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A comprehensive guide to understanding accounting KPIs

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A comprehensive guide to understanding accounting KPIs

Are you wondering if you're measuring the right things regarding your business's finances? You're not alone. In fact, plenty of business owners are unsure which KPIs (key performance indicators) they should be tracking to make sound strategic decisions. 

But don't worry.

This comprehensive guide breaks down all the most crucial accounting KPIs and explains what each means for your business. Plus, we provide tips on how to track them effectively so you can get accurate insights into your company's financial health.

By understanding and utilizing these KPIs, you can ensure that your business runs as efficiently as possible and makes the most money possible. 

Wouldn't that be amazing? Let's get into it.

What is an accounting KPIs?

Accounting KPIs, or key performance indicators, are valuable measurements used by an accounting department to understand its operations and evaluate its performance. Companies today have an abundance of data available to them. However, this data can quickly become overwhelming, and it's easy to lose sight of the big picture. That's why KPIs are so important. 

They act as a guide, helping you identify the few essential financial metrics that indicate how well your business is achieving its goals. By tracking KPIs regularly, the accounting manager can gain insights into internal accounting department performance and decide which accounting function needs to be improved.

These KPIs typically measure accounts receivable turnover, operating cash flow, days sales outstanding (DSO), actual and budgeted costs, debt-to-equity ratio, current ratio, etc.

However, it's wise to use accounting software to keep your business running smoothly and accurately measure its performance. Why? Because including KPIs in your management accounts allows you to see an up-to-date view of the company's financial situation and enable effective decision-making.

Now you got the basic idea. Let's explore KPIs in detail.

What are the accounting key performance indicators?

Is your business growing but still feeling like something's missing? It may be time to look beyond the traditional KPIs like gross profit, revenue, net profit, etc. Dig deeper and look closely at other important accounting key performance indicators given below that you must need to improve your business performance.

Days sales outstanding (DSO)

Days sales outstanding (DSO) is an essential key performance indicator for accounts receivable departments that should not be overlooked. This metric allows businesses to measure how efficiently they collect their accounts receivable. 

To calculate DSO:

  1. Divide your total credit sales by the total amount of accounts receivable.
  2. Multiply it by the number of days in the time frame you are examining.
  3. Remember, a low days sales outstanding (DSO) number signals that your organization is effectively collecting its accounts receivable and improving its cash flow. 

To stay on top of performance, ensure you run this formula each month, quarter or year. Because an accurate understanding of DSO will help accounts receivable departments manage their credit sales and maximize their financial performance.

Days payable outstanding (DPO) 

When examining a company's financial performance, it is essential to look at days payable outstanding (DPO). It's a financial metric that reflects the average number of days it takes for a company to pay its bills. A higher DPO value allows companies to keep their cash around longer and invest in short-term investments. 

However, too high of an average indicates that the company is struggling with repayment. That's why to increase free cash flow, businesses should aim to maintain the right balance between spending and repayment while keeping an eye on their DPO.

Accounts receivable turnover

Tracking accounts receivable turnover (ART) is another essential metric of financial success. This KPI measures how quickly a company collects payments from customers. And how to calculate it? Simply by dividing total sales by average accounts receivable during a given period. 

Maintaining control over ART gives companies improved cash flow and a better chance of achieving their financial goals. Companies should have a firm grasp on accounts receivable KPIs like collecting payments and receivables to maximize results.

Debt to equity ratio

It's essential to keep an eye on the Debt-to-equity ratio (D/E) when assessing your business's financial health. This KPI measures the proportion of liabilities relative to shareholder equity. It shows how efficiently you are utilizing investments and funding growth. Plus, how much debt was taken to make the company profitable? 

A high D/E tells that the company relies heavily on loans as opposed to other sources of financing. Pay close attention to this KPI, as it will help you maintain fiscal responsibility and ensure that your finances are in check.

