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Developing KPIs for Finance & Accounts Functions
Developing KPIs for Finance & Accounts FunctionsA KPI for a function is a measurable value that demonstrates how effectively a function is meeting organizational objectives. KPI needs to be specific, measurable, realistic, and communicated to concerned key functional team members to accomplish.How to develop KPIFor developing a robust KPI system,11 business activities are considered essential for any type of organisation, as below.· 1. Sharing of corporate targets like Sales nos, Revenue, and costs & Completion targets with CFO · 2. Design of format/contents of KPI with inputs from CEO/MD· 3. Identify important KPIs based on corporate objectives and external influences like customer demand or & competitors’ offerings, or & economy or &statutory considerations· 4. Proposing initial KPI Targets and Measures by each HOD of F&A function and review with CFO· 5. Reviewing, modifying, and approving the F&A ‘s KPI by CEO/MD· 6. Putting up measurement systems in place like reports /dashboards · 7. Converting each functional KPI into KRA-Key result areas of functional team members at different levels i.e.§ Higher level: directors-, CFO, HOD, General managers-GM, and so on as applicable§ Middle level: senior manager-sr. mgr, manager, and so on as applicable§ Lower level: assist. manager/junior mgr., staff, workers so on as applicable· 8. Monthly capturing of actual accomplishment of KRA by respective teams in templates· 9. Periodic review of Actual achievement of KPI vs. Target· 10. In exceptional cases, reviewing, updating, and resubmitting KPI to CEO/MD· 11. Compile Level-wise Actual vs. Target of KRA and forward updated reports to the HR team for each level's subsequent annual performance appraisal system.Suggested Template for 30 identified KPIs -An Illustration KPI for F&A functions has been broadly categorized under two categories, ie. Direct responsibility area and Indirect responsibility area · Direct responsibility area. = 15 KPI -with 63% weightage3 KPI rows have been assigned with weightage score@5 for each KPI with cumulative impact =15 score points as per illustrations below.12 KPI rows have been assigned with weightage score@4 for each KPI with cumulative impact =48 score points as per illustrations below.· Indirect responsibility area = 15 KPI with 37% weightage (F&A teams play facilitative roles)7 KPI rows have been assigned with weightage score@3 for each KPI with cumulative impact =21 score points as per illustrations below.8 KPI rows have been assigned with weightage score@2 for each KPI with cumulative impact =16 score points as per illustrations below.Scoring methodologyThe KPI measurement can be either quantitative or qualitative, and a few examples of quantitative KPI are as underQuantitative KPI· Profitability- In Rs or USD or %· Cash flows - in Rs or USD· Receivables - in Days or Rs· Return on Investments- In %· Solvency related KPI- In Ratios or %and so onIn such cases, it is easy to compare performance based on Target vs. Actuals and compute % achievement based on scores earned and illustrations given.Quantitative KPIHowever, there can be many KPIs that may be both qualitative & quantitative in nature, such as below:· IPO/Equity· Long term borrowings· Investments· M&A/JV· Board mattersIn such cases, the scoring methodology is proposed below, wherein *1 mark has been indicated, highlighting the following.*1=Indicates, the target value to be set up by the CFO in consultation with the CEO/MD at the beginning of each financial year as per the unit of measurement indicated. There can be KPI where it is difficult to quantify performance in Rs terms or % value or any other unit. In such a few cases, a score is given and assessed qualitatively on a 5-point scale, as highlighted below. · 5 score indicates the highest performance · 4 score shows very good performance · 3 score indicates good performance· 2 scores indicate below-average performance· 1 score indicates poor performance Scoring methodology-Column 7In both Qualitative and Quantitative KPIs, the actual performance and score earned will be computed & captured inActual performance is to be captured by the appraising person supported by factual data from MIS, Financial books & with ERP/Other software support & measured in terms of UOM indicated earlier, with inputs from the appraisee.The score earned (in Column 8) will be computed based on the actual value in column 7 divided