The accounting department is central to the success of any organisation, so it’s important to make sure it stays on track.
Not only do key performance indicators (KPIs) give management an idea of how well the department is working, but they also give accounting professionals clear objectives to aim for, keeping their focus well aligned with the company’s broader goals.
Let’s look at the most useful KPIs within some of the main accounting functions.
Accounts receivable KPIs
The accounts receivable function manages incoming payments, and is therefore the lifeblood of the business.
For staff involved with accounts receivable, the chief KPI should be the reduction of debtor days. This means reducing the number of days it takes customers to pay, which contributes towards a healthy cash flow. Effective cash flow forecasting relies on having an accurate prediction of how long it will take to bring money into the business.
KPIs can also be based on other circumstances relating to customer accounts, such as the number of errors made on invoices produced, the number of accounts with personal guarantees, and the collection costs that arise. The quality of communications with customers can even be the basis of a KPI, as this impacts on the quality of customer relationships, and how quickly payments are made.
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Accounts payable KPIs
As well as receiving payments, an accounting department must efficiently pay vendors so that business operations can run smoothly with no interruptions.
Similar to accounts receivable, the most important KPI for staff responsible for accounts payable is the time taken to process payments.
Other KPIs can relate to the quality of the process, such as settlement discounts received through timely payment, time taken to resolve issues that arise, and the maintenance of good relationships with suppliers.
To keep things running like clockwork, a business needs not only to pay its vendors, but its staff.
As with other areas of accounting, this function can be measured on whether payments are made accurately and by agreed dates. Payroll staff need to ensure that staff bank details and salaries are correct and up-to-date at all times.
General accounting KPIs
An accounting department is a service, and it therefore needs to provide effective support to the rest of the organisation. Most accounting departments receive queries from other staff and stakeholders, whether this is through ad hoc email or a ticket system.
It’s a good idea to use the proportion of queries responded to, and the time taken to respond to these queries, as the basis of KPIs. This helps ensure that issues that could affect the running of the business are resolved quickly.
For senior and management accounting roles, an important KPI could be the reduction in variances between budget and actual. This relies on regular reporting, so that management is always aware of how much is being spent, and whether they need to take action.
A KPI that applies across the department is the timely and accurate completion of the month-end closing calendar.
We’ve looked at the kind of KPIs you might set, but what about the specific measures?
When setting KPIs, make sure you use SMART (specific, measurable, attainable, relevant and timely) objectives. Ask yourself precisely how and when you will evaluate whether KPIs have been met, and whether they are achievable and motivating at the same time.
So, rather than just telling staff they should reduce the number of debtor days, look at what the average currently is, and what it would be reasonable to reduce it to in a specific amount of time.
It’s important to make sure staff understand and agree with everything; to get the best out of people, KPIs should be about shared goals, not unexplained orders. So make sure you talk about why the KPIs are being set, not just what they are.
To help your accounting department flourish, it’s wise to ensure all staff have relevant qualifications. Junior accounting professionals often start with AAT, while CIMA and ACCA can support more experienced staff to flourish in their roles. For advice from an accounting course advisor, get in touch below.