The necessity of evaluating core accounting metrics has frequently been stressed, but how can you effectively classify your KPIs so that your F In summary, leading organizations must concentrate on KPIs that support the company’s short-, mid-, and long-term strategies rather than focusing solely on organizational metrics.
It is crucial to make sure your metrics cover every aspect of the close process, from cost to time to effort to quality. When considering how to manage your metrics, you must initially take a comprehensive approach to your financial process. You can start to transition from simply viewing metrics that provide you with information that you already know to those that start to tell you what you really need to know to improve the quality of your financials by taking a step back and considering the whole of your financial close.
It’s essential to manage your accounting KPIs holistically to make sure the entire financial close process is managed successfully. It has been demonstrated that top companies that use technology to boost performance complete the financial close more quickly while using fewer resources and spending less money on each month-end close. Profit and loss exposure, process costs, time to close, and close quality are some important metrics to monitor.
What is KPI in accounting?
KPIs are metrics that organizations use to gauge and track the workforce’s progress toward operational or financial objectives. These metrics can be used in an accounting department to monitor efficiency or productivity within the department and the organization’s financial health. To create more efficient financial strategies for achieving organizational or departmental goals, managers can use and analyze these metrics. The business can determine what works and what still needs improvement by continuously monitoring KPIs.
List of 15 KPIs used in accounting
Here are 15 KPI examples that accounting departments or professionals may use to evaluate the financial performance of a business or division:
1. Budget variance
A KPI called budget variance measures actual performance in relation to forecasts or budgets. This KPI can be measured by accountants for the entire company or for particular departments and projects. Additionally, they can assess different financial metrics like revenue, costs, or profitability. Businesses evaluate the outcomes based on whether they observe a significant or minor variance. Whether it’s a positive or negative value, a sizable variance can indicate that the company may need to change something to reduce it. This metric can be calculated using the following formula, which can then be multiplied by 100 to obtain a percentage:
Actual results minus the budgeted amount are used to calculate the budget variance.
2. Line of business (LOB) revenue vs. target
A KPI called LOB revenue versus target compares a company’s line of business revenue to its anticipated revenue. The term “line of business” refers to the goods or services that a business offers, and accountants may use this metric to evaluate particular divisions or offerings. Businesses can calculate their actual LOB revenue to compare it to their projections even though this metric doesn’t have a formula. They can use this kind of variance analysis to pinpoint areas for development and create more sensible plans or budgets to help them achieve their revenue objectives.
3. Line of business (LOB) expenses vs. budget
A KPI that compares a company’s actual expenses to its budgeted amounts is called LOB expenses versus budget. Expenses represent costs to the business. This KPI is a type of variance analysis, similar to LOB revenue against target. Companies can determine whether they are on track or need to make changes by comparing their actual expenses to their budgeted expenses. In order to avoid large variances, they can create future budgets with greater accuracy by understanding the problems that can arise with expenses.
4. Operating cash flow
Companies use the operating cash flow (OCF) KPI to determine whether they will be able to cover regular or necessary operating expenses. This cash flow is produced by a business’s core operations and typically appears on the cash flow statement. A positive result means the company has sufficient funds. Here are the formulas for calculating operating cash flow:
Operating cash flow is determined by subtracting taxes and depreciation from operating income.
Or
Operating cash flow = total revenue – operating expenses
5. Operating cash flow (OCF) ratio
A KPI called the operating cash flow ratio assesses a company’s operating cash flow in relation to its current liabilities. Debts with a one-year maturity date or less are referred to as current liabilities. The outcome enables the business to determine whether it can settle its immediate debts using operating cash flow. For instance, a result higher than one indicates that the business has enough cash flow to cover its current obligations and operate. As this figure increases, it demonstrates the organizations financial growth. The formula for calculating this metric is:
Operating cash flow to current liabilities is known as the operating cash flow ratio.
6. Working capital
Working capital is the amount of money that a company has on hand right away. This KPI is frequently used to assess a company’s liquidity. It includes current liabilities as well as the firm’s assets, including cash, short-term investments, and accounts receivable. This KPI can be used by an organization to assess whether it has enough cash on hand to pay off its current obligations. While a significantly high amount could also indicate that the company isn’t effectively optimizing its assets, results that are low in terms of dollar value indicate that the company may be facing difficulties. The formula for calculating this metric is:
Working capital = current assets – current liabilities
7. Current ratio
Another KPI that illustrates a company’s liquidity is the current ratio. It incorporates current assets and current liabilities by comparing them, just like working capital. The outcomes of this KPI assist in determining whether the business can consistently and timely meet its financial obligations. This KPI is frequently used by businesses to evaluate their solvency over a specified time period using data from the balance sheet.
When assessing the results, a current ratio between 1. 5 and three typically represents a healthy financial situation. Although some companies may experience periods where the current ratio is below one because they’re making investment decisions or taking on debt in the interest of growth, a negative current ratio indicates that the company may have difficulties addressing its short-term debts. Heres the formula for calculating this metric:
Current ratio = current assets / current liabilities
8. Quick ratio
Another liquidity KPI that businesses use to gauge their capacity to pay current obligations is the quick ratio. Its sometimes referred to as an “acid test. This KPI evaluates the company’s ability to convert its liquid assets into cash in order to meet its immediate financial obligations. Quick assets, also known as near-cash assets, are those that the company can sell for cash without depreciating their value. A higher score typically indicates greater liquidity and better financial standing, while a lower ratio warns that the company might have trouble paying its debts. Here are the formulas for calculating this metric:
Cash and equivalents, marketable securities, accounts receivable, and current liabilities are all divided by the quick ratio.