by the target value in column 6.S.no Suggested KPI Measure of accomplishment UOM % Weight-age Target Actual Scoreearnedbased on col 7/6x5Col1 Col 2 Col 3Col 4 Col 5 Col 6Col 7Col 8 Direct responsibility area3 KPI rows each with weightage score@5 =15 score12 KPI rows each with weightage score@4 =48 score 1IPO/EquityPricing, roadshows,, %subscription, costs, equity & preference shares issuance & inflows & so onScaleof 5 55note*1 2Long term borrowingsBorrowing rates/cost from banks/FI, covenants, Credit ratings received for Bonds & debenture, % interest rates Inflows-disbursals, EMI repayments, utilisationScaleof 5 55note*1 3Investments Risk analysis , % return on investments choices in Shares, Bonds, debentures, Mutual funds & so onScaleof 5 55note*1 4M&A or JVDue diligence, Price negotiations, Terms & conditions, statutory approvals, Forex hedging, ownership control% Royalty etcScaleof 5 44note*1 5Board mattersQuarterly/annual results, Dividends, Corporate governance , /Audits & so onScaleof 5 44note*1 6Cash flows from business operationsduring a perioudComputations based on:Inflow from =customers, interest received, dividends, rentals etc ,Outflows to = vendors, employees, taxes etcNotes: More heads can be added as relevantRs 4? 7 Cash flows from investing activitiesduring a perioudComputations based on;Inflow from sales of =Assets, intangibles, co securities, & divestures, loans repayment by borrowers etcOutflows for purchase of =Assets, securities of other cos, acquisitions, investments made etcNotes: More heads can be added as relevantRs 4? 8Cash flows from Financing activitiesduring a perioudComputations based on:Inflow from sale of =Equities/stocks, preferred shares, bonds, etcOutflows for =Dividends, buy of treasury stocks, bonds, short term debts payments etcNotes: More heads can be added as relevantRs 4? 9Free Cash flow Cash flow from business operations- Net capital expenditureRs4? 10Cash burn ratio Free cash flow during a specific period Divided byNo of days during the periodNotes: It indicates daily cash during the period.(-) Negative indicates company can go into financial distress Rs (+ or -)4? 11Operating cash flow to current liabilities Cash flow from operations OCFCL= Divided by Average current liabilitiesNotes:It represents the net amount of cash derived from operating activities during the year and ability of the company to generate cash from operations to pay its debts% or ratio4? 12Solvency Total liabilitiesDebt/equity ratio =. Divided by Total stockholders' equity % or ratio4? 13LiquidityWorking capital =Current Assets-Current liabilitiesRs4? 14Liquidity Current asset Current Ratio. = Divided by Current liabilities Notes: Current ration expresses working capital as a ratio .Value exceeding 1( one) indicate a positive net working capital . However ,excessively high current ratio indicates inefficient asset useratio 4? 15Operating cash flow to capital expenditure Operating cash flow … Divided by Annual capital expenditure % or Ratio 4? Indirect responsibility area(F&A teams play facilitative roles)7 KPI rows each with weightage score@3 =21 score8 KPI rows each with weightage score@2 =16 score 16Liquidity -Quick ratio Cash + Short-term securities + Accounts receivable Divided by Current liabilitiesNote: The quick ratio reflects on a company's ability to meet its current liabilities without liquidating inventories that could require markdowns. Quick assets are those which are likely to be converted into cash within a short period of time. Value >1 indicates companies ability to meet its current liabilities without any difficultyTimes3? 17Profits MarginEarnings without interest expense Divided by Net sales revenueNotes: The higher %, indicates profitable operations%3? 18Gross Profit marginNet Sales revenue - Cost of goods sold Divided by Net sales revenue Notes: % indicates how much every sale Rupee is gross profit. Higher the better %3? 19PBTProfit before taxDivided by Net salesNotes: The higher %, indicates profitable operations%3? 20EBIDTEarnings before interest, depreciation and taxDivided by Net Sales valueNotes: The higher %, indicates profitable operations%3? 21Expense to sales ratio Direct ExpensesETS=. Divided by . Net sales revenueNotes: It measures the percentage of each sales Rupee that goes to cover specific expenses..Lower the better%3? 22Return on Equity Net income ROE= Divided by Average stock holder’s equity Notes: ROE measures the return on the investment made by the firm's stockholders. Itis one of the primary measures of company performance for a specific period, usually a fiscal year.