Accounts payable turnover

Knowing your accounts payable turnover KPI is essential for effectively managing your business's finances. This ratio tells you how fast your company pays its suppliers and helps you determine if the speed of payments is increasing or decreasing over time. 

To determine your accounts payable turnover KPI, divide the total cost of sales in a period by your average accounts payable during that period.  

It's essential for ensuring good relations with vendors, so you can take advantage of discount opportunities and maintain a positive reputation with them. It's also crucial to keep an eye on this KPI as it conveys essential insights into your accounts payable department's performance.

Inventory turnover

The inventory turnover KPI gives insight into how efficient your business is by comparing your sales within a given period against the average inventory. It explains how much average stock has been sold over that time frame.

Knowing this key performance indicator can help you highlight areas that need improvement and make the most of any positive outcomes. With accurate data and strategic analysis, there's no limit to what your business can achieve when optimizing inventory turnover.

Actual and budgeted costs

To make sound financial decisions, you should know the difference between actual and budgeted costs. If this accounting manager's KPI measures a huge difference between these two figures, it signals that the budgeting process has missed crucial expenses. Or it may be due to other departments that need to be controlling their spending. 

The key is to stay aware of this KPI. Monitor it closely to ensure that budgeted and actual costs remain in line. Plus, use it to identify areas for improvement concerning both spending and forecasting. 

Operational cost per collection

Knowing your operational cost per collection is essential for understanding the efficiency of your accounts receivable staff. This financial metric tells the total expenditure it takes to collect a single payment, helping you monitor process changes as time goes on. 

Automation can be beneficial when it comes to decreasing this value over time. Keeping tabs on this key performance indicator can provide insight into the efficacy of your accounts receivable procedures and help optimize financial metrics for the future.

Return on equity

Return on equity (ROE) is a key performance indicator that tracks the profitability of a company's net income. To calculate, the amount of shareholder equity is divided by the net income generated by the company. This KPI should be monitored over each accounting period, as increases or improvements indicate an effective strategy. 

Companies that can improve their ROE results may gain a competitive edge by convincing shareholders that their investments are being used appropriately. 

Current ratio

The current ratio KPI is a great way to measure your business's solvency and ensure it is meeting its financial obligations on time. The ratio divides total assets by liabilities and tells whether your company can maintain a consistent credit rating over time. 

This KPI should be monitored regularly to track progress and spot potential red flags before they become significant problems. 

Invoice payment cycle

The invoice payment cycle KPI identifies how quickly customers pay their invoices and measures trends in customer payment behavior. It is essential for understanding customer behavior patterns and making payment terms decisions. This helps organizations avoid any potential cash flow problemscaused by overdue invoices.

Operating cash flow (OCF) ratio

OCF ratio monitors the operating cash flow of a company in comparison to its current liabilities. This helps assess whether the business has sufficient funds to pay off its short-term debts and operate efficiently. If this accounting metric tracks a result more significant than one, the company has more than enough funds to easily maintain operations and meet obligations.

Accounting employees to full-time employees (FTE) ratio 

Understanding the ratio of accounting employees to full-time employees (FTE) is a key performance indicator when it comes to gauging the efficiency of your internal accounting department. 

This essential measurement compares the size and cost of your accounting staff with the total number of company employees. A lower ratio means that fewer personnel are required, which, in turn, can lead to more significant cost savings. 

However, it is essential to ensure that other equally important KPIs are not overlooked merely to keep this number low. Make sure you do not sacrifice quality for quantity when understanding your FTE ratio.

Number of budget iterations 

Managing the number of budget iterations is a crucial internal accounting department KPI. It can help give you insight into how efficient your company's budgeting process is and what areas need improvement. Also, how many times should you revise your budget? 

To ensure accuracy, it's essential to consider all external influences that may impact this figure. Organizations can reduce overall costs with improved optimization through regular analysis while still producing high-quality results.

Invoice exception rate 

The invoice exception rate is a critical accounting KPI that can give you insights into the potential pitfalls of your system. It shows the percentage of invoices with errors or incorrect details, meaning manual intervention is required. 