Or
Current liabilities / Current Assets – Inventory – Prepaid Expenses
9. Debt-to-equity ratio
A key performance indicator (KPI) that contrasts a company’s total liabilities and shareholders’ equity is the debt-to-equity ratio. Long-term and short-term financial obligations are included in total liabilities, and shareholders equity is the amount of equity that remains for owners after liabilities have been paid. This KPI illustrates how the business uses shareholders’ funds to support growth. Depending on the organization and its industry, the ideal outcome may change. Companies frequently aim for a ratio below one or, at most, two because a high ratio indicates that the company finances its growth by accumulating debt. Heres the formula for calculating this metric:
Debt-to-equity ratio = total liabilities / total shareholders equity
10. Accounts payable turnover
Companies can use the accounts payable turnover KPI to gauge how quickly they pay their vendors, suppliers, or creditors. Accounts payable represents money owed to such entities. Companies track this KPI over time, frequently annually, and may compare results to gauge performance. The faster the company pays its accounts payable, the higher the ratio result. When a company’s ratio declines from one period to the next, it could indicate problems with cash flow. Here are the formulas for calculating this metric:
Net credit purchases divided by the average amount owed during the period equals accounts payable turnover.
Or
Total supply purchases / [(accounts payable at beginning of period accounts payable at beginning of period) / 2] equals accounts payable turnover.
11. Accounts receivable turnover
Accounts receivable turnover is a KPI that aids businesses in understanding how quickly they can obtain payments from clients. After receiving a good or service, customers still owe money, which is represented by accounts receivable. The higher the ratio result, similar to the accounts payable turnover, the quicker the business receives its payments. Similar to this, businesses monitor this metric over time, like a year. The company may put strategies in place to help improve this rate if the ratio is low or declining. Heres the formula for calculating this formula:
Net value of credit sales divided by the average accounts receivable for the period equals accounts receivable turnover.
Or
Accounts receivable turnover is calculated as net credit sales divided by [(accounts receivable at the beginning of the period divided by the beginning of the period) / 2].
12. Days payable outstanding
Days payable outstanding (DPO) is an additional KPI that gauges a company’s payment frequency for its accounts payable. Businesses frequently examine this metric over a specific time frame, like a year or a quarter, and measure the outcome in days. The company pays back its purchases to creditors faster the less days there are. A high DPO may indicate that the company can maximize the use of its available funds while also indicating that it has trouble making timely bill payments. Heres the formula for calculating this metric:
Days payable outstanding are calculated as follows: (accounts payable x days) / cost of goods sold
13. Inventory turnover
An efficiency KPI called inventory turnover measures how quickly a company sells and replaces its inventory. Businesses frequently track this KPI over a predetermined time period, looking at the average inventory sold during that time. A low ratio indicates that the company may be buying too much inventory or not making enough sales when evaluating the results. A higher ratio potentially demonstrates lower inventory and stronger sales. When businesses monitor inventory turnover, a disproportionately high ratio may indicate that they don’t have enough inventory to meet customer demands. The formulas you can use to determine this metric are as follows:
Inventory turnover = sales / inventory
Or
Inventory turnover is calculated as cost of goods sold divided by [(starting inventory minus ending inventory) / 2].
14. Return on equity
Return on equity (ROE) is a key performance indicator (KPI) that contrasts a company’s net income with its shares of shareholder equity. It has to do with how much money the business makes for its shareholders. A business can evaluate its profitability and financial efficiency using this metric. Businesses can compare the results by measuring this KPI at the end of each accounting period. The effectiveness of the company’s investment optimization is demonstrated to shareholders by high or improving ROE results. For instance, the business might use those investments to keep things running smoothly and expand. Heres the formula for calculating this metric:
Return on equity = net income / average shareholders equity
15. Time to close
Time to close, also known as days to close, is a KPI that demonstrates how successfully the company reaches its intended closing date. It contrasts this target with the number of days it actually took to close. The term “closing” refers to the last phase of the accounting cycle, also known as “closing the books.” The accounting team moves the balance from temporary to permanent accounts during closing, bringing the temporary account balances to zero for the upcoming accounting period. The close process begins when the accounting period ends. Heres the formula for calculating this metric:
Time to close = actual closing days / window closure
What is a KPI?
FAQ
What does KPI mean in accounting?
A leading high-level measure of revenue, expenses, profits, or other financial outcomes that is streamlined for collection and review on a weekly, monthly, or quarterly basis is known as a financial key performance indicator (KPI). Examples of this include gross profit margin, operating cash flow, and total revenue per employee.
What is KPI example?
A key performance indicator might be “targeted new customers per month,” for instance. Metrics gauge the effectiveness of routine business operations that help you achieve your KPIs. Although they have an impact on your results, these are not the most important metrics. Some examples include “monthly store visits” or “white paper downloads”.
What are the 5 key performance indicators?
- Revenue growth.
- Revenue per client.
- Profit margin.
- Client retention rate.
- Customer satisfaction.
