What is an Accounting KPI?
An accounting Key Performance Indicator (KPI) or metric is an explicitly defined and quantifiable measure that the accounting industry uses to gauge its overall long-term performance. KPIs for accounting departments differ based on the type of accounting function they perform.
KPIs for Accounting Departments–Tailored for Your Organization
Accounting is the process of recording, analyzing and reporting financial information of a business which can be used by a variety of stakeholders including regulators, investors and management. Since accounting is such a broad subject, accounting KPIs tailored to the needs of your organization are vital in order to evaluate performance.
In this post, we will focus on KPIs for accounting managers to measure performance for accounts payable, accounts receivable and internal accounting departments. By using these metrics with our interactive accounting KPI dashboard, you will easily be able to identify areas for improvement and optimize your 2021 reporting.
Accounting KPIs for Accounts Payable Departments
Accounts payable departments take care of a company’s short-term liabilities. They are responsible for tracking what is owed to suppliers and when. Accurate accounts payable data is required to ensure accounting managers have the best information possible when making important decisions. When accounts payable departments pay their bills accurately and on time, it maintains good relationships with external vendors which can lead to favorable payment terms and discounts. Here are the best key performance indicators that an accounts payable department can use to track performance:
- Days Payable Outstanding (DPO) – This is a financial ratio that shows the average number of days it takes for a company to pay its bills. It may sound counterintuitive, but a higher DPO value is actually desirable since it allows a company to hold onto their cash for longer which can be used for short-term investments and increase free cash flow. However, if DPO is too high it can indicate that the company may have problems paying its bills.DPO = (Accounts Payable / Cost of Goods Sold) x # of Days
- Cost per Invoice – This is an accounting manager KPI that indicates the total average cost of processing a single invoice from receipt to payment. A high cost per invoice suggests that inefficiencies exist within the accounts payable department.Cost per Invoice = Total AP Department Expenses / # of Invoices Processed
- Invoice Cycle Time – This is an accounting metric that tracks the average amount of time it takes to complete the invoice payment cycle from receipt until payment. High invoice cycle time can make it difficult to make payments in time which will result in late payment penalties and strain on vendor relationships.
- Invoice Exception Rate – This accounting KPI shows the percentage of invoices that have issues and require manual intervention due to missing or incorrect information. High invoice exception rates are associated with a slowdown in the entire accounts payable process and can potentially lead to duplicate payments or other errors.Invoice Exception Rate = Total Invoices with Exceptions / Total Invoices
- Payment Error Rate – This key performance indicator measures the accuracy of the accounts payable department. Common payment errors include incorrect account numbers, incorrect payment amounts and duplicate payments. High payment error rates indicate that a problem exists with accounts payable staff or processes.Payment Error Rate = Total # of Payments Made Containing Errors / Total # of Payments Made
- Error Resolution Time – This accounting metric tracks the time it takes to correct an error when it is identified. If this value is high, it likely means the error resolution process can be made more efficient in order to free up staff time and better satisfy vendors.Error Resolution Time = Total Time Spent Resolving Errors / Total # of Errors
- Invoices Processed per Year per Full Time Employee (FTE) – This key performance indicator reveals the efficiency of your accounts payable department employees. A low value for this suggests that accounts payable processes have room for improvement or that staff can benefit from additional training.Invoices Process per Year per FTE = Total Invoices Processed in a Year / # of FTEs
- Accounts Payable Expense as a Percentage of Revenue – This ratio compares the cost of accounts payable to total revenue. As companies grow, they will usually need to spend more on accounts payable. This KPI allows accounting managers to track if accounts payable expenses are growing at the same pace as revenue. If this value is increasing, it could indicate inefficiencies within the department.
- Discounts Received for Paying within Discount Period – Paying within the discount period according to the agreed upon credit terms can allow your company to receive sizable discounts and increase profitability. Tracking the amount of discounts received compared to discounts lost allows accounting managers to determine how well the accounts payable department is adhering to credit terms. It also quantifies the dollar value associated with their performance.
- Electronic Invoices Rate (as a Percentage of Total Invoices) – Electronic invoices are much faster to process when compared to paper invoices. Encouraging vendors to provide electronic invoices can save your accounts payable department time and money.Electronic Invoices Rate = Total Electronic Invoices / Total Invoices
You should now have a grasp of what KPIs for the accounting department look like. However, it is important to note that not all KPIs are created equally – some are more useful than others. This next section will help you identify which accounting KPIs you should be implementing at your company.
What Makes the Best Accounting KPI Metrics?
The accounting sector is rapidly changing and growing more complex with the development of new technology that has resulted in widespread productivity improvements. However, this means that tracking performance using accounting KPIs is more important than ever. Accounting managers must use new metrics to track how well their department is adapting rather than just changing for the sake of change. While this article explains the most common examples of accounting KPIs, you may want to come up with your own that are customized specifically for your company. Take the following important factors into consideration:
- Define Associated SMART Goals – Every accounting KPI should have a goal in mind that is SMART: specific, measureable, attainable, realistic and timely. This will allow you to track your progress as your organization gets closer to achieving its goals.
