Accounting Metrics: What Are Key Performance Indicators And Why Are They Important?

Key Performance Indicators, or KPIs, are accounting metrics used to determine the sustainability and condition of your business model. You could say KPIs are what you use to check on your business’ health. By regularly reviewing them, you can spot potential problems before they blow out, giving you a chance to be proactive.

The goal of all KPIs is one; to keep your business fine-tuned towards achieving financial success. However, how the way they go about this can vary drastically. KPI is a blanket term for different types of accounting metrics businesses use to measure performance in various areas. These two main KPIs can help you answer the question: Is my business meeting its objectives?

Financial Key Performance Indicators

If you are the finance manager, having a full view of your business’ financial landscape is critical for increasing your competitive advantage. Finances provide you with quantifiable accounting metrics or KPIs that are easy to read and act on. Financial KPIs include:

• Gross Profit Margin – This tells you whether your pricing structure is appropriate. The gross profit margin should be large enough to cover your operating expenses and still leave you a profit at the end of the day.

• Net Profit – This is your bottom line; the cash left after you have paid all your bills.

• Net Profit Margin – This KPI gives you a percentage of your revenue as profit.

• Aging Accounts Receivable – This will help reveal some of your business’ cash flow problems; for example, slow-paying clients.

• Current Ratio – This is your business’ ability to pay its bills.

Non-Financial Key Performance Indicators

Non-financial KPIs are quantitative measures of your business’ performance but not quantifiable in monetary units. Some typical examples include measures of employee or customer satisfaction, market share, product quality or consumer confidence changes.

Several areas are particularly important for ensuring the success of your business and where these non-financial KPIs play a critical role. These are:

• Service and product quality
• Company profile and brand awareness
• The management of human resources

Next, use the insights you gain from these KPIs to roll out changes that address the weaknesses identified. The more efficiency and insight you bring into the process, the bigger your competitive advantage becomes.