%3? 23Earnings/share The net profit or loss for the period Divided by weighted average number of equity shares outstanding during the periodNotes: Computation as per accounting standard 20Rs2? 24Dividend yield Dividend per share Dividend yield = Divided by Market value per shareNotes: Dividend per share is calculated based on the annual dividend declared during the year divided by the number of outstanding common stock %2? 25Return on Assets Net income+ Interest expense net of tax savingROA =. Divided by (Beginning total assets +Ending assets)/2Notes: It measures utilization of assets to earn a profit. ROA measures the return earned on each Rupee that the firm invests in assets. Interest costs is excluded from the ROA calculation so that return is measured without the effect of debt financing.%2? 26Return on Financial leveler ageROFL= ROE-ROANotes: Financial leverage refers to the effect that liabilities (including debt financing) have on ROE.A firm's management can increase the return to shareholders (ROE) by effectively using financial leverage.On the other hand, too much financial leverage can be risky as too much debt increases chances of failure to make timely debt payments %2? 27Accounts receivable Turnover Net Sales revenue ART= Divided by Average accounts receivable Notes: More turns indicate that accounts receivable are being collected more quickly Turns2? 28Days sales outstanding 365 Divided by Accounts receivable TurnoverDays2? 29Average vendor credit daysValue of Accounts payable Divided by x 365 Cost of goods soldNotes: No of days payable to vendorsDays2? 30Inventory turnover Cost of goods sold INVT= Divided by Average inventoryNotes: It measures the number of times during a period that total inventory is turned (sold). Higher no of times indicates that inventory is managed efficiently No of times2? How to populate the KPI template· As is evident from the above table, a template (with 8 columns and 30 rows) has been proposed for the F&A function, which can be populated by the HOD of each function within the F&A team and reviewed by the CFO. Each row represents a KPI parameter (along with the unit of measurement) with different weightages for each KPI.For an easy-to-understand model, in column 5, the total of all the weightages of KPIs' must add up to 100, · Essential inputs for computing actual accomplishment vis a vis each KPI are given in column 3. · The values for the “Target” KPI and “Actual” vis a vis each KRA are populated in columns 6 & 7, respectively. · After that score earned is to be determined as follows: The actual value in column 7 Divided by X weightage score in column 5 Target value in column 6 The computation of the score earned is illustrated below for four random KPIs, each with different weightage of 5,4,3,2, respectively, in column 5. The values or numbers in cols 6 & 7 ,indicated in the illustration, are hypothetical. · KPI parameters will undoubtedly vary from organisation to organisation, and weightages can be decided by CFO in consultation with CEO/MD.· Therefore, at the absolute discretion, CFO can do the following:§ Change the character/narration of each KPI and its measurement unit.§ Add or delete or edit the KPI in consultation with CEO/MD§ Change the proposed weightage @ 5 or 4 or 3, or 2 for KPI to any other number,· However, for simplicity and to develop a Robust quantifiable model, the amended KPI's, overall weightage must add up to 100.· In large organisations with multi-plants/offices in different countries/states/locations or companies with multiple end products or services, separate KPIs must be identified for each sub-functions of F&A.· CFO can evolve KPIs for the above functions based on a similar approach with a focus only on relevant KPIs for each function· For the service industry, KPI related to inventory will not be relevant, and end products will get replaced by “Services“ and cost of goods sold will get replaced by the cost of rendering services. Illustration table for 4 KPIs # mark in col 6 & indicates values considered in these cells are hypothetical and only for enhancing readers' understanding. The score earned for 4 KPI’s=11 out of the target weightage of 14 (reflected in Col 5 and Col 8, respectively) and a similar methodology is to be applied for all 30 KPIs with a target weightage of 100 .KPIS.no Suggested KPI Measure of accomplishment of KPI UOM % Weight-age Target Actual Scoreearned ComputationFor