In this article, we will discuss the top 11 KPIs your accounting practice should track and why, as well as formulas for how these KPI examples are calculated.
What is a key performance indicator (KPI)?
A KPI is a critical measure of progress towards targets, strategic goals, benchmarks, or core objectives of your accounting practice.
KPIs are quantifiable measures over time that focus on strategic and operational performance.
For a KPI to work effectively it must be:
- Simple, easy to measure and defined
- Communicated effectively across your practice, and
- Both achievable and relevant in the long term
What happens if you don’t act on monitoring KPIs?
Don’t let KPI’s become a tick box exercise for your accounting practice!
If your practice doesn’t track the leading KPIs that you’ve laid out to inform your practice decisions and drive performance, then you’re missing out on a big opportunity to shape the strategic vision of your practice.
You’ll also be hindering your ability to succeed as an accounting practice, because performance indicators will help you employ fact-based decision-making to improve the way you operate from within.
Why are KPIs important?
KPIs are important because they ensure that your accounting practice is on track to achieve its strategic and operational performance and gain a better understanding of the financial health of your practice.
They will also help your practice staff to understand what is expected of them, and how they’re tracking against these expectations.
So why do accounting practices need KPIs? Put simply, they can help inform better decision-making on the future direction of your practice.
What are good KPI examples?
1. Billable Hours
This is where you track the number of billable hours worked by each team member to ensure that resources are being used effectively.
The more productive accountants will have a higher percentage of billable hours, whereas a lower individual percentage may indicate that an accountant is less productive and there may be room for improvement.
Access time and billing software for accountants allows you to track and control staff productivity to ensure maximum return on client work by improving efficiency and billing with predefined activities and flexible time tracking.
Billable hours: multiply how much you’ve worked by your hourly rate.
2. Accounts Receivable (AR) turnover
Accounts receivable is another way of saying money owed by your clients, and the turnover represents how long it takes to collect the payment for your services. This KPI helps you to gauge the financial health of your clients, and when the ratio is higher it means your practice is receiving payments in a reasonable time frame.
If this KPI is low or you see a decline, it is important to think about strategies that can help you improve the rate.
Accounts receivable turnover = net value of credit sales/average accounts receivable for a period.
3. Accounts Payable (AP) turnover
This KPI will answer the question: how long does it take for your accounting practice to pay its bills? Track your accounts payable turnover and find out at what rate you’re paying all your suppliers, creditors or vendors.
If the ratio trends higher in the given period, it means that your practice is paying its accounts payable.
If you notice a decrease in your ratio, it may signify that your accounting practice has an issue with cash flow.
Accounts payable turnover = net credit purchases/average accounts payable for a period.
4. Gross profit margin
Gross profit margin is the percentage of revenue that remains after deducting direct costs. This KPI is very important as it can help to showcase if an accounting practice is generating enough revenue to cover outgoing costs.
A positive gross profit margin indicates that you have effective revenue generation based on how much your practice is spending. As an example, startups and new practices will usually strive for a high gross profit margin so that they can reach the break-even point. A negative gross profit margin may indicate that your practice needs to review your pricing strategies, such as lowering the price of your service offerings.
Gross profit margin = total revenue − cost of goods sold) / total revenue.
5. Client retention rate
Measuring clients who return to your practice year after year will give you a good idea of how satisfied they are and help to define how your practice’s reputation is viewed by those who’ve done business with you.
This KPI will be made easier to track with Access client management software for accounting practices, where you’ll be able to access all client information in one place allowing you to have a helicopter view of your clients like never before.
Client retention rate = number of clients today/number of clients over previous period x 100.
6. Revenue per employee
Measuring the revenue generated by each of your team members can tell you how wisely you are currently using your greatest resource: your people.
The higher your revenue-per-employee ratio is, the more high-performing and more productive your practice staff are. Your practice will also be more profitable if you have higher ratio results.
You’ll have greater visibility over your practice with Access workflow management software for accounting practices, by tracking the progress of tasks and getting real-time status updates.
Revenue per employee = net sales/average number of employees.
7. Cost revenue ratio
Cost revenue ratio means the ratio of your expenses when compared to your revenue. This KPI will give you better insight into the overall performance of your cost control and profitability.
The ratio shows, as a percentage, how much cash a practice spends to generate each dollar of revenue. Lower percentage revenues indicate that your practice is more efficient in generating revenue, whereas a higher percentage would suggest there are inefficiencies that need to be addressed.
Cost revenue ratio = cost of revenue/total revenue.
8. Project completion rate
Tracking the percentage of project tasks completed on time and within budget can help your team members to report on progress and estimate the overall time that is needed to complete projects in your practice.
This KPI will help your practice to determine the percentage of tasks you still need to complete and give you visibility on how productive you and your practice staff are at seeing projects through to completion.
Project completion rate: Divide the number of project tasks completed by the total number of project tasks.
9. Working capital
Working capital basically means the cash currently available to your practice and incorporates all of your assets, including cash, current liabilities, accounts receivable and any short-term investments you may have.
Your accounting practice can use this metric to determine whether they are able to pay their short-term debts. A practice may have its challenges in doing so if the calculations result in a low dollar value.
Conversely, if the amount is too high, this could show that the practice isn’t utilising their assets in an effective way.
Working capital = current assets - current liabilities.
10. Measuring churn
Clients exiting your accounting practice means they’re either not engaged or satisfied. Measuring churn will help you to know what you need to do to improve.
If you discover you have a higher churn rate than your previous benchmark, this will indicate that the profitability and growth of your practice are under threat, and you should consider some strategic changes to get back on track.
Measuring churn: Calculate the number of clients lost during a given period.
11. Average Revenue Per Customer (ARPC)
The ARPC is a great indicator of how successfully your practice offers, sells and deploys your services. It tracks the revenue you’ll theoretically be able to earn from each new client.
Your practice can use this KP to analyse which of your service offerings generates the highest or lowest revenues for your practice. It’ll help you to make amendments to service offerings so that they’re as fiscally viable as they can be and can complement your overall business growth strategy.
Average Revenue Per Customer (ARPC): total revenue of the business/total number of clients.
Additional KPI examples your accounting firm can track
- Costs – this means the total cost of the total revenue of your practice, including staffing costs, system costs, overheads, and any other expenses.
- Marketing KPIs – such as Customer Acquisition Costs, Lifetime Value, Profitability, Ad Spend, and other marketing costs.
- Client Feedback - this is a KPI tracking client feedback through client satisfaction surveys and other customer feedback scores. These are a measure of client satisfaction and the quality of service provided.
- Employee Satisfaction - Use regular