How to measure CFO performance

As a startup founder, a chief financial officer (CFO) can be your most valuable partner on the path to growth. However, hiring one is a significant investment, so it’s important to regularly assess whether their impact on your business is worth the cost.

This guide will show you how to measure CFO performance using financial metrics and qualitative analysis.

Types of CFO performance metrics every business should track

Your CFO’s performance affects many different aspects of your business, so relying on a single key performance indicator (KPI) to assess it can be misleading. Instead, you typically need to track several types of metrics.

For example, here are some of the most important angles to consider:

• Profitability: These metrics focus on your company's ability to generate and retain earnings. They can help you evaluate how effectively your CFO manages margins and drives bottom-line growth.
• Liquidity: These measure your company's ability to meet its short-term obligations. They can help you determine how well your CFO juggles operating, investing, and financing cash flows.
• Efficiency: These indicators show how quickly and smoothly your finance team completes various financial workflows. They can help you gauge your CFO’s ability to lead internal processes.

It’s also important to pay attention to more qualitative measures, such as a CFO’s influence on company culture or their ability to mentor the finance team. After all, a CFO is just as much a company leader as they are a strategic decision-maker.

Profitability metrics to evaluate your chief financial officer

Profitability is arguably the most direct reflection of your CFO’s ability to make effective financial decisions. However, it’s important to look beyond revenue growth rate and study how efficiently they turn sales into net income.

With that in mind, the most important profitability metrics to track fall into two main categories: margin metrics and return metrics.

Margin metrics are ratios between income statement line items and revenue that provide valuable insight into how well your CFO controls costs. Return ratios compare earnings to the resources used to create them, showing how well they deploy capital.

For example, here are some of the most important margin and return ratios:

• Gross profit margin: This measures the percentage of revenue remaining after subtracting the cost of goods sold (COGS). It can help you gauge your CFO’s pricing strategy and production cost management.
• EBITDA margin: This is the percentage of revenue remaining after COGS and operating expenses. However, it excludes the costs that can hide how well your core business is performing: interest, taxes, depreciation, and amortization. It reflects your CFO’s ability to manage the day-to-day costs of doing business.
• Net profit margin: This is the percentage of revenue remaining after accounting for all expenses, including taxes. It’s the ultimate tool for benchmarking your profitability against other businesses in your industry. 
• Return on equity (ROE): This is the ratio between net income and total equity, which helps you determine how well the CFO uses equity financing to generate profit. For example, a 10% ROE means your company nets 10 cents of profit for every dollar of shareholder funding.

Liquidity and cash flow management indicators

Strong profitability metrics may be a requirement for long-term growth, but they don’t guarantee financial stability. Healthy cash flows are also necessary for your business to remain an ongoing concern.

Liquidity indicators are the best tools for analyzing a CFO’s capabilities in this aspect of financial management. They reflect your company’s access to cash and indicate whether it has sufficient resources to meet its ongoing obligations.

For example, these are some of the most valuable liquidity ratios:

• Current ratio: This compares current assets to current liabilities. If your ratio is greater than one, your company should generally have enough short-term resources to cover upcoming debts.
• Quick ratio: The formula for this financial metric is the same as the current ratio, but it excludes inventory for a more conservative view, as your company may not always be able to convert it to cash quickly.
• Cash ratio: This is the most conservative version of the current ratio that only compares cash and cash equivalents to current liabilities. If it’s greater than one, you should have enough highly liquid assets for short-term needs.

To clarify, liquidity measures reflect your company’s ability to meet its obligations during the next twelve months. Solvency ratios are key performance indicators that deal with its ability to cover its debts over the long term.

Operational efficiency metrics for CFO evaluation

Operational efficiency metrics indicate how well your CFO manages the financial workflows that support daily operations. More specifically, they often track how quickly capital and information move through your business.

This can help you evaluate your CFO’s ability to design robust processes, troubleshoot bottlenecks, and ensure the finance team delivers support to the rest of the business.

For example, these are some of the most important operational efficiency metrics to track:

• Days sales outstanding (DSO): This measures the average number of days it takes to collect payment after a sale, similar to the accounts receivable turnover. A lower DSO suggests your CFO has effective billing and collections processes.
• Days payable outstanding (DPO): This tracks how long your company takes to pay its vendors, similar to accounts payable turnover. An optimized DPO reflects strong payment controls that meet obligations on time while preserving liquidity.
• Inventory turnover: This measures how often inventory is sold and replaced during a period. Higher turnover generally indicates more efficient inventory management and less cash tied up in operations.
• Time to month-end close: This tracks how many days it takes to finalize the financial reporting after the month ends. A shorter close cycle signals well-designed systems, often involving automation.

Strategic performance metrics beyond the numbers

Even a comprehensive set of financial KPIs may fail to capture your CFO’s full impact. These indicators can help you track quantifiable results, but CFO responsibilities also influence your company in less tangible ways.

Here are some of the more qualitative aspects of their performance to consider:

• Leadership and team development: Your CFO’s ability to build and mentor a strong finance team can be just as important as their strategic decision-making. Effective leaders are essential for maintaining a finance function that scales with your business as it grows.
• Risk management and foresight: A CFO should proactively identify and address potential risks, such as market shifts, cash shortfalls, or regulatory changes. This skill may not always be readily apparent in your financial results, especially in the short term.
• Communication and collaboration: An ideal CFO can translate financial information into clear and relevant insights for internal and external stakeholders. That includes other C-suite members and department leaders, as well as shareholders and investors.

Remember, the best CFOs aren't just financial experts. They’re executives who have the technical knowledge, strategic judgment, and leadership skill to guide your business to its next stage of development.

Common mistakes when evaluating CFO performance

One of the most common mistakes business owners make when evaluating CFOs is to focus too much on profitability alone. These metrics are important, but don’t overlook cash flow management, operational efficiency, and less tangible performance aspects.

Similarly, it’s easy to track the wrong metrics, even when you know to consider multiple types. CFO KPIs aren’t one-size-fits-all, and the most meaningful indicators can vary by industry, business model, and stage of growth.

For example, burn rate may be the most important liquidity ratio to a seed-stage startup, while operating cash flow may be more important to a more mature business.

Short-term thinking can also distort CFO evaluations. Finance leaders often make decisions that prioritize long-term stability, even if that limits near-term results. Judging their financial performance without this context can undervalue financial strategy.

Having unrealistic expectations is another pitfall to watch for. A CFO can help optimize financial processes, but they don’t control every outcome. As a result, reasonable benchmarks are essential for fair and effective evaluation.

How to set up a CFO dashboard for ongoing measurement

Tracking CFO performance requires visibility into many different metrics, including profitability, liquidity, and efficiency ratios. A CFO dashboard is the most efficient way to track these measures continuously rather than through one-off reports.

Many businesses start by building CFO dashboards in spreadsheets. However, this typically requires extensive manual effort and ongoing maintenance, and there’s a significant risk of error with each update.

A more scalable and efficient approach is to use software that automatically tracks and updates KPIs. These platforms pull financial data directly from your systems, providing real-time visibility into each CFO performance metric.

For example, Zeni’s AI-powered bookkeeping includes a built-in finance KPI dashboard that has financial insights in real time. 

Our platform also includes fractional CFO services and an AI CFO agent that can provide expert financial guidance without the cost of a full-time professional.

Schedule a free demo today to see how Zeni can enhance your financial management.

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