- Track Your Progress – Seeing your KPIs move closer to your goals shows that changes you are making are improving performance. If they are moving in the other direction, it could mean that process changes are having the opposite effect and should be revisited.
- Aligned with your Processes – accounting KPIs need to be aligned with your accounting department’s processes. Creating additional work for the sake of a new KPI is counterproductive.
- Context – KPIs need to be evaluated within the context of your organization as a whole. It can be difficult to control KPIs that are easily influenced by external forces.
- Reliable Data – KPIs are only as good as the data that are used as inputs. Business intelligence software can help you retrieve, analyze and report data to be used as inputs for your accounting KPIs.
Now that you have a better understanding of how to develop and utilize accounting KPIs, let’s take a look at some examples of KPIs for accounts receivable departments.
Accounting KPIs for Accounts Receivable Departments
Accounts Receivable Departments are responsible for the collection of credit sales. By managing invoice due dates and minimizing the amount of outstanding receivables, they are instrumental in maintaining the company’s cash flows and liquidity. Profitability can also be influenced by the effectiveness of an accounts receivables department because some receivables turn into bad debt, a receivable that is unable to be collected. The reduction of these factors must also be balanced with maintaining good relationships with customers so that repeat sales can occur. Here are the best KPIs for an accounts receivable department:
- Days Sales Outstanding (DSO) – This is a financial ratio that measures the average number of days it takes for a company to collect receivables from a sale. A low DSO number indicates good cash flow as a result of receivables being converted to cash quickly.DSO = (Accounts Receivable / Total Credit Sales) x # of Days
- Bad Debt to Sales Ratio – This accounting manager KPI shows the number of unpaid invoices compared to total sales. A low number is generally good as it means bad debt is being avoided. However, companies should also consider that avoiding all credit risks can lead to a reduction of revenue due to lost sales.Bad Debt to Sales Ratio = Total Bad Debt / Total Annual Sales
- Best Possible Days Sales Outstanding (BPDSO) – This key performance indicator is similar to Days Sales Outstanding (DSO), but excludes overdue invoices and should be compared to your company’s payment terms. If BPDSO is higher than your standard payment terms, not all of your invoices are being billed under the same policy. This could be due to favorable terms being given to some customers or it could indicate a problem with some invoices.BPDSO = (Current Accounts Receivables / Total Credit Sales) x # of Days
- Average Days Delinquent (ADD) – This accounting metric tracks the duration that the average payment is overdue. A high ADD value can be a warning that the accounts receivable procedures need improvement. The calculation for this metric is the difference between two KPIs we previously discussed: Days Sales Outstanding and Best Possible Days Sales OutstandingADD = DSO – BPDSO
- Collection Effectiveness Index (CEI) – This calculation measures a company’s ability to collect all accounts receivables from customers over a certain time period. Tracking CEI over time can help identify actions that are helping or hurting the collection of accounts receivables.CEI = [(Beginning Receivables + Monthly Credit Sales – Ending Total Receivables) / (Beginning Receivables + Monthly Credit Sales – Ending Current Receivables)] x 100
- Receivables Turnover Ratio – This accounting department KPI shows how often a company converts receivables into cash over a period of time. This provides useful information on liquidity and cash flow. A high value means that receivables are being collected quickly. However, it could also indicate that the company is too averse to accepting riskier credit sales and a loss of total revenue.Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable
- Percentage of High-Risk Accounts – This accounting metric is useful in combination with the other accounts receivable KPIs because it helps provide context to what their values mean. One example of this is if the percentage of high-risk accounts is high and bad debt to sales ratio is low, we can be assured that the accounts receivable department is working effectively. In this case, we know that bad debt is not low just because riskier credit sales are being avoided.
- Number of Invoicing Disputes – Billing mistakes can damage the reputation of a company and also increase the amount of processing time required for a single invoice. If this value is increasing, it can indicate that staff or changes in processes are causing more mistakes and should be reviewed for effectiveness.
- Percentage of Credit Available – If your accounts receivable department sets a limit on the amount of credit sales that individual customers can use, the amount of credit given should be compared to the amount available. If any customers are at the maximum amount, but regularly pay off their accounts on time, increasing their credit limit may increase total sales.
- Operational Cost Per Collection – This KPI tracks the full operational cost of collecting a single payment. This allows your company to determine the efficiency of accounts receivable department staff and tracks how it changes as processes are updated. Automation of accounts receivable procedures can help reduce this value in the long run.
