The vanity of performance metrics is fast being replaced by an approach that puts the future first.
Far too many software tools in finance continue to lack flexibility and control. This results in an over-reliance on vanity metrics that do little more than illustrate historical performance and ignore the many changes a business undergoes.
Any financial pro knows that forecasting is all about the future, not just reviewing the past. Real, actionable insights are the new benchmark for today’s CFOs and this is why:
Vanity Metrics are An Empty Promise
Built In describes vanity metrics as “unimportant data that gives a falsely inflated view of a company's growth or potential”. This is most common in performance metrics, where data is used to show a business's past performance with no other insight.
Areas where the business may have missed opportunities, or threats posed to maintaining that growth, won’t show up in vanity metrics. It’s just about looking good. This might suit a finance pitch, but it’s useless to the CFO trying to give actionable insights to their teams that can inform future strategies.
A CFO’s Job is All About Strategy
Information technology may be automating some of the more basic responsibilities of a CFO with regard to accounting and compliance, but their position as a strategist and advisor remains highly valuable.
To plan for the future, it’s fair to expect that you may need to consider the past, but the metrics by which that past is assessed matter greatly. Vanity metrics tend to show historical performance in a light that at best, flatters, and at worst puts any kind of strategy out the window.
If a business’s history simply shows growth, does that mean that their strategy shouldn’t change? AnyCFO serious about pushing their FP&A to the next level knows that it’s never as simple as that. Businesses are in a constant state of flux and simply looking at the past cannot account for that.
There’s No Action in Vanity Metrics
Vanity metrics are static by nature. They look back without showing the way forward. For example, a basic look at a business’s history may show a 20% growth in sales over 5 years. Beyond a pat on the back, what can be done with that information?
That’s the question CFOs need to answer with any metrics used to influence their forecasting. If the metrics go beyond just growth and offer insights into area codes where sales increased the most, there is already more potential for action.
It may mean a greater marketing budget to target said area, or could even bring attention to why the business is succeeding in some places rather than others. These are all crucial insights for a CFO trying to stay on top of not just a business’s performance, but how its finances may be successfully directed in the future. Such insights however require software that can keep up.
The New Benchmark in Forecasting
Data technology has grown exponentially over the years and with it, expectations of analysis. While spreadsheets gather dust on a 90’s computer, CFOs forecasting for even a medium-sized enterprise need software flexible enough to explore all corners of the business. They need metrics that show a way forward, not just what’s already been.
Looking at Performance Metrics Differently
Performance metrics themselves are not the issue, it’s when they show an overinflated or one-sided view that they end up in the vanity pile. By looking at performance differently, however, real insight can be gained into why a business is doing well and the possibilities for growing it further.
One of the most important things in managing the finance of a business is for CFOs to deliver performance metrics that actually reflect their KPIs. Saying a company has achieved X may mean very little if the goal was to gain traction with problem Y.
In this way, how performance metrics are framed matters greatly for FP&A. It’s why financial software that offers more control is so important. CFOs need to be able to shape performance metrics to suit their exact finance goals, especially as they change over time.
Picking Metrics Wisely
Context is one of the most important considerations when it comes to business metrics. The problem of course is that context changes and financial professionals need software that can catch up, fast. The metrics need to shift with them.
Sometimes it can be as simple as picking a rate of change metric rather than a cumulative one. Cumulatively, Netflix has managed to gain hundreds of millions of subscribers since they first started, but in Q2 of 2022, they were reported to have lost 200 000 of them. Cumulative metrics would show that drop but the picture would still reflect a mostly flattering view of over 200 million subscribers.
Insight into where Netflix lost most of its subscribers or the rate of new users per day, wouldn’t come through. The streaming context has changed, as industries always do. It’s why CFOs need insights that can adapt with that change, or even predict it.
Vanity metrics are a thing of the past in more ways than one. What most characterizes the new benchmark in forecasting is just how focused it is on the future. FP&Ahas moved to an era focused on data and the insights it can provide not just on how a business has performed, but how best to strategize for the future.
It’s a daunting task. Not only does forecasting demand increasing flexibility fromCFOs, but also speed. Businesses are always in flux and the analysis needs to match that. To keep up with this shift and deliver more than vanity metrics, CFOs need the right tools
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