arriving at score based on values incol 7/col 6 x col 5Col1 Col 2 Col 3Col 4 Col 5 Col 6Col 7Col 8Col 9 1IPO/EquityPricing, roadshows,, %subscription, costs, equity & preference shares issuance & inflows & so onScaleof 5 5544KPI’s measure is overall qualitative 6Cash flows from business operationsduring a perioudComputations based on:Inflow from =customers, interest received, dividends, rentals etc ,Outflows to = vendors, employees, taxes etcRs 480Lacs#60Lacs#3(60/80) x4=316Liquidity -Quick ratioFor a perioud Cash + Short-term securities + Accounts receivable Divided by Current liabilitiesNote: Value >1 indicates companies’ ability to meet its current liabilities without any difficultyTimes 31.10#6.2L+4.1L+8.6LDivided by 20.2L. #=0.932.54(0.93/1.10).x 3=2.5427Accounts receivable TurnoverFor a perioud Net Sales revenue ART= Divided by Average accounts receivable Note: More turns indicate that accounts receivable are being collected more quickly Turns 29 #6820L-salesDivided by (915L+1125L)/2Avg Receivables =6.61.466.6/9 x 2=1.46Score earned for above 4 KPI’s=11 out of 14 (in col 5 and Col 8 respectively) 14 11 Activities that can adversely impact the business Providing incorrect inputs to senior management -CFO/CEO/MD with malice intent of assigning easy targets/goals for KPI parameters.In the workflow/embedded software (that enables accessing of KPI), incorporating incorrect parameters vis-à-vis management-approved parameters by not exercising prudence leads to inaccurate capturing of KPIsMaking changes in the KPI Targets or actuals before the performance review period with ulterior motivesMeasures of accomplishment are deliberately kept vague and not merit-based, leading to the scope of manipulation.Percent weightages assigned to each KPI are biased with ulterior objectives of influencing outcome vis-à-vis performance perspective.Targets Set are biased (too stretched or loose) to reprimand or favour specific team levels /employees, leading to demotivation/dissatisfaction.The actual measurement carried out is captured inaccurately or manipulated.§ Through the back end of software, making circular changes in the KPI Targets or actuals during the performance review period, with ulterior motives and turning off the audit trail to prevent detection.§ Not ensuring restricted access rights to KPI values in the appraisal software in HR, thus enabling unauthorised persons to make unauthorised changes in targets vis a vis approved KPI.
Developing KPIs for Functions of Design of Architectural, Interior designing, and Design of MEP.
A KPI for a function is a measurable value that demonstrates how effectively a function is meeting organizational objectives. KPI needs to be specific, measurable, realistic, and communicated to concerned key functional team members to accomplish. How to develop KPI For developing a robust KPI system,11 business activities are considered essential in each of the 3 Project design and engineering functions as below. · Sharing of corporate targets like Sales nos, Revenue and Construction costs & Completion targets with HOD of Design of Architectural, Interior designing, and Design of MEP · Design of format/contents of KPI with inputs from CEO/MD · Identify important KPI for each of the 3 design functions based on corporate objectives and external influences like customer demand or & competitors’ offerings or & economy or &statutory considerations · Proposing initial KPI Targets and Measures by HOD of design functions · Reviewing, modifying, and approving the respective design team’s KPI by CEO/MD · Putting up measurement systems in place like reports /dashboards · Converting each functional KPI into KRA-Key result areas of functional team members at different levels i.e. § Higher level: directors-, HOD/Chief designer, General managers-GM, and so on as applicable § Middle level: senior manager-sr. mgr, manager, and so on as applicable § Lower level: assist. manager/junior mgr., staff, and workers so on as applicable · Monthly capturing of actual accomplishment of KRA by respective teams in templates · Periodic review of Actual accomplishment of KPI vs Target · In exceptional cases, reviewing, updating, and resubmitting KPI to CEO/MD · Compile Level-wise Actual vs Target of KRA and forward updated reports to the HR team for subsequent annual performance appraisal system at each level. Suggested Template for KPI -An Illustration Based on the above, a template with 9 columns and 20 rows is proposed below for the 3 Design functions