Key Performance Indicators or KPIs in accounting are measurements or metrics which have been agreed upon between an organization and its partners and stakeholders. These metrics allow managers to make informed decisions on how to improve the performance of their business.
Financial KPIs, in particular, help businesses monitor the success of their accounting practices by giving a quick snapshot of important information, such as profitability, sales, return on investment (ROI) and overall cash flow.
In this guide, we will go over the most important financial KPIs used by accounting departments and explain why it is important to track each one so that you can measure your company's financial well-being.
Why are KPIs Important?
Every business owner has different goals and ambitions. Some want to grow their customer base, while others want to increase profit margins or improve customer retention rates. Whatever your goals may be, it’s important that they align with the expectations of your customers and employees.
If you want to know whether or not your company is on track with its objectives, you need to measure your performance against these goals regularly. This will help ensure that everyone involved in the business knows what’s expected of them and whether or not they’re meeting those expectations.
What are KPIs in Accounting?
Various KPIs are used to measure the performance of financial departments. The most common KPIs in accounting are accounts payable, accounts receivable and internal accounting.
Accounts Payable KPIs
Accounts payable KPIs measure the amount of time it takes for invoices to be paid by customers and the average amount of days that vendors wait before settling their invoices.
Accounts Receivable KPIs
Accounts receivable KPIs measure how much profit is lost due to bad debt, which is when customers do not pay their bills within a specified period of time after receiving them.
Internal Accounting KPIs
Internal accounting KPIs are used to evaluate how well a company's internal financial processes work. These include cash management, budgeting, forecasting, liquidity, and cost management.
What are the Main Financial KPIs?
Below we will go over the main KPIs in each of the three critical accounting areas discussed above so that you can get a better sense of what each accounting KPI is, how to track each KPI for accountant processes, and how to use each of these important accounting department KPIs to measure the overall financial health of your company.
Accounts Payable KPIs
1. Days Payable Outstanding
The days outstanding metric shows you the average number of days that each customer is late in paying you. You can calculate this number by taking the total amount of invoices that your customers owe you and subtracting the total amount of money you’ve received from the customers.
The difference, or days outstanding, is the length of time that each customer takes to pay you. If each customer takes the same length of time to pay you, then the net amount that you are owed is the same, so the primary benefit of knowing this metric is to help you plan when you need to extend your payment terms with a customer.
2. Cost Per Invoice
The cost per invoice metric shows you the average cost per invoice as a percentage of sales. This is useful if you are comparing how much profit you are making per invoice with other companies in your industry. If you have a low cost per invoice, then you will be able to sell more products per hour and possibly hire more people to produce the same amount of product.
If you have a high cost per invoice, there are a couple of things you can do to reduce the cost per invoice. One is to find a cheaper supplier. Another is to reduce your overhead or overhead costs, such as payroll and rent.
3. Invoice Cycle Time
The invoice cycle time metric shows you the average time between when the customer places an order with your company and when they receive their invoice. The reason this is important is that it shows you how fast your customers are receiving their invoices. If they receive their invoices early, then they will have money to pay you sooner. If they receive their invoices late, then they may not have as much money as they thought that they were going to receive.
4. Invoice Exception Rate
The invoice exception rate metric shows you the percentage of invoices that are different from the original order that customers placed. Because you are holding the inventory, receiving the order and issuing the invoice, some percentage of invoices are going to be different from the original order.
The question is how often this happens and what is the average amount of money that is lost as a result of these exceptions. If this metric is high, then it is a red flag. It may be a sign that there is something broken in your process. If you find a problem, it will save you a lot of time and money in the long run.
5. Payment Error Rate
The payment error rate metric shows you the percentage of customers that are late in paying you. It is important to track this metric because it shows you which customers are not paying you on time, and it dispels any notion that customers are consistently paying you or that they are fine.
If every customer is late in paying you, then you need to find out why. Is one customer consistently late and not paying you? Is there something broken in your customer relationship process?
6. Error Resolution Time
The error resolution time metric shows you the average number of days it takes for you to resolve an error that is associated with an invoice. This is important to track because it shows you how quickly you are resolving invoice errors.
If it takes you longer than average to resolve a few invoices, it will add up over time and affect your cash flow. If you are consistently resolving invoices faster than average, again, it may be a sign that something is broken in your process. It could also be that there is a problem with your employees.
