What Are Two Metrics a CFO Should Always Monitor?

In today’s fast-moving business environment, the role of the Chief Financial Officer (CFO) goes far beyond managing budgets and closing the books. Modern CFOs are strategic leaders who guide decision-making, manage risk, and ensure long-term financial health.

While CFOs track dozens of financial indicators, two metrics stand above the rest. These metrics provide a clear picture of a company’s financial strength, operational efficiency, and ability to grow sustainably.

The two metrics every CFO should always monitor are:

1. Cash Flow
2. Profitability (in particular Operating Margin).

It would be interesting to explore the importance of these two metrics, their mechanisms and how CFOs can utilize them to make more sound business decisions.

Why Metrics Matter for a CFO

It is worthwhile to comprehend the importance of tracking the correct metrics before getting into the actual metrics.

A company may be selling well but it may even fail. It may demonstrate accounting profits and still go out of cash.

The right metrics help CFOs:

1. Early detection of financial risks.
2. Make effective strategic choices.
3. Communicate effectively with CEOs, boards and investors.
4. Support sustainable growth.

Of all the metrics that can be used, cash flow and profitability will always give the best indicators of financial health of a company.

Metric #1: Cash Flow

What Is Cash Flow?

Movement of money in and out of a business is termed as cash flow. In contrast to profit which is computed in accordance with accounting regulations, a cash flow is the actual dollars to pay bills, employees, lenders and investors.

The cash flow can be of three major types:

Operating Cash Flow – cash that is generated in the normal course of business.

Investing Cash Flow – cash utilized or realized in investment (equipment, acquisitions).

Financing Cash Flow- cash of loans, equity or dividends.

To a majority of CFOs, cash flow is the most important to run.

Why Cash Flow Is Critical for CFOs

Cash flow is termed as the blood of a business, rightly so. Even profitable companies can fail if they don’t have enough cash on hand.

Monitoring cash flow allows CFOs to:

1. Make sure that payroll and vendor payments are paid
2. Avoid liquidity crises
3. Plan for debt repayment
4. Growing funds without excessive borrowing.

In the U.S., financial stability requires the visibility of the cash flow given that interest rates and credit conditions may fluctuate very fast.

Key Cash Flow Indicators CFOs Track

Although total cash flow is significant, CFOs tend to pay attention to:

Cash Flow from Operations (CFO) – indicates whether the business is able to generate cash.

Free Cash Flow (FCF) = operating cash flow – capital expenditures.

Cash Conversion Cycle (CCC)– the speed at which the company collects sales.

A smaller cash conversion cycle is normally an indication of increased operational efficiency.

Real-World Example

A manufacturing firm, which is based in the U.S., can record high quarterly profits. Nevertheless, when the cash flow of the business is subjected to 90 days of invoice payment and suppliers insist on 30 days payment, cash deficits can occur.

Keeping a close eye on cash flow, the CFO is able to alter payment terms, enhance collections, or acquire short-term finance before things go wrong.

Metric #2: Profitability (Operating Margin)

What Is Operating Margin?

Profitability is a measure of efficiency of a firm in converting revenue into profit. Although profitability is measured in a number of ways, operating margin is one of the most valuable measures of profitability to CFOs.

Operating Margin = Operating Income ÷ Revenue

It indicates the amount of profit left after deductions to operate expenses on salaries, rent, marketing and utilities-but not interest and taxes.

Why Operating Margin Matters

Operating margin shows the effectiveness of the main business of the company.

In the case of CFOs, this measure assists in answering the following crucial questions:

1. Are we setting the right prices on our products?
2. Are the operating costs in control?
3. Can we scale profitably?

High operating margin means that the business is resistant to economic crises, increase in costs and competitive forces.

Profit vs. Cash Flow: Why Both Matter

It should be mentioned that there is a difference between profitability and cash flow.

1. A firm may be profitable and have no cash.
2. A firm may have a high cash flow and a low margin.

CFOs should track the two metrics simultaneously in order to have a full financial picture.

Industry Benchmarks and the American Market

Investors and lenders in the U.S tend to compare operating margins with industry standards.

For example:

1. Software firms tend to be more profitable to operate.
2. Businesses that have lower margins include retail and manufacturing.

A CFO who is aware of industry standards is able to communicate better performance to the stakeholders and to justify the strategic decisions.

How CFOs Use These Metrics Together

Supporting Strategic Decision-Making

Cash flow and operating margin are best analyzed in combination with each other.

For example:

1. Entering a new market can enhance the long-term margins and press cash in the short term.
2. Cost reduction can enhance profitability at the expense of operation.

CFOs can strike the balance between growth and financial stability by tracking both metrics.

Improving Forecasting and Planning

Accurate forecasts depend on understanding how cash and profitability move together.

CFOs use these metrics to:

1. Build realistic budgets
2. Plan capital investments
3. Get ready for theuncertainty of the economy.

Market conditions in the U.S. may change quickly, and good forecasting is a competitive edge.

Communicating with Stakeholders

Investors, banks and board members are very much concerned with the cash flow and profitability.

CFOs that articulate such metrics can:

1. Build trust.
2. Obtain superior terms of financing.
3. Valuation assistance in raising funds or merger and acquisition.

Companies that are publicly traded and venture-backed in particular should have clear communication on these metrics.

Best Practices for Monitoring These Metrics

Use Real-Time Dashboards

New financial tools enable CFOs to track cash flow and operating margin within near real-time.

Dashboards provide:

1. Faster insights
2. Early warning signals
3. Improved cross-functional fit.

Review Metrics Regularly

CFOs are to consider the following metrics:

1. On a monthly basis to examine in detail.
2. On a quarterly strategic review basis.
3. On a long-term basis, annually.
4. Consistency is key.

Align Teams Around Financial Goals

The finance, operations, and sales departments are supposed to know how their decisions affect the cash flow and margins. Performance is better within the organization when teams are aligned.