Are You Tracking These Accounting KPIs?
Once you’ve set up monthly financial reports, your work isn’t quite done. In order to get the most out of your bookkeeping and reporting, accounting KPIs are going to be an important ally for your business.
What are Accounting KPIs?
Accounting Key Performance Indicators (KPIs) are metrics that provide insights into the financial health, performance, and efficiency of a business.
KPIs serve as measurable values that gauge various aspects of a company's financial activities, allowing stakeholders to:
Assess progress toward strategic objectives
Identify areas for improvement
Make informed decisions
Businesses can have non-financial KPIs as well, tracking customer satisfaction, employee engagement, lead conversion rates, and social impact metrics.
Why are Accounting KPIs Important?
Accounting KPIs are valuable to business owners in many ways, going beyond providing an overall view of a company’s financial health and performance. Businesses can use accounting KPIs to support in a number of ways, including:
Strategic Planning and Decision-Making: Accounting KPIs provide valuable insights into the effectiveness of business strategies, resource allocation, performance against goals, and investment decisions, enabling you to make informed choices that drive success.
Investor and Stakeholder Confidence: Whether you’re applying for a loan or looking for investors, meaningful accounting KPIs enhance confidence in your company.
Risk Management: Accounting KPIs help to identify and mitigate financial risks by highlighting areas of potential concern, such as liquidity issues, excessive debt levels, or declining profitability. By proactively monitoring these indicators, businesses can implement risk mitigation strategies and safeguard against unforeseen challenges or economic downturns.
Benchmarking Against Industry Standards: Accounting KPIs enable businesses to benchmark their performance against industry standards and competitors. By comparing KPIs to industry benchmarks, companies can identify areas where they excel or lag behind their peers. This comparative analysis provides valuable insights for setting realistic goals, identifying opportunities for improvement, and staying competitive in the marketplace.
Not All Accounting KPIs Are Equal
Not all KPIs will be relevant for your business. KPIs should support and inform your larger strategic direction. It’s important to consider factors including your company’s industry, size, mission, goals, and values.
For example, a retail business might track the Average Transaction Value (the amount spent by each customer per transaction) to understand purchasing patterns and maximize revenue.
A service provider, on the other hand, might focus on tracking Average Revenue Per Client, assessing the profitability of their pricing and customer retention strategies.
How to Select Relevant Accounting KPIs for Your Business
Businesses can begin with a thorough analysis of their operations, goals, and industry benchmarks. This involves identifying key drivers of financial performance, such as revenue streams, cash flow, and cost structures.
Once these factors are identified, businesses can then prioritize and select the accounting KPIs that are most relevant and actionable for their unique circumstances. This may involve:
Consulting with industry experts
Benchmarking against peers
Leveraging data analytics tools to identify correlations and trends
Baseline Accounting KPIs
While every business is different, below are some accounting KPIs most small businesses will want to track.
Revenue Growth Rate
This KPI measures the percentage increase or decrease in revenue over a specific period, indicating the business's ability to generate more sales and expand its customer base.
Gross Profit Margin
The gross profit margin calculates the percentage of revenue retained after deducting the cost of goods sold, providing insights into the efficiency of production or service delivery and overall profitability. It summarizes how efficiently you're converting sales into profit.
Net Profit Margin
This key metric shows the percentage of revenue remaining after accounting for all business expenses. It's the ultimate indicator of your business's profitability.
Accounts Receivable Turnover
This metric evaluates how efficiently a business collects payments from customers by measuring the number of times accounts receivable is converted into cash within a given period. A lower number suggests faster collection and better cash flow management.
Debt-to-Equity Ratio
The debt-to-equity ratio assesses the proportion of debt financing relative to equity financing, indicating the level of financial leverage and risk exposure for the business.
Operating Cash Flow Ratio
This ratio compares operating cash flow to current liabilities, representing the business's ability to generate sufficient cash to cover short-term obligations and sustain daily operations.
Accounting KPIs Made Easy
Choosing and monitoring accounting KPIs is important for businesses navigating the complexities of financial management.
By aligning KPIs with organizational goals, benchmarking against industry standards, and regularly tracking performance, businesses can:
Gain valuable insights into their financial health
Identify areas for improvement
Make informed decisions to drive growth and profitability
It's important to remember that KPIs are not static but evolve with your business, requiring regular updates and refinement to remain relevant and effective.
If figuring out the accounting KPIs for your business isn’t something you feel excited about, our team at Accounting Made Accessible can help!
You can expect to better leverage your KPIs, identify and minimize threats, and improve your financial performance when working with our team.
Book your free strategy call today!