What is an Accounting KPI
An accounting Key Performance Indicator (KPI) or metric is an explicitly defined and quantifiable measure that the accounting industry uses to gauge its overall long-term performance. KPIs for accounting departments differ based on the type of accounting function they perform.
Accounting is the process of recording, analyzing and reporting financial information of a business which can be used by a variety of stakeholders including regulators, investors and management. Since accounting is such a broad subject, accounting KPIs tailored to the needs of your organization are vital in order to evaluate performance.
In this post, we will focus on KPIs for accounting managers to measure performance for accounts payable, accounts receivable and internal accounting departments. By using these metrics with our interactive accounting KPI dashboard, you will easily be able to identify areas for improvement and optimize your 2021 reporting.
Accounts payable departments take care of a company’s short-term liabilities. They are responsible for tracking what is owed to suppliers and when. Accurate accounts payable data is required to ensure accounting managers have the best information possible when making important decisions. When accounts payable departments pay their bills accurately and on time, it maintains good relationships with external vendors which can lead to favorable payment terms and discounts. Here are the best key performance indicators that an accounts payable department can use to track performance:
This is a financial ratio that shows the average number of days it takes for a company to pay its bills. It may sound counterintuitive, but a higher DPO value is actually desirable since it allows a company to hold onto their cash for longer which can be used for short-term investments and increase free cash flow. However, if DPO is too high it can indicate that the company may have problems paying its bills.DPO = (Accounts Payable / Cost of Goods Sold) x # of Days
This is an accounting manager KPI that indicates 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.Cost per Invoice = Total AP Department Expenses / # of Invoices Processed
This is an accounting metric that tracks the average amount of time it takes to complete the invoice payment cycle from receipt until payment. High invoice cycle time can make it difficult to make payments in time which will result in late payment penalties and strain on vendor relationships.
This accounting KPI shows the percentage of invoices that have issues and require manual intervention due to missing or incorrect information. High invoice exception rates are associated with a slowdown in the entire accounts payable process and can potentially lead to duplicate payments or other errors. Invoice Exception Rate = Total Invoices with Exceptions / Total Invoices
This key performance indicator measures the accuracy of the accounts payable department. Common payment errors include incorrect account numbers, incorrect payment amounts and duplicate payments. High payment error rates indicate that a problem exists with accounts payable staff or processes.Payment Error Rate = Total # of Payments Made Containing Errors / Total # of Payments Made
This accounting metric tracks the time it takes to correct an error when it is identified. If this value is high, it likely means the error resolution process can be made more efficient in order to free up staff time and better satisfy vendors.Error Resolution Time = Total Time Spent Resolving Errors / Total # of Errors
This key performance indicator reveals the efficiency of your accounts payable department employees. A low value for this suggests that accounts payable processes have room for improvement or that staff can benefit from additional training. Invoices Process per Year per FTE = Total Invoices Processed in a Year / # of FTEs
This ratio compares the cost of accounts payable to total revenue. As companies grow, they will usually need to spend more on accounts payable. This KPI allows accounting managers to track if accounts payable expenses are growing at the same pace as revenue. If this value is increasing, it could indicate inefficiencies within the department.
Paying within the discount period according to the agreed upon credit terms can allow your company to receive sizable discounts and increase profitability. Tracking the amount of discounts received compared to discounts lost allows accounting managers to determine how well the accounts payable department is adhering to credit terms. It also quantifies the dollar value associated with their performance.
Electronic invoices are much faster to process when compared to paper invoices. Encouraging vendors to provide electronic invoices can save your accounts payable department time and money.Electronic Invoices Rate = Total Electronic Invoices / Total Invoices
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