Accounting KPIs for Internal Accounting Departments: Metrics That Matter

In the current complex and rapidly changing business environment, accounting departments are expected to do much more than bookkeeping or compliance. They have been increasingly relied upon to provide insights that drive strategy and operational efficiencies. Finance teams are using Key Performance Indicators (KPIs), measurable values that can help determine the effectiveness of an accounting operation, to measure and improve performance.

This article outlines some of the most important KPIs accounting departments should be compelled to follow to increase accuracy, efficiency, and alignment to organisation goals.

What Are Accounting KPIs?

Accounting KPIs are measurable values that indicate the performance of an accounting function in specific areas. KPIs are an integral part of evaluating the effectiveness of financial processes, identifying inefficiencies, tracking internal controls, and supporting business strategies. 

When KPIs are carefully chosen, they will help accounting teams track progress toward goals, alert them of anomalies in the process, and provide opportunities for continuous improvement in key areas such as:

• Financial accuracy
• Timeliness of reporting
• Cash flow and working capital management
• Operational efficiency
• Compliance preparedness

Let’s consider some of the more relevant KPIs in detail.

1. Days Sales Outstanding (DSO)

Purpose: Measures how long on average it takes to collect payment after a sale.

Why it is important: A high DSO may indicate there are issues with credit control, customers’ payment practices, and/or cash flow management. 

Formula: DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of Days

Best practices: Generally, aim for a lower DSO, under 45 days is the best practice depending on the industry.

2. Days Payable Outstanding (DPO) 

Purpose: Measures the average days to pay suppliers. 

Why it’s important: This measure helps organisations effectively manage cash outflows while not damaging relationships with suppliers. 

Formula: DPO = (Accounts Payable ÷ Cost of Goods Sold) × Number of Days

Best practices: Aim to maintain a healthy balance, enabling capital management improvement without damaging supplier goodwill.

3. Accounts Receivable Turnover 

Purpose: Measures how efficiently a firm collects its receivables. 

Why it’s important: A high accounts receivable turnover indicates that credit policies are effective and collection processes are efficient. 

Formula: Receivables Turnover = Net Credit Sales ÷ Average Accounts Receivable

Best practice: Higher levels of receivable turnover are favourable. Monitor the relationship over time to determine if turnover trends higher or lower.

4. Accounts Payable Turnover 

Purpose: Measures how quickly a firm pays suppliers’ obligations.

Why it’s important: This measure allows organisations and their practices to gauge how well a company manages its short-term liabilities while optimising cash flow. 

Formula: Payables Turnover = Total Supplier Purchases ÷ Average Accounts Payable

5. Budget Variance 

Purpose: Comparison of actual financial performance to budget

Why it matters: Significant variances could indicate forecasting problems, or overspending or unexpected costs. 

Formula: Budget Variance = Actual Amount – Budgeted Amount 

Best practice: Compare the budget to actual, and seek explanation for deviations regularly to enhance budgeting accuracy.

6. General Ledger Accuracy 

Purpose: Measures how often adjustments or errors were made in the general ledger. 

Why it matters: Errors in the general ledger could result in inaccurate reporting, audit issues, and compliance risk. 

Best practice: Aim for as few corrections as possible, and develop strong internal controls.

7. Invoice Processing Time 

Purpose: Report average time taken to process supplier invoices. 

Why it matters: Delays may result in exceeding payment timelines, incurring penalties, or missing early payment discounts. 

Formula:

 Average Invoice Processing Time = Total Time to Process Invoices / Number of Invoices Processed 

Best Practice: Aim for an average turnaround of five business days or less, using automation tools if necessary.

8. Cost to Process an Invoice 

Purpose: Calculate the average cost to process each invoice. 

Why it matters: Useful for detecting inefficiencies in the process, and assessing the ROI from automation purchases. 

Formula: Cost per Invoice = Total AP Processing Cost/ Number of Invoices Processed

Best practices: Industry benchmarks recommend an efficient accounts payable (AP) department target pegged nominally at £2 – £5 per invoice.

9. Cash Conversion Cycle (CCC) 

Purpose: To measure the time taken for an organization to turn its investment in inventories and other inputs into a cash flow. 

Why it matters: The shorter the Cash Conversion Cycle, the better the organization is managing its working capital. 

Formula: CCC = DSO + Days Inventory Outstanding (DIO) – DPO

Best practice: Generally, a shorter Cash Conversion Cycle is desirable, as it means increased liquidity. 

10. Time to Close the Books 

Purpose: To track the number of days it takes to close monthly, quarterly or annual accounts. 

Why it matters: The quicker you close the books, the more timely the financial reporting and the better the decision-making can be. 

Best practice: Other leading organizations close their books monthly in 5 – 10 business days. 

11. Audit Readiness 

Purpose: To measure the extent to which an organization is prepared for external audits. 

Why it matters: Audit readiness indicates the degree of risk exposure pertaining to compliance issues, penalties and reputational damage. 

Best practice: Up-to-date documentation, regular internal audits and a strong control environment. 

12. Percentage of Manual Journal Entries 

Purpose: To measure the amount of journal entries posted manually compared to identifying journals that are automatically functional. 

Why it matters: The more manual processing, the more likelihood of error and wasted time.

Best practice: Use ERP and accounting software with a recurring or standard entry function to automate the entries.

13. Financial Report Accuracy

Purpose: Measure how often post-report submissions corrections to financial reports are made, and the scope of the corrections.

Why it matters: Accuracy is key to stakeholder credibility, audit outcomes, and regulatory compliance.

Best practice: Have multiple levels of review and data validation processes built into the report before it is finalised.

14. ROI on Accounting Technology

Purpose: To measure return from investment in accounting software or to measure investment in automation tools.

Why it matters: to rationalise technology investment, and for future plans with digital transformation.

Formula: ROI = [(Financial Gains – Costs) /Costs] x 100

Best practice: Measure both qualitative (time, fewer errors) and quantitative value gained.

Best Practices in KPI implementation

In order to have your accounting KPI output be effective and result in action: 

1. KPIs Should Align with Strategic goals – KPI’s need to align with company-wide financial and operational goals for them to hold any value.

2. Use standard data sources – It is important to be consistent in determining how the data collected is calculated, to ensure it can be accurately compared across the time series.

3. Use technology – Accounting applications including NetSuite (ERP), Xero, QuickBooks, and other accounting applications offer dashboards and key performance indicators built into their platforms and you can also share indicators to stakeholders while staying connected through real-time insights.

4. Review your KPIs constantly – Maintain your KPIs in work-in-progress for further evaluation, as business checks and actions continue to evolve, it is important to constantly revisit which metrics are valuable and ongoing.

5. Report Results – Share performance results with internal stakeholders to promote data-informed decisions.

Conclusion

Accounting KPIs are crucial navigational tools for the finance function. They pinpoint strengths, indicate emerging risks, and show the way to continuous improvement. Focusing on the most meaningful set of KPIs enables accounting departments to improve efficiency, ensure accuracy, and add real value to organisational strategic priorities.

Start measuring a few key metrics that align with your business priorities and grow out your dashboard as you grow. In doing so, you will change the role of accounting from a transactional partner in your company to a strategic partner.