Welcome to The Ledger where we sum up the latest finance and accounting news for you. This week, we've rounded up everything finance leaders need to know about key performance metrics (KPIs) today. Read on to discover which accounting key performance indicators are table stakes, how to decide what to measure, signs you're tracking the wrong KPIs and how it all fits together for a data-driven accounting function. Let's dive right in:
5 Table Stakes Accounting Key Performance Indicators for Finance Leaders
Data is everywhere these days and improvements in collection, analysis and discovery allow organizations to dissect and dive deeper into performance in ever more granular ways. That's great news for the adage "you can't improve what you don't measure" — if you know where to start.
In the finance function, there are five KPIs every business should measure to keep track of short- and long-term progress, identify hiccups and stay competitive. These are your essentials:
OCF: Your operating cash flow measures exactly what you'd expect – the amount of cash you have on hand for daily, monthly and annual operations.
OCF= Total Revenue - Operating Expenses
Revenue growth: This KPI compares of the amount of revenue an organization generates in a certain timeframe — usually quarterly — with the amount in generated in the previous timeframe. It's useful for measuring progress, making projections and comparing your growth to a competitor's.
Revenue Growth= Current Period − Previous Period / Previous Period
Profit margin: This key performance indicator measures how profitable a business is and is expressed as the percentage of how much of every dollar it gets to keep once the costs of running the business are all accounted for.
Profit Margin= Net Income / Net Sales ×100
RPU: Revenue per unit (or per user) is a measurement of how much revenue a single customer or end user generates for the business. It's usually taken as an average.
Average Revenue Per Unit (ARPU)= Total Revenue / Total # of Users
Customer satisfaction: Also called a CSAT score, this KPI allows you to predict potential rates of retention or churn and adjust your processes accordingly. To measure it you'll need to collect feedback from your customers, usually in the form of surveys or questionnaires.
CSAT %= # of Positive Responses / Total Number of Responses
Once you know what to measure and get your table stakes KPIs up and running, you can set up a collection and reporting cadence, choose related metrics to focus on and stay on top of performance changes. To understand more about these five KPIs, read the full article at accountingtoday.com.
Choosing Accounting KPIs for Growth
Once you've laid the foundation with the essentials, you can build on your reporting strategy by choosing data streams and KPIs that track and inspire growth. Quantitative and qualitative KPI tracking is a useful tool for everything from drilling down into individual employee metrics to widening the scope to overall business performance so you can keep growing. Choose your growth inspired KPIs when they:
Tap into strategy: You can measure pretty much anything — but should you? Keep the scope narrow to avoid creep and link your KPIs directly to company finance and IT strategies so they work for you and not the other way around.
Stay relevant: Don't allow data collection and KPI-tracking to become a carte blanche for micromanaging. When the goal is growth, spending time on nice-to-know metrics should take a back seat to need-to-know data.
Avoid data complacency: Data is objective, but data collection rarely is — it's architected by people, after all. Let the data you collect guide your judgment but avoid data dogma by double-checking your quality controls.
In the end, data-driven decision making is as much "decision" as "data". When you ramp up your KPI strategy remember that your dashboards are a means to an end and not the end itself. Dive deeper into tracking KPIs to drive growth over on forbes.com, and don't miss the segment of the article on common KPI mistakes and how to avoid them.
Make Sure You're Tracking the Right Accounting Key Performance Indicators
As useful as it is to know what to measure and how to get started, your KPI strategy will only be effective if you can recognize when you're measuring the wrong thing, too. At best, you could waste time you don't have on irrelevant data and at worst you could end up with a skewed sense of your organization's performance or problem areas.
Looking for and flagging the signs of ineffective accounting key performance indicators can keep you and your team on track:
You can't tie it back to revenue: Every KPI you choose to measure should have a clear connection to the impact it will have on revenue. Whether you're measuring user experience or sales growth, you should always be able to say why improving it will benefit the bottom-line. If that's hard to articulate, head back to the drawing board.
There's no 'north star': A north star metric is the number that is the single best indicator of a company's long-term success — famously, Facebook's north star is monthly active users (MAUs). An effective KPI strategy aligns all your other metrics to your north star.
The KPI is not actionable: If you're getting very interesting but ultimately irrelevant data from tracking a KPI, there's a good change that it's not measuring what you need it to. It's fine to peek at "vanity metrics" every now and then or mine your data for interesting factoids to include in the company newsletter — so long as they're not being used to guide strategic decisions.
It relies solely on internal data: Your business doesn't operate in a vacuum, so it doesn't make sense to track its performance in one, either. A good accounting key performance indicator measures progress against itself and the market, so be sure to include external data for benchmarking, better geographical insights, and competitor analysis.
You're not getting results: If you're measuring for improvement but nothing you do seems to move the needle, consider whether the KPI is delivering information about the root cause or a proximate, surface-level contributor. Make sure to measure the core issue and not its symptoms with the right KPI.
Measuring the correct accounting key performance indicators means you can continue to make improvements and critical business decisions. Head over to forbes.com for the full list of warning signs that your KPIs aren't as effective as they need to be.
Data-driven decision making requires a strategy that's constantly in motion — choosing, analyzing and continuing to adjust KPIs in the finance function is an ongoing process. Ready to free up the time you need to start getting strategic with all the insights your accounting KPIs provide? Personiv has virtual accounting solutions designed to help you do just that.