Every department in every organization uses Key Performance Indicators (KPIs) to supply them with a wide variety of information. Are their goals being met? Do their targets need to be revised? Are their teams being pushed too little or do they need to be pushed harder? What factors are acting as a barrier to optimum performance?
Based on these KPIs, the department designs strategies that will remove barriers and ensure peak performance.
The finance and accounting department requires KPIs as well, but determining these could be a cause of confusion – what factors can they use to track the performance of their teams, and how will this information help them improve themselves?
Features of KPIs for Finance and Accounting Departments
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KPIs need to give the managers two sets of information:
- They should inform management and the employees about how efficiently the department is being run
- They should ensure that the behavior of the employees is aligned with the goals of the company
Other features that KPIs should have:
- They should be realistic. They should not be so far-fetched that meeting them becomes a burden
- The indicators should be clearly communicated to all the employees so that they can constantly work towards achieving them
- There should not be too many indicators. Stay away from the temptation of cramming even simple tasks and activities in the list of indicators. Focus on what factor is most important to the business and measure that in the KPI
Many finance departments these days work on automated systems. The organizations do not mind investing in upgrades, because they know that it will save them time and cost in the days to come. But is the technology really working as well as it should? How can you tell? The KPIs should provide the managers with three key sets of information:
- The time taken to report the financial data
- The reliability of the information and the strength of the internal control systems
- The insights provided by the data into business performance
Only when the KPIs indicate that these three factors have been met can the finance manager have complete faith in these systems. Otherwise, he or she has to constantly redesign systems and processes till the goals are met. Thus, even in an automated environment, KPIs play a highly useful role.
Factors to be Included in Finance and Accounting KPIs
The question arises as to what factors should finance managers include in their KPIs when they are measuring specific items on their balance sheet. Here are a few examples:
- If you are going to be measuring the Accounts Payable, then consider:
a) The cost per invoice
b) Time taken to process the invoices
c) How many were paid within the agreed timelines
d) Discounts for early payment
e) Days payable outstanding
- Measure these aspects and you can control your cash outflows.
- If you are going to have KPIs for Accounts Receivable, then measure:
a) The collections effectiveness index
b) Days sales outstanding
c) The best possible days sales outstanding
d) The average number of days in which payments have been delinquent. If you wish to have control over your cash inflows, then this factor definitely needs to be a key part of your KPIs.
- When accounts managers decide to have payroll as part of their KPIs, then the factors that should be considered are:
a) Cost per payroll payment
b) Error rates
c) Number of manual check-outs.
d) You can go a step further and collaborate with the HR department to understand how many days it takes to process new hires, the cost per payroll inquiry, and the days taken to resolve these inquiries.
Since the finance and accounts department is at the heart of the company, it is essential that it function smoothly. That is why a coherent set of indicators should be created that would tell the finance managers everything they need to know to ensure that work in the department carries on seamlessly.
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