which can be populated by the HOD of Architect, Interior design, and MEP design respectively S.no Suggested KPI Measure of accomplishment UOM % Weight- age Target Actual Score earned based on col 7/6x5 Remarks 1 2 3 4 5 6 7 8 9 1 No of the projects for which Architectural, Interior, and MEP designs were commercialized successfully New projects commercialized Nos 5 Approval of Sample flat or mockup unit by potential customers leading to booking 2 Benchmarking of competitor’s projects Site Visits to Sample apartments or & completed Construction projects to gather unique project features Nos 5 Presentation to Promoters of the features and our plans to offer even better features in design plans 3 Mockup unit Development costs Costs include: i)Direct -pro-rata costs of dedicated manpower for Architecture, Interior design, or MEP functions + ii)Outsourced consultancy iii)Mockup unit -costs of BOQ -local+ imports (excluding Interior design & MEP) + iv)Costs of consumables+ v)Costs of manpower for the construction of mockup+ vi)Dedicated Software+ vii)Travel costs directly related to Project+ viii)Rework costs+ viii)Surplus BOQ samples that are unusable Excludes -manpower engaged in supporting existing models Mockup/sample room costs Rs or USD/Project or Rs /USD 5 4 Timeliness -for preparation, release & approval of design works vis a vis Developing Concept design On-time release - score on a 5-point scale, with five being excellent /delightful & 1 being poor score 5 From the Start of Go ahead given by the promoter for designing the specific Projects 5 Timeliness -for preparation, release & approval of design works vis a vis Developing Schematic design As above score 5 6 Timeliness -for preparation, the release of design works for obtaining Sanction design from statutory authorities (This KPI may not apply to Interior design) As above score 5 7 Timeliness -for preparation, the release of design works vis a vis detailed Design-Based on statutory approvals including RERA/Statutory body as applicable As above score 5 8 Timeliness -for preparation, comprehensiveness, and release of Tenders vis a vis technical design aspect, including designs/technical specifications · Structure works · Civil works · Façade works · Landscape Works-Hardscape · Landscape works-Softscape · Interior design -Finishing · Interior design -FFE works · Interior design -Artwork · MEP-Electrical works · MEP-Airconditioning works · And so on As above score 5 9 Timeliness -for preparation, comprehensiveness, and release of Target/estimated Project Costs in Rs or USD & or Rs or USD/sqft including (BOQ+ Labour+ direct construction variable costs)- As above score 5 Package-wise costs along with assumptions to be prepared. 10 Timeliness -for preparation, comprehensiveness, and release of design works vis a vis Working drawing/GFC (Good for construction drawings) As above score 5 11 Timeliness in obtaining statutory approvals (Before or during construction) such as below but not limited to: Zoning plans, Building /site plans & drawings, building height clearances, In principle approval for BOQ material specification of the works to be constructed & many more, including Structural design safety certification As above score 5 12 Comprehensiveness & accuracy of technical specifications & designs in tenders As above score 5 13 Technical support to in-house purchase and contracting teams in selecting consultants and contractors and incorporating clauses in their agreements w. r. t. their scope of work, specifications, and deliverables As above score 5 14 Quality of designs causing delays in project execution due to inadequacy/rework of designs vis a vis various packages for Architecture, Interior designing, MEP works vis a vis each package mentioned earlier As above score 5 15 Rendering Support to Project construction team +Contractors during construction for issues related to constructability of design and drawings As above score 5 16 Rendering support to the QS team for carrying out measurements of all related works vis construction packages including bills for substitute/extra materials As above score 5 17 Accuracy in the passing of outsourced consultant’s/service provider’s bills vis a vis deliverable in agreement As above score 5 18 Timeliness for release of: - As-built drawings & design - Revised Project costs vis a vis target As above score 5 19 Timeliness in obtaining statutory approvals-post construction such as below but not limited to: · Deed of declaration for actual area