It is great to have lots of KPIs for your accounting department, but how well are they being tracked? Is your accounting department tracking KPIs in Excel? Or have they implemented specialized financial reporting software, like a dashboard?
Enhance Your Reporting with an Accounting KPI Dashboard and Reporting Software
Accounting departments in organizations of all sizes can realize benefits by using an accounting KPI dashboard and reporting software. insightsoftware’s reporting software can provide a solution that offers the following features:
- Handling Large Datasets – insightsoftware’s accounting reporting solution is able to process large sets of raw data into useful information which can then be analyzed.
- Consolidated Data – An accounting KPI dashboard allows all of your data to be brought to one centralized location which can save an accounting department time and money.
- Integration with Existing Systems – Are your KPIs for the accounting department primarily in Excel or another ERP? Our software has the ability to integrate with your current ERP system allowing for automatic update of information as each system is updated.
- Instant Reporting – Reports are available on demand and instantly. Business agility is becoming more important in our current business environment, and this will allow your organization to react faster to internal and external factors rather than waiting around for reports to be generated.
It should now be obvious that an accounting reporting solution makes managing KPI data and reporting simpler and more effective. Let’s discuss another type of accounting department that can improve its performance by tracking various metrics.
Accounting KPIs for Internal Accounting Departments
Internal accounting departments are responsible for budgeting and reporting financial information to various stakeholders across an organization. Accurate budgets will reduce wasted expenses and timely reports will allow managers to make decisions more quickly. Both of these enhance the profitability of a company, so it is important to track performance using KPIs suited for an internal accounting department. Here are the best metrics to use:
- Budget to Actual Variances – This accounting manager KPI measures the deviation between actual and budgeted costs. A high variance indicates that the budgets are out of sync with the actual spending of other departments. This could mean that the budgets did not adequately consider all required spending or it could show that other departments are not doing a good job of controlling their expenditures.
- Days to Complete Monthly Close – This example shows how efficient the internal accounting department is at closing the books at the end of each month. If this period is too long, it can lead to delayed reporting of financial information.
- Days to Complete Annual Close – Similar to the previous measure, this shows how fast your internal accounting department is at closing the year end books. Delays to the annual close can lead to poor quality annual reports as a result of being rushed.
- First Contact Resolution Rate (FCRR) – This accounting manager KPI measures the proportion of requests to the internal accounting department that are solved upon first contact, so that further communication is not necessary. A high FCRR indicates that the service level of the internal accounting department is satisfying other business areas and reducing the amount of time that staff spends resolving issues.FCRR = # of Requests Solved upon First Contact / Total # of Requests
- Number of Self-Identified Errors – Every internal accounting department should be running audit reports with the purpose of catching errors. For this KPI, the value must be interpreted carefully. If this number is increasing over time, it could indicate that more errors are occurring or it could mean a more effective internal audit process.
- Errors Detected by External Auditors – This metric is a record of how many errors are not caught by internal audits or reports and make it all the way to detection by external auditors. These errors are serious as they indicate that the internal accounting department does not have sufficient measures in place to catch mistakes. It is best to track this over time and ensure that this value is not increasing.
- Accounting Employees to Full Time Employees (FTE) Ratio – This key performance indicator shows how efficient your internal accounting department is as it compares its size to the rest of the company. Having a low value means the internal accounting department is being efficient with costs by reducing the number of employees needed to complete the job. However, it is important to ensure that other KPIs are not ignored in order to keep this ratio low.Accounting Employees to FTE Ratio = Total # of Accounting Employees / Total # of FTEs
- Internal Complaints Received – For the internal accounting department, other business areas are the customers. If complaints are decreasing as process and policy changes occur, it is a good indication that these changes are working. Not only does this increase customer satisfaction, but it also saves accounting staff time and costs to resolve these issues.
- Ad Hoc Time Spent – The time it takes for individual employees to perform tasks that are not part of normal operational work should be tracked in order to monitor the effectiveness of an internal accounting department’s standard processes. This can include time spent responding to inquiries, resolving problems or providing unusual reports. Too much time spent on ad hoc processes means that the standard procedures may not be providing sufficient information that is required by stakeholders in other departments.
- Number of Budget Iterations – This internal accounting department KPI helps determine the performance of the company’s budgeting process by recording the number of times a budget needs to be reworked in a year. This can be influenced by the degree to which the process has been automated as manual processes tend to be more prone to errors. Factors external to the accounting department must also be considered when analyzing the results. Some examples of this include changes to inter-departmental policies, overall business strategy, or economic climate.
Now that you have learned about the top 30 accounting KPIs and metrics for various types of accounting departments, you have made the first step to improving your organization’s accounting performance. We encourage you to speak with one of our insightsoftware product experts who would be happy to provide guidance on how to best implement the key performance indicators mentioned above. If you have any questions about how our reporting solutions can streamline your 2021 reporting process, do not hesitate to contact us here.