7. Invoices Processed per Year per Full-Time Employee
The number of invoices that you process per year per full-time employee is one of the most important Accounts Payable KPIs. The number of invoices that you process per year is an indication of how often you will be paid.
It is important to know this metric because it will help you plan how often you will need to pay your employees. If you know how many invoices you will be receiving every year without fail, then you can plan when it is time to hire more people or how often you will need to pay them.
8. Accounts Payable Expense as a Percentage of Revenue
Another important accounts payable KPI is the accounts payable expense as a percentage of revenue. If your accounts payable expense is high, then it may be a sign that there are costs associated with your payment process that are not directly related to the payment of the company’s outstanding invoices. For example, if your payroll is high and you have to pay employees regularly, then it may be a sign that your accounts payable expense is high.
9. Discounts Received for Paying within Discount Period
Discounts received for paying within discount period is another vital Accounting KPI. The idea here is that you want to know how often your customers are accepting your discounts.
A high discount received within a discount period indicates that your customers are willing and able to accept discounts from you. A key part of running a successful business is maintaining relationships with your customers. The key is to keep those customers happy and satisfied so they will continue to do business with you.
10. Electronic Invoices Rate
The last Accounts Payables KPI we will cover is the electronic invoices rate. This shows you how often your customers are accepting electronic invoices. If your customers are accepting electronic invoices, then this is a good sign that they are happy with the service and product you are providing. The key is to make sure that your customers are happy, and the way to do that is to make sure that you are providing a good product or service.
Accounts Receivable KPIs
1. Days Sales Outstanding (DSO)
The Days Sales Outstanding (DSO) is a key Accounts Receivable KPI that shows how long it takes, on average, for customers to pay their bills. The DSO is calculated by dividing the total amount of unpaid bills by your average revenue per day. This shows you how many days of sales are tied up in uncollected accounts.
The DSO is an important metric to track because it gives you an idea of how much cash you have tied up in accounts receivable. It gives you a picture of the financial health of your customers and can help you identify potential risks.
2. Bad Debt to Sales Ratio
The Bad Debt to Sales Ratio is a key Accounts Receivable KPI that shows you the percentage of sales that are expected to be uncollected. This can help you identify possible risk factors, such as customers who are having difficulties paying their bills. The bad debt to sales ratio is calculated by dividing the amount of bad debt by the total sales for a given period.
This KPI can be tracked on a monthly or yearly basis, depending on how quickly your sales cycles are. This can be an important metric to track if your company deals with a high level of bad debt. It can help you identify if there are any areas for improvement in your collection process.
3. Best Possible Days Sales Outstanding
The Best Possible Days Sales Outstanding (BPDSO) is a key Accounts Receivable KPI that shows you the maximum number of days your sales will take to be collected. This KPI should be tracked on a monthly basis and calculated by adding the total number of outstanding sales with the total number of outstanding invoices.
This KPI can be helpful in identifying future risks and can be used to compare the performance of different teams within your business. It can also be used to measure the effectiveness of your collection process. If you notice that the BPDSO is increasing, it could indicate that you need to make some changes to your collection process.
4. Average Days Delinquent
The Average Days Delinquent is a key Accounts Receivable KPI that shows you the number of days it takes for customers to pay their bills after being invoiced. This can help you identify possible risk factors, and it can be used to track the effectiveness of your collections team. This KPI can be calculated by taking the total amount of days delinquent and dividing it by the total amount of invoiced bills.
5. Collection Effectiveness Index
The Collection Effectiveness Index (CEI) is a key Accounts Receivable KPI that measures the effectiveness of your collections team. It is calculated by taking the total amount of bad debt and dividing it by the total amount of invoiced bills.
This can be helpful for tracking the number of invoiced bills that are not being paid. It can also be used to predict the possible losses from bad debts. By tracking this KPI, you can identify areas for improvement and make changes where necessary.
6. Receivables Turnover Ratio
The Receivables Turnover Ratio is a key Accounts Receivable KPI that shows how many times your accounts are collected in a given period. You can measure this by taking the total amount of receivables and dividing it by the number of collections. This can be helpful for identifying possible risk factors, and it can be used to track the effectiveness of your collections team.
