In the world of finance, measuring accounting success is of major importance for businesses and new accountants alike. However, many are unaware of specific Key Performance Indicators (KPIs) that can significantly aid in this endeavour. Finsmart – trusted globally for outsourced accounting services – believes that understanding and utilizing these metrics can pave the way for better financial decision-making, growth, and overall success.
The reason why we decided to shed light on the crucial significance of measuring accounting success through KPIs! We will list 7 essential performance indicators that will serve as powerful tools for gauging financial health and performance.
Are you ready to learn about KPIs for accounting? Let’s go!
Profit Margin
We bet that you’ve already guessed what this accounting KPI is going to be about. Profit Margin is a fundamental KPI that indicates the percentage of profit a company earns from its total revenue. It can be calculated by dividing the net profit by total revenue and multiplying the result by 100 to get the percentage.
A higher profit margin reflects efficient cost management and pricing strategies. It indicates that the company is generating substantial profits relative to its revenue. Comparing the profit margin over time or against industry benchmarks will help both accountants and entrepreneurs assess a business’ financial health and profitability.
Accounts Receivable Turnover
Accounts Receivable (AR) turnover helps businesses measure how efficiently they’re collecting payments from their customers. It can be calculated by dividing the net credit sales by the average accounts receivable balance. A high accounts receivable turnover indicates that the company is efficiently managing its credit policies and collecting payments promptly. It also signifies that it is working on its cash flow and minimizing the risk of bad debts.
A low turnover, on the other hand, suggests potential issues with credit management. It could lead to cash flow problems.
Accounts Payable Turnover
Now that we’ve mentioned accounts receivable turnover, it makes complete sense to throw light on AP turnover as well! This accounting KPI assesses how easily a company pays its suppliers and vendors. It can be determined by dividing the total purchases made on credit by the average accounts payable balance.
Having a turnover ratio means that the company is effectively managing its payables and settling debts promptly. Not only does this improve supplier relationships but also leads to early payment discounts. Conversely, a low ratio might indicate a liquidity issue or strained vendor relations.
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Return on Equity (ROE)
One of the most important KPIs for accounting. As the name suggests, return on equity helps measure a company’s profitability relative to its shareholders’ equity. Calculated by dividing net income by shareholders’ equity and multiplying the result by 100 to express it as a percentage, ROE reflects how efficiently a company utilizes shareholders’ investments to generate profits.
In the world of accounting, a higher ROE is generally favorable. Why, you ask? Because it signifies better profitability and efficacious use of equity capital.
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Debt-to-Equity Ratio
When a company is to assess its financial leverage, it checks its debt-to-equity ratio KPI. As the name itself suggests, this key indicator in accounting is about comparing total liabilities to shareholders’ equity. A lower ratio indicates that the company relies less on debt to finance its operation and growth. Put simply, a low ratio is seen as less risky.
A higher ratio, on the contrary, implies greater reliance on debt, potentially increasing financial risk and interest expenses. This KPI is particularly valuable for evaluating a company’s long-term financial stability.
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Working Capital Ratio
The working capital ratio, also called the current ratio, is used to evaluate a company’s short-term liquidity and ability to meet its current obligations. One can calculate it by diverging assets from current liabilities. A ratio above 1 indicates that the business has adequate current assets to cover its short-term liabilities.
Liquidity issues and potential inability to meet short-term obligations arise when the working capital ratio is below 1.
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Gross Profit Percentage
Our list of KPIs for accounting will be considered incomplete without talking about this key indicator. The Gross Profit Percentage is used for checking out a company’s profitability at the gross profit level. Accountants calculate it by subtracting the cost of goods sold (COGS) from total revenue. They then divide the result by total revenue, multiplying by 100.
This accounting KPI highlights how meritoriously a company produces and sells its products or services. A higher gross profit percentage indicates better cost control and pricing strategies, contributing to overall profitability.
KPIs for accounting
Above are some useful KPIs for accounting. By monitoring these key performance indicators, businesses and accountants can gain valuable insights into their financial health, operational efficiency, and overall success. Make informed decisions to drive growth, improve financial performance, and attain sustainable success by paying heed to these Key Performance Indicators.
Got any queries to ask? Send them to sales@finsmartaccounting.com and have them answered by our accounting experts!
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CEO
Mrs. Dipali Phadke is the back bone of the company’s operations. A qualified Chartered Accountant with more than 12 years of experience in the field of Accounting, Taxation and Audit.
