What Is Accounting KPIs?
Accounting key performance indicators (KPIs) are a quantifiable measure of the financial performance of a business and provide valuable insights into its financial health. Regardless of the size of your business or the industry you are in, your business will benefit from the insights provided by carefully selected KPIs. Choosing suitable KPIs is important to keep the business on track to provide actionable and relevant information that matches your business goals. KPIs can be used to analyse trends over time, measure progress against defined targets or objectives, compare against similar businesses, identify areas that need improvement or highlight those areas that are doing well. A KPI dashboard is an effective way of tracking and communicating the business performance with management and will aid business managers and leaders to focus on the bigger picture. With the right software, these metrics can be automated and provided in real-time.
What KPIs Are Suitable for Your Business?
There is a vast range of accounting KPIs available. The types of KPIs that will be of most value to your business will depend on your business goals, your industry, operational processes, and your business model. We outline the top accounting KPIs used by businesses, and these KPIs can be used alongside many other KPIs to meet the specific needs of your business .
Gross Profit Margin
This profitability metric measures the percentage of revenue left over after allowing for the cost of goods sold (COGS).
Gross Profit Margin = (Net Sales – COGS)/ Net Sales x 100%
Net Profit Margin
Net profit margin measures the business’s profitability by determining the percentage of income after allowing for direct and indirect costs, including the cost of goods sold and overheads.
Net Profit Margin = (Net Profit / Revenue) x 100%
Net Working Capital (NWC)
NWC measures the business’s liquidity by determining the capital left over after the short-term liabilities are settled with current assets. It is calculated as the difference between the current assets, including cash, accounts receivable and inventory, and its current liabilities, including accounts payable and other short-term debts. A positive net working capital indicates the business can meet its current short-term debts obligations and may have funds available to invest in growth opportunities. A negative net working capital means that the business does not have sufficient capital to settle the short-term debt with the current assets alone.
Net Working Capital = Current Assets – Current Liabilities
This is a measure of liquidity and provides an insight into whether the business would be able to meet its short-term liabilities with only its current assets. This ratio can also compare industry averages and benchmark against similar businesses. A ratio of less than 1 indicates liquidity problems and depending on the industry, a healthy ratio could range between 1.5 and 3.
Current Ratio = Currrent Assets/ Current Liabilities
Quick Ratio/ Acid Test Ratio
This measure of liquidity measures the business’s ability to meet its short-term liabilities with only its highly liquid current assets. Current assets that are considered highly liquid are cash and other current assets that are readily converted to cash, such as accounts receivable and some securities. It excludes inventory as it is not seen as being readily converted to cash. A ratio of less than 1 indicates the business may not be able to meet all current liabilities with its liquid assets. A quick ratio of greater than one indicates the business can pay off all its current liabilities without obtaining additional funding.
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Debt to Asset Ratio
This is a measure of the debt used to finance the purchase of assets and is a useful measure to determine whether a business can meet its debt obligations. The ratio is 1 if all the assets are funded entirely with equity. As debt is used, the ratio will increase above 1 and is an indicator of the riskiness of the business.
Debt to Asset Ratio = Total Debt/Total Assets
Debt to Equity Ratio
This leverage measure shows how much the business is financed using debt. If the debt to equity ratio is too high, it indicates the business is in financial distress and may not be able to meet its debt obligations. A debt to equity ratio that is too low may indicate that the business is relying too much on equity to finance their business which can be inefficient. The ideal ratio is very dependent on the industry, which can vary significantly from industry to industry.
Debt to Equity ratio = Total Debt/Total Equity
This efficiency ratio will measure the number of times the business sold its inventory in a given period. It highlights whether a business has excessive stock compared to its sales level.
Inventory turnover = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory)/2)
Total Asset Turnover
This measures how efficiently a business utilises its assets to generate revenue. A high ratio will indicate better performance.
Total Asset Turn over = Revenue / ((Beginning Total Assets + Ending Total Assets /2))
Return on equity (ROE)
This is a profitability measure and highlights the performance of a businesses equity investments to earn profit for shareholders.
ROE- Net Profit/((Beginning Equity + Ending Equity)/2)
Return on Assets (ROA)
This measure of profitability measures how much profit a company generates from its assets.
ROA = Net Profit/((Beginning Total Assets + Ending Total Assets /2))
Operating cash flow Ratio (OCF)
This liquidity ratio measures a business’s ability to pay off its current debts with the cash generated from its core business activities. This metric shows the amount a business is earning from its operating activities per dollar of its current liabilities.
OCF = Cash Flow from Operations/ Current Liabilities
This compares the forecasted or budgeted amount to the actual amount spent. This calculation can be used on any level of financial data and can be represented as a dollar amount or a percentage amount. A budget variance can be positive, indicating spending is over budget or negative, meaning spending is under budget or neutral, meaning spending matches the budget.
Budget Variance = (Actual Result – Budgeted amount)/Budgeted amount x 100%
Sales growth rate
The is a measure of the rate at which a businesses sales is growing (or declining) and is measured as a percentage of the previous period sales compared to the sales value of the current period.
Sales Growth Rate = (Current period sales – Prior period sales)/Prior Period Sales x 100%
Earnings per share (EPS)
EPS is a measure of the profitability of a business, and it is calculated as the net income generated per share of the stock. Market analysts and investors often use this to determine the profitability and value of the business, a higher EPS indicates a more profitable business.
EPS = Net Income / Weighted average of outstanding shares
Interest coverage ratio (ICR)
This calculates the number of times the business can pay its interest payments with its current earnings. It is indicative of the riskiness of a business as it shows the ability for the business to pay the interest of their outstanding debts.
Interest Coverage Ratio = Earnings before interest and tax (EBIT) / Interest expense