constructed · Occupation certificate, · Completion certificate etc. (This KPI may not apply to Interior design) As above score 5 20 Cost reduction/Value engineering in BOQ Savings in Project cost Rs or USD 5 Total 100 * Notes: * Total score earned of all KPI parameters can be computed and used in annual appraisal/ promotion etc · 80-100=Excellent · 60-80= very good · 40-60= average · 20-40= below average · Below 20=Poor How to populate the KPI template i)Here each row represents a KPI parameter (along with the unit of measurement) with a score @5 for each KPI (as an example for simplicity) thus adding up to a total KPI Target score of 100 mentioned in column 5 of template ii) Basic inputs for computing actual accomplishment vis a vis each KPI are given in the last column iii) The values for the targeted KPI and actual accomplishment, are to be filled in columns 6 & 7 respectively iv) Thereafter score earned to be determined as: The actual value in column 7 ……………………………………… X weightage score in column 5 Target value in column 6 eg. For the 1st KPI in row 1 is no of projects commercialized with values as below Target =10 (column 6) actual= 9 (column 7) weightage=5 (column 5) Score earned will be = 9/10 x5=4.5 v) Likewise score earned of each KPI to be computed in 20 rows and say it works out to be = 85 vi) The total score earned as above can serve as one of the relevant qualitative inputs for performance appraisal. This score will classify as an excellent category as the assumption mentioned at end of the table vii) The HOD of Architecture, Interior design or MEP functions can make modifications, to the number of KPIs, and their description vis a vis this template in consultation with the Project head, CEO, and MD viii) Likewise, HOD of Architecture, Interior design, or MEP functions assign different weightages to the KPI parameter listed in rows, instead of keeping 5 as mentioned in the above illustration but the total of all KPI must add up to 100 in column 5. viii) Suggest separate sheet to be prepared for Residential, commercial, hospitality, and other projects ix) KPI can be developed by teams of Design of Interior and MEP functions based on a similar approach KRAs- or Key result areas While KPIs are applicable at the functional level, KRAs are applicable at the individual levels within the function. KRA can be driven by KPI, and the scoring method can be similar to KPI.KPIs need to be separate for different levels, and positions within each design function. Therefore the number of KRA parameters can vary from level to level and positon to position depending on competence, role assigned to each design team member, and design package.The overall score earned on KRA can provide meaningful inputs for developing a robust performance appraisal system based on the weighted average scores for the following:i) Quantification score as computed in this blog based on KRAii) Qualitative score based on (applicable competencies to the level ) demonstrated by designer vis a vis 36 competencies identified (please refer to an earlier blog dated 1 st July 22) Activities that can adversely impact the business while developing KPI § KPI parameters are non -comprehensive due to the following: § Not aligned to Corporate Objectives § Contain primarily transaction-related mundane indices § Measures of accomplishment are deliberately kept vague and not merit-based leading to the scope of manipulation § Percent weightages assigned to each KPI are biased with ulterior objectives of influencing outcome vis-à-vis performance perspective. § Targets Set are biased (too stretched or too loose) to reprimand or favor specific team members or specific levels of employees, leading to demotivation/dissatisfaction. § The actual measurement carried out is captured inaccurately or manipulated. § Making circular changes in the KPI Targets or actuals during the performance review period and restoring original values, with ulterior motives and simultaneously disabling the audit trail to prevent detection. § In the workflow/embedded software (that enables accessing of KPI) incorporating incorrect indices vis-à-vis management-approved KPI indices by not exercising prudence leads to mistaken capturing of % Weightages or Targets Detailed about business activities to be performed for developing the KPI are included in chapter 18 (annex 42B) in the handbook of the author and titled” ETHICS in the real estate and hospitality industry, Volume 1- Architectural, Interior design, and MEP services