example, FP&A professionals analyze the cost per customer segment to find out which segments are most profitable, which in turn enables them to invest more in profitable segments.

4. Efficiency

The efficiency KPI measures how well your company uses its resources to generate revenue. It is calculated by dividing revenue by expenses.

A high-efficiency ratio indicates that a company is using its resources efficiently to generate revenue. A low-efficiency ratio indicates that a company is not using its resources efficiently and may be wasting money.

You can use your efficiency ratio to identify how best to allocate resources and save money without compromising performance (which involves aligning FP&A with engineering).

Here are some specific examples of how efficiency can be improved in a business:

By tracking efficiency and making improvements, your FP&A team can improve your company’s COGS and profitability.

5. AWS cost per headcount in R&D

This KPI can apply to other cloud providers such as Azure or GCP cost per headcount in R&D. It enables you to determine if you are using resources responsibly.

For example, could you be keeping instances or VMs spun up unnecessarily? Or, are there some unused or idle cloud resources consuming your budget?

With robust cloud cost optimization tools such as CloudZero, you can drill into the costs of individual cost factors, enabling you to tell who, what, and why your R&D costs are changing.

6. Unit cost per service

This KPI measures how much you spend supporting a specific service. Every billing cycle, you can collect, analyze, and report the costs associated with running a particular service in production.

The purpose of measuring unit cost per service is not just to monitor current products. It is also crucial intelligence for modeling out scenarios for new products that you’d combine with existing services.

In addition, this unit economics approach is vital for understanding who are your most and least profitable customers, services, features, and other cost centers in your business.

7. Cash flow analysis

The main goal of a cash flow analysis is to determine where cash is coming from and going. It does this by tracking the flow of money into and out of a business over a period of time.

A cash flow forecast differs from an accrual-based financial statement that measures profitability. Rather, cash flow analysis indicates your company’s liquidity, and its ability to meet its short-term obligations, such as paying its daily bills.

You can then use the intel to identify potential problems, such as cash flow shortages, helping you make necessary adjustments to improve the company’s financial posture.

Also, you can use cash flow analysis to track both operating cash flow and investing cash flow.

Here’s more.

8. Leverage

Financial leverage is often measured in terms of debt to equity ratio. The D/E ratio reveals the amount of debt your company owes in relation to its equity. It is calculated by dividing a company’s total debt by its total equity.

It is a crucial FP&A KPI because it helps you determine factors such as:

A high debt-to-equity ratio may indicate that your company is using more debt to finance its operations than equity. This can be a sign of risk because having a high debt-to-equity ratio indicates a higher probability of missing payments when the business is struggling.

A low debt-to-equity ratio may indicate that a company is not taking advantage of all of its financing options.

9. Valuation

Valuation as an FP&A KPI hints at a company’s worth. You can use it to track your company’s performance over time, compare it to industry peers, and make decisions about future financing and investments.

There are various valuation methods. Some common valuation methods include:

The valuation method that best suits your FP&A requirements will depend on a number of factors, including your industry, stage of development, and risk profile.

10. Cost per customer

Here’s the thing. Average cost per customer is not the same as cost per customer. While the cost per customer KPI indicates how much it costs to support a particular customer, the average cost per customer often averages out the total cost incurred for all customers.

Let’s show an example.

Say you have multiple tenants in a multi-tenant architecture. The average cost per customer metric won’t help you identify the specific tenants driving your costs. That could mean:

Check out this example of Cost per Customer dashboard by CloudZero:

In CloudZero, Cost per Customer is one view of the per-unit cost approach to understanding cloud costs. There are more, such as cost per project, per product, per service, per environment, per engineering team, and per software feature.

Note that only a few FP&A software and platforms offer this level of cost intelligence, so be keen when choosing your solution.

How To Shortlist KPIs For Your FP&A Teams (And Tips for Tracking FP&A KPIs)

The right FP&A KPIs are as unique to your company as the goals you set. Here are tips for prioritizing FP&A KPIs over general finance and business metrics.

Wondering where, how, and when to gather the most important financial metrics for your FP&A goals? CloudZero can help.

With CloudZero, you get immediate insight into your SaaS per-unit costs so you can make crucial decisions quickly. Among other capabilities, CloudZero helps you:

CloudZero also detects cost spikes in real-time, alerting you to potential overspending so you can protect your margins. These capabilities have helped Drift save $4 million in annual AWS costs. It’s also helped businesses like Seat Geek save 6-8 hours per cloud cost question.

Want to see how you can, too? to get started.