In an industry where accuracy and efficiency are paramount, accounting teams can take advantage of data insights by tracking specific Key Performance Indicators (KPIs). These metrics can be monitored by accountants to measure:
- Client satisfaction
- Cash flow
- Department performance
- Reporting
Throughout all aspects of an accounting firm’s operations, tracking KPIs allows for increased performance due to informed decision-making.
Although there are tons of accounting KPIs that one can track (and certain teams certainly benefit from tracking other KPIs), we've listed 10 KPIs that are amongst the most widely used, and important, in the industry.
WHAT ARE THE 10 KPIS EVERY ACCOUNTING TEAM SHOULD TRACK?
For Accounts Payable
KPI tracking within your accounts payable department helps with the effective measurement of short-term liabilities. Accounting managers utilize accounts payable data to make the best possible decisions, pay bills accurately, and maintain strong relationships with vendors. Here are some accounts payable KPIs worth tracking:
- Days Payable Outstanding (DPO)
This KPI measures the average number of days it takes for a company to pay its bills. Accounting managers aim for a higher DPO since it allows a company to hold onto its cash for longer (which can be used for short-term investments and increase free cash flow). If DPO is too high it can indicate that a company may have problems paying its bills. To calculate this KPI, use the following formula:
DPO = (Accounts Payable / Cost of Goods Sold) x # of Days
- Cost Per Invoice
This is an accounting KPI that calculates 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, while the opposite suggests that the department is operating at high efficiency. To calculate Cost Per Invoice, you can use the following formula:
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 an invoice payment cycle, from receipt to payment. High invoice cycle time can cause difficulties in making timely payments, which can have a number of negative downstream effects like late payment penalties, strained vendor relationships, and so on.To calculate Invoice Cycle Time, use the formula:
Invoice Cycle Time: Average time between completion of invoices
For example, if an accounts payable department processes 100 invoices in a 40-hour week, the average processing rate is 1 invoice per 0.4 hours, or once every 24 minutes.
For Accounts Receivable
Accounts receivable departments are responsible for the collection of sales. Managing and tracking accounts receivable KPIs can improve:
- Management of invoice due dates
- Minimization of outstanding receivables
- Volume of cash flows and liquidity
These aspects of accounts receivable departments must, of course, also be balanced with maintaining positive relationships with customers. Here are some of the most helpful accounts receivable KPIs to measure for improved performance:
- Days Sales Outstanding (DSO)
This is a KPI that measures the average number of days it takes for a company to collect receivables from a sale. A low DSO measurement indicates good cash flow and quick conversion from receivables to cash. To measure DSO, use the formula:
DSO = (Accounts Receivable / Total Credit Sales) x # of Days
- Best Possible Days Sales Outstanding (BPDSO)
This accounting KPI is similar to Days Sales Outstanding (DSO) but excludes overdue invoices and should be compared to your company’s payment terms. If your BPDSO is higher than your standard payment terms, not all of your invoices are being billed under the same policies. This could be due to favorable terms being given to some select customers, or it could indicate a problem with some of your invoices. The formula to measure this KPI is:
BPDSO = (Current Accounts Receivables / Total Credit Sales) x # of Days
- Average Days Delinquent (ADD)
This accounting metric tracks how long the average payment has been overdue. A high ADD value can serve as a warning that your 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 Outstanding:
ADD = DSO – BPDSO
For Internal Accounting
Internal accounting departments are responsible for budgeting and financial reporting to clients and shareholders. By tracking these KPIs, internal accounting departments can more accurately draft budgets and reduce unnecessary expenses. Track these KPIs to improve profits and your bottom line:
- Budget to Actual Variances
This accounting 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 failed to adequately consider all required spending, or it could illustrate that some departments are not doing a good job of controlling their expenses. To calculate this KPI, use the formula:
Budget to Actual Variances = Budgeted Costs – Actual Costs
- 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 no further communication is necessary). A high FCRR indicates that the service level of the internal accounting department satisfies other business areas and reduces the amount of time that staff spends resolving issues. The formula for FCRR is as follows:
FCRR = # of Requests Solved upon First Contact / Total # of Requests
HOW TO TRACK ACCOUNTING KPIs
By tracking the accounting KPIs we mentioned, accounting managers can greatly improve the efficiency and co-ordination across all departments within their business.
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