With a higher exception rate, it's more likely for duplicate payments or other costly mistakes more likely to occur. Knowing this metric gives you greater visibility on how well your system is set up and what steps need to be taken to ensure accuracy and efficiency.

All these are the major KPIs that affect your company's performance. Now, what should be your strategy to evaluate these KPIs? Read on to learn.

How to calculate KPI in accounting?

Calculating key performance indicators (KPIs) in accounting is essential for understanding a business's efficiency and effectiveness.It involves measuring performance against specific objectives to determine whether or not the goals are being achieved. Here are five steps to calculating KPIs in accounting:

Step 1: Set clear KPIs and objectives

Before you can begin calculating KPIs, it is vital to establish what the specific KPIs and objectives are. This means clearly defining each KPI and determining which metrics will be used to measure progress toward achieving the goal. For example, an accounting team might want to track the time taken for a customer invoice processing task as their KPI.

Step 2: Analyze historical trends

Once the specific KPIs and objectives are established, it is essential to analyze historical trends to assess how well the company has been performing relative to past performance. 

This can help identify areas of improvement as well as provide insight into what factors may be affecting performance. For example, an accounting team could look at historical data to identify potential bottlenecks in the customer invoice processing task.

Step 3: Measure results against goals

After analyzing historical trends, it is essential to measure performance against goals. This step involves setting up a system for tracking and reporting KPIs over time so that progress can be monitored easily. 

For example, an accounting team could set up a system that tracks how much time is taken to process each customer invoice and compare it to their goal of reducing processing times by 20%.

Step 4: Communicate changes to stakeholders

Teams need to communicate changes in performance to stakeholders so that they are aware of progress and can provide feedback if required. This step involves ensuring that everyone who needs to know knows how the company's KPIs are changing over time. 

For example, an accounting team could make sure their progress toward reducing customer invoice processing times is communicated to stakeholders regularly.

Step 5: Ensure transparent reporting 

Finally, teams need to ensure that reporting is done transparently so that stakeholders can easily understand how the KPIs change over time. This means providing clear and concise reports that accurately capture performance. 

For example, an accounting team could ensure that their customer invoice processing times are reported in a way that is easy to read and understand. 

What is the importance of accounting APIs?

Accounting APIs are quickly becoming an essential part of the modern business landscape because you can get a range of benefits for your business to streamline and optimize financial processes. 

Accounting APIs provide users with access to real-time data from accounting systems to improve efficiency and accuracy in financial management. Here are a few key reasons you should use accounting APIs for your business:

Automation and efficiency

Accounting APIs enable businesses to automate routine tasks such as invoice processing, payment reconciliations, and expense management. This automation can dramatically reduce the time spent on manual accounting processes and improve financial accuracy, leading to greater efficiency across the entire organization.

Seamless integration

Accounting APIs allow businesses to integrate their accounting systems easily with other applications and services. This integration can improve workflows by allowing information to flow more freely between different systems, eliminating the need for manual data entry and saving time.

Cost savings

Accounting APIs help businesses save money by streamlining their accounting processes and reducing the need for manual work. By automating labor-intensive tasks, such as invoice processing or payment reconciliations, companies can reduce labor costs and increase efficiency in the process.

Data accuracy 

Using an accounting API to automate tedious tasks helps to ensure that data is accurate and up to date. By streamlining processes, businesses can reduce errors and ensure accuracy, leading to better financial management.

Conclusion

In conclusion, accounting KPIs are essential for businesses of any size or industry. Because a clear and comprehensive overview of your finances is beneficial in making informed decisions and staying on top of trends and performance, by leveraging accounting APIs, businesses can automate processes, ensure accurate financial tracking across multiple systems, and increase efficiency with seamless integration. With the right tools and knowledge, companies can move one step closer to achieving their financial goals. 

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Cash Flow Forecasting Xero
Ray Wyand, CEO of gini
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