Posted by Mary Milorrie Campos
Apr 18, 2023
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The key performance indicators (KPIs) in accounting are indispensable tools for measuring an organization’s overall financial performance. If you want to know how well your organization is doing, or if it’s hitting its financial goals, the best thing to do is to zero in on those KPIs.
But what KPIs should you be measuring and how can you identify the KPIs that are relevant to your department? .jpg?width=1200&height=800&name=pexels-alena-darmel-7710141%20(1).jpg)
This article covers:
What is an accounting key performance indicator?
In accounting, a key performance indicator (KPI) is a quantifiable measure for gauging the progress of your organization’s high-priority initiatives, objectives and goals. It also provides insights into the financial and operational status of the business.
Due to the accounting department’s unique function, KPIs are crucial not only for tracking the effectiveness of your team but also for the financial performance of other departments and the organization in general.
But are KPIs the same as metrics?
All KPIs are metrics, but not all metrics are KPIs. While they’re often used interchangeably, their functions and end goals are not the same. Consider this:
- KPI: Increasing your net profit margin by 15 percent in 2023.
- Metric: Getting a 10-percent increase in website traffic yearly.
From this example, we can see that a KPI has a direct impact on growth. It can commonly be obtained through a combination of various metrics. The operative word here is key, which means KPIs have the most impact in guiding your organization toward its long-term goals. When set and measured correctly, these KPIs can give you insights into your organization’s overall financial performance. In return, you can use these insights to make smarter decisions.
Metrics, on the other hand, are more operational than strategic. Rather than measuring your progress based on your long-term initiatives, metrics gauge day-to-day processes.
Related: Top Management Accounting Concepts and Techniques
Steps to identify KPIs
1. Identify and set your key goals/targets
Always start by knowing what you need to achieve in a certain period. Doing so will help you narrow down your data and select the metrics for gauging your progress.
2. Select KPIs based on those goals and targets
As much as possible, track only financial metrics that help you with decision-making.
It’s also important to prioritize quantifiable metrics. While we should neither ignore nor belittle the value of qualitative data, note that the quantitative aspects of business progress are easier to measure. Quantifiable metrics come in the form of net profit and the number of repeat customers, to name a few, as opposed to customer satisfaction feedback.
3. Consider information frequency
Review the numbers you use extensively. Chances are those numbers are the key metrics you should include on your KPI dashboard.
4. Ensure alignment with business goals
When measuring performance, less is always better. Unnecessary metrics can only overwhelm and confuse you. To keep your focus on your goals, track only the KPIs that are directly tied to your initiatives.
5. Your KPIs should be SMART
Finally, your KPIs must be specific, measurable, attainable, relevant and timebound (SMART).
SMART KPIs make your expectations and progress clearer for everyone. In effect, it’ll be easier to see how much you’ve achieved and what else you can do to get closer to your goals.
KPIs for accounting departments
Below is the list of common KPIs for accounting departments. See which ones apply to your organization and are linked to your current goals.
- Budget variance
- Net profit margin
- Gross profit margin
- Operating cash flow ratio (OCF)
- Working capital
- Current ratio
- Quick ratio
- Debt-to-equity ratio
- Accounts payable turnover
- Accounts receivable turnover
- Return on equity
- Return on assets
- Gross burn rate
- Inventory turnover
- Time to close
Read Next: 5 Tips to Manage Your Accounting Department Effectively
Measure the right KPIs to hit your desired goals
With the right KPIs, you can plan and implement strategies to hit your short- and long-term goals. Make sure to identify the ones that apply to your department to keep your team focused and engaged.
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This article was first published on 29 September 2014 and updated on 18 April 2023 for comprehensiveness and relevancy. Edited by: Mary Milorrie Campos
