Is your accounting department missing the mark? Does it seem like you have more finance employees than you need? There is no need to make guesses about the answers to these; we have formulas to help you! We’ve identified formulas in the form of Key Performance Indicators (KPIs) to help shed some light on the effectiveness of your financial department, as well as the financial health of your entire organization.
By tracking KPIs, business owners can understand the condition, sustainability, and trends within the accounting department, keep a close handle on the organization’s financial health, and proactively manage this critical area. Let’s take a look at some KPIs that can help illuminate the effectiveness of an accounting department in any industry, and learn how to measure financial performance.
The days to close KPI is equal to the number of days necessary to close the books, and finalize and deliver financial reports. This KPI helps provide an overarching assessment of a department’s cycle time. Although cycle time varies by size and complexity of an organization and its accounting department, five and a half days is a standard optimal target.
This KPI measures revenue generated per unit of shareholder equity. The ratio offers insight into an organization’s profitability and efficiency. If this KPI seems to be trending upwards, shareholders may question the use of their investments to ensure they are helping bolster the growth of the business.
This KPI measures the amount of money earned and spent by a business over a one-year span of time. It can help a business and its accounting staff keep track of monthly earnings and expenditures and determine whether they are maintaining profit consistency month over month.
The acid test is a quick method by which an organization’s ability to meet short-term obligations is measured. This quick test provides a conservative view of the financial health of a business and differs from the current ratio in that it excludes inventories from the measurement of assets.
This KPI measures the financial health of a business by analyzing assets that are readily available to meet short-term financial liabilities, such as cash-on-hand, short-term investments, and accounts receivable. Working capital measures the ability to generate quick cash, and is calculated by subtracting current liabilities from current assets.
The current ratio is equal to current assets divided by current liabilities. A current ratio can help a business understand current or upcoming financial issues. By taking stock of accounts receivable, accounts payable, and current liabilities, an organization can better understand its ability to pay its bills. This number should fall between 1.5 and 3. A current ratio of less than 1 indicates that there is not a sufficient influx of cash to keep current bills paid in full.
The gross profit margin measures a company’s profit before expenses. This margin is calculated by subtracting the cost of goods sold from the total revenue and dividing that number by total revenue. This helps an organization understand whether it is pricing goods and services appropriately, and whether its margin is good enough to cover its operating expenses.
The net profit margin measures the profitability of a business and can help companies make decisions with both long and short-term scope, such as profit projections, benchmarks, and goal setting.
This ratio helps determine how an organization is funding growth. The debt to equity ratio is an important measurement that helps shareholders evaluate how effectively a business is using their investments. Businesses with a high debt to equity ratio may need to take a closer look at how they are growing. A high number here indicates an organization is growing by means of accumulating debt.
This KPI measures the amount of total revenue the company earns per full-time (equivalent) accounting employee. It can help an organization review its current employees and estimate how many employees it will need based on the amount of revenue handled. Organizations should shoot for close to $20 million in revenue per employee.
This ratio helps manage employee count by measuring how many people in the organization are supported by each individual employee in the accounting department. A low number here may indicate that the accounting department is overstaffed. This can help organizations fetter out redundant positions and job duties to improve efficiency. In top-performing companies, one finance employee can support 55 company-wide employees.
This report error rate measures the amount of financial reports that require error corrections after submission. Error rates can have a huge impact on an organization, and can determine the quality of the work completed. A high error rate not only bogs down the accounting department, but increases the expense of running the department and reduces overall income. Errors can also become a legal liability for a company.
This KPI helps analyze the effectiveness of records created or managed by individual finance employees over a given time period. This measurement can help assess the productivity of each employee and help an organization build a benchmark for future employee performance. Tracking output in combination with the financial report error rate of individual employees helps separate the high performers from the low performers. It also helps create an objective scale upon which to assess employee performance and keep the entire department performing at its best.
This KPI measures the rate at which a business collects on outstanding accounts. It can indicate that a business is allowing customers to defer bills interest-free, or that the accounting department is not diligent about collections. This KPI can help organizations keep an eye on collections and ramp up their focus if turnover is lagging.
Key Performance Indicators help organizations measure the service, productivity, quality, cost, volume, and organizational effectiveness of their accounting departments and their business as a whole. KPIs can help keep a business running at the top of its game, increase its competitive advantage, and maintain an accounting department that runs like a well-oiled machine, year over year.