You can’t measure anything until you figure out what you want to track.
But where do you get these from? Don’t just pull metrics out of thin air. To identify your KPIs, take the following three steps:
1. Close bookkeeping cycle timely
Stick to a schedule when it comes to closing your books. Any delays or inconsistencies can cause errors and inaccuracies.
In a study focused on businesses that reconcile balance sheets on a monthly, quarterly, and year-end basis, just 39% of businesses were satisfied with the quality of their closing process.
Furthermore, only 28% of people said they trusted the numbers in the closing reports.
A big problem is that it’s taking companies too long to complete the process. This study discovered that it takes roughly 78% of businesses more than three days to close the books.
If you’re not on a timely bookkeeping schedule, it will be challenging to identify and measure your KPIs.
2. Prepare financial statements
Once you close the books, you need to prepare accurate financial statements. This should be done on a monthly, quarterly, and annual basis.
There are three main types of financial statements:
- Income Statement
- Balance Sheet
- Cash Flow Statement
After you generate these statements, you’ll be able to move on to the next step.
3. Analyze financial statements
Now it’s time to review your financials. But you can only do this if you close the bookkeeping cycle on a timely basis and generate financial statements.
Otherwise, you won’t be able to identify any patterns or benchmarks.
Look at each statement. Compare it to the previous month or quarter. See where you stand compared to that same month from the previous year. This is the best way for you to see trends and ultimately identify your KPIs.
This is how you make sure that your KPIs are implemented. Again, this is contingent on a timely closing cycle.
10th day following month end — implemented by bookkeeper
It’s the bookkeeper’s responsibility to enter everything into the books and make sure all the records are up to date. Bookkeepers track income, expenses, invoices, payroll, and even pay the bills.
Your bookkeeper is the original source of your data entries, and they code all transactions.
13th day following month end — implemented by controller
The controller oversees all accounting operations and functions. It’s their responsibility to ensure that month-end closing processes and financial report generations are both accurate and timely.
Usually, it’s up to the controller to make sure that all the statements have been recorded, reconciled, and sent to the appropriate parties.
15th day following month end — implemented by CFO
The CFO needs to monitor the big picture of a company’s financial situation. Depending on the size of the company, the CFO can also take on the responsibilities of the controller.
By sticking to a schedule each month and having multiple positions assess the KPIs, it ensures that your performance indicators are measured and tracked appropriately.
Examples of Bookkeeping KPIs
There is at least a dozen or so KPIs you can track that are related to your accounting department. I think it’s safe to assume that you’re already tracking things like revenue, expenses, gross profits, and net profits.
But here are a few examples of bookkeeping KPIs you might not initially think to track.
Days’ Receivable and Days’ Payable
Days’ receivable is also referred to as “days sales outstanding” or DSO for short. Businesses use this to measure the average outstanding sales in days.
Here is the formula to calculate DSO:
(Accounts Receivable / Annual Revenue) x (365 days) = Days Receivable
You can always adjust the number of days in the formula to get the ratio for a month or quarter, as opposed to a full year.
On the flip side, days’ payable measures the number of days it takes for a business to pay their bills. Here is the formula for DPO:
(Accounts Payable / Cost of Goods Sold) x (365 days) = Days Payable
Again, you can use a different number for days to calculate DPO for another period.
Days’ receivable metrics are used to measure the effectiveness of your collection efforts, while your days’ payable KPI indicates how well you manage your cash flow.
The current ratio KPI is used to determine if your business is in a good position to meet all financial obligations on a timely and consistent basis.
A simple formula is used to calculate your current ratio.
Current Assets / Current Liabilities = Current Ratio
All your assets should be listed on your balance sheet. This includes cash, accounts receivable, inventory, intangible assets, and equipment, etc. Anything your company owns that could be liquidated in less than a year can be considered a current asset.
Liabilities include accounts payable, accrued expenses, sales tax payable, deferred revenue, and long-term debt, etc.
Leverage ratios are used to measure debt obligations compared to a company’s equity. These are some of the most common leverage ratio formulas.
Debt to equity (D/E) ratio:
Total Liabilities / Total Shareholders’ Equity = Debt/Equity Ratio
Total Assets / Total Equity = Equity Multiplier
Degree of financial leverage:
Percent Change in EPS / Percent Change in EBIT = DFL
Use these ratios to help manage your debt. Incurring too much debt can put your company in a dangerous situation.
ROA (return on assets) is a segment of ROI (return on investment).
The reason why ROI is so popular is because it’s versatile and can be used to measure something specific, such as a marketing campaign.
(Value of Investment – Cost of Investment) / Cost of Investment = ROI
It’s a simple formula, with plenty of functional applications.
ROA, on the other hand, is a bit more specific. It measures how profitable a business is in relation to its current assets.
Net Income / Average Assets = ROA
Both formulas are valuable KPIs for your accounting department.
You won’t know where your company stands unless you take the time to measure your bookkeeping KPIs.
For those of you who have never done this before, it can sound a bit intimidating. Fortunately, if you follow the steps that I’ve outlined in this guide, identifying and establishing this KPIs shouldn’t be much of a challenge.
But with that said, we’re always here to help you out if you have any questions or concerns. Consider outsourced bookkeeping services, and let the professionals handle all of this for you.