What is KPI in Accounting and Why it Matters

Key Performance Indicators (KPIs) have become an indispensable tool for measuring success across all departments in an organization This includes accounting departments that can utilize tailored KPIs to track their effectiveness and identify areas for improvement. But what exactly are KPIs in accounting and why do they matter?

What is a KPI?

A KPI is a measurable value that indicates how well a company is achieving its key business objectives. Organizations use KPIs to evaluate different factors that contribute to the success of the business.

The “key” element in KPI refers to the fact that only the most vital performance metrics for reaching goals should be tracked as KPIs. Too many KPIs can dilute focus and create noise that hides the most influential measures.

KPIs are different from regular metrics because they not only provide data but also context around that data so it can be used to make better decisions that impact the business. In addition, KPIs are

• Quantitative – A KPI must have a numerical value that can be measured over time.

• Relevant – The KPI must directly relate to and help achieve a strategic goal.

• Time-bound – A target date is set so progress towards the goal can be measured.

• Actionable – KPIs are used to inform and drive actions that influence the metric.

Well designed KPIs should act as a management tool that provides the most valuable performance data to executives and managers so they can take actions that have the highest impact on achieving strategic goals.

Examples of Common KPIs

Here are some examples of KPIs that are often tracked at a company-wide level:

• Profitability KPIs:

  • Gross profit margin
  • Operating profit margin
  • Net profit margin

• Efficiency KPIs:

  • Turnover per employee
  • Revenue per employee

• Growth KPIs:

  • Increase in revenue
  • Increase in customers

• Customer KPIs:

  • Customer lifetime value
  • Customer satisfaction score
  • Customer retention rate

Different departments throughout an organization also use more specific KPIs tailored to their own objectives and processes. Next, we will take a closer look at KPIs for accounting.

What Are KPIs in Accounting?

Accounting KPIs are metrics used to gauge the performance of the accounting department. They help accountants and accounting managers measure financial processes to identify areas where performance is strong or needs improvement.

Since accounting departments are involved in many different activities, the right KPIs need to be selected that align with the processes and goals for each specific accounting function.

Here are some examples of accounting KPIs for common department types:

Accounts Payable KPIs

• Invoice processing cost
• Invoices processed per employee
• Percentage of electronic invoices
• Payment error rate

Accounts Receivable KPIs

• Days sales outstanding
• Bad debt to sales ratio
• Receivables turnover ratio
• Percentage of high-risk accounts

Internal Accounting KPIs

• Days to complete monthly close
• Budget vs. actual variance
• First-contact resolution rate
• Number of self-identified errors

Financial Reporting KPIs

• Time to consolidate financials
• Time to issue financial statements
• Audit adjustments
• Financial statement rework rate

Why KPIs Matter for Accounting

Using properly designed accounting KPIs is vital for several reasons:

Measure Progress Towards Goals

Well-defined KPIs with target values allow accounting managers to track performance over time to see if it is improving and goals are being reached. For example, accounts payable could have a goal of reducing invoice processing costs by 10% over the next year. Ongoing monitoring of that KPI identifies whether process changes are having the desired impact.

Identify Issues and Opportunities

Unexpected fluctuations or trends in accounting KPIs can reveal problems that need to be addressed or shine light on areas where performance excellence exists. If days to complete the monthly close has suddenly jumped 20%, it flags accounting managers that something needs to be investigated and corrected. Highlighting best practices through top KPI marks conversely allows successes to be replicated across the department.

Inform Strategic Decisions

KPIs provide the fact-based input that decision makers need to determine which actions will best improve performance. Executive meetings focused on examining the latest accounting KPI results inform strategic planning around changes to policies, investments in technology, process improvements, training programs, and more.

Increase Accountability

Connecting accounting KPIs to individual team members and managers boosts accountability across the department. Rather than just stating a goal of decreasing processing costs, assigning ownership for hitting a target cost per invoice KPI to the head of the accounts payable group drives better results.

Enable Benchmarking

Relevant KPIs that are commonly used across the accounting industry allow for benchmarking against competitors or industry averages. If accounts receivable turnover is significantly lower than industry peers, action can be prioritized around collections processes to catch up.

How to Design and Implement Accounting KPIs

Follow these best practices when establishing an effective KPI program for your accounting department:

Gain Buy-In for KPI Initiatives

Get leadership and team member alignment early in the process so that KPI efforts are supported. Demonstrate how proper use of performance metrics can make their jobs easier.

Determine Critical Goals

Consult department leaders and subject matter experts to identify the handful of goals that are most important for accounting. Resist the urge to capture too many metrics that dilute focus on the vital few KPIs.

Map Metrics to Goals

For each critical goal determine 1-2 KPIs that will best track performance for that goal. Provide clarity on exactly how the metric will be calculated.

Set Realistic Targets

Current baselines for each metric need to be established so that realistic targets can be defined for the next 1-3 years. This helps drive meaningful progress over time versus arbitrary numeric goals.

Monitor KPIs

Display real-time accounting KPI dashboards with targets in central locations so they are continuously visible to staff. Automated reporting software removes manual effort to update KPIs.

Review and Refine

Assess KPIs on an ongoing basis to determine if they are driving the desired behaviors for hitting goals. Adjust or replace KPIs that are not working as intended.

Connect KPIs to Individual Objectives

Include achieving accounting KPI targets as part of employee goal setting and reviews to promote individual accountability.

Key Takeaways About Accounting KPIs

• KPIs are vital metrics specifically selected to monitor the performance of key organizational goals and processes.

• Accounting managers should identify the KPIs most critical for measuring the success of core accounting functions.

• Well-designed accounting KPIs provide objective data to inform impactful decisions that improve department results.

• Ongoing monitoring of KPI dashboards enables the accounting department to continuously track progress towards strategic targets.

• Effective utilization of accounting KPIs requires buy-in across the department along with proper implementation and governance.

Adopting accounting KPI best practices will equip any accounting department to leverage data-driven insights that enhance decision making and boost performance. Reach out to learn more about how we can help you successfully apply KPIs.