7. Percentage of High-Risk Accounts
The Percentage of High-Risk Accounts is a key Accounts Receivable KPI that shows the percentage of accounts that are considered high risk. A high-risk account is an account that has a high probability of becoming uncollectible. This can be caused by a variety of factors, such as the customer's financial situation, payment history, and other factors. If you notice a high percentage of high-risk accounts, it can be helpful to take action to collect the money.
8. Number of Invoicing Disputes
The Number of Invoicing Disputes is a key Accounts Receivable KPI that shows the number of customers who have disputed the invoice they were sent. An invoice dispute can be a red flag for potential bad debts and should be investigated by your collections team. If you notice that the number of invoice disputes is increasing, it may be because customers are disputing the accuracy of their bill, which could indicate that something is going wrong with your invoicing system.
9. Percentage of Credit Available
The Percentage of Credit Available is a key Accounts Receivable KPI that shows you the percentage of sales that are being done on credit. If the percentage of sales on credit is high, it can lead to a higher percentage of bad debt. If the percentage of sales on credit is too high, it may be time to consider tightening up your credit policy. This can help you avoid potential cash flow problems down the road.
10. Operational Cost Per Collection
The Operational Cost Per Collection is a key Accounts Receivable KPI that shows you the cost of each collection. If the operational cost per collection is high, it could indicate that you need to make some changes to your collections process.
This could include delegating some collections tasks to lower-cost employees or outsourcing the collections process completely. If the operational cost per collection is increasing, it could be a sign that your collections team is inefficient and that something needs to be changed.
Internal Accounting KPIs
1. Budget to Actual Variances
This KPI measures how accurately budgets are created and how well they are managed throughout the year. There are two types of variances: negative and positive. A negative variance means that budgets were overspent; a positive variance means that budgets were underspent.
This Internal Accounting KPI is important because it shows how well your company can manage budgets. Budgets are important for financial departments since they allow for proper planning and forecasting. If budgets are not being followed properly, your financial department might not have enough money to make payroll or pay suppliers.
2. First Contact Resolution Rate
This KPI measures how successful your customer service department is. It shows how well your team resolves customer issues the first time they call. This Internal Accounting KPI is important because it shows how efficient your customer service team is. Companies like Amazon and Apple have FCRs of over 90%. This means that 90% of calls are resolved the first time they are made. If your company’s FCR is lower than this, then your team is not performing very well.
3. Number of Self-Identified Errors
This KPI is measured by employees to show how many mistakes they find that they made. This Internal Accounting KPI is important because it shows how well your employees perform their tasks. If there are a lot of self-identified errors, then it means that employees are not doing very well.
If this KPI is high, it means that your employees are being very thorough and double-checking their work. If it is low, it means your employees are not paying as much attention and making more mistakes.
4. Errors Detected by External Auditors
The next KPI on our list is the number of errors detected by external auditors. This KPI measures how many financial errors external auditors find. If there are a lot of errors detected by external auditors, then it means your accountants are not doing a very good job. If this KPI is high, it means that your auditors are being very thorough and double-checking their work. If it is low, it means that your auditors are not performing their jobs as well and making more mistakes.
5. Internal Complaints Received
The last Internal Accounting KPI on our list is the number of internal complaints received. This KPI measures how many customers are complaining about your company. This Internal Accounting KPI is important because it shows how well your company is performing.
If there are a lot of complaints, it means that your customers are unhappy with the way your company works. This could be due to bad customer service, faulty products, or any other number of different reasons. If this KPI is high, it means that your company is not performing very well, and customers are unhappy with your results.
The Benefits of Tracking KPIs for Accounts Department?
The first and most obvious benefit is that it helps you to plan for the future. As a business owner, if you don’t know how much money you’re bringing in or how much money is going out, then you won’t be able to make informed decisions.
This is especially important when it comes to managing cash flow. If sales are down and expenses are up, it may be time to cut costs so that your business can remain solvent. However, if sales are up but expenses are also up, then you might want to consider investing more money into marketing or hiring new employees so that you can get even more sales!
Another benefit of tracking financial KPIs is that they help you understand where your business stands compared with other similar companies. You might find that your products aren’t selling as well as they could be or that your profits are significantly higher than those of other businesses in your industry. These insights can help shape future decisions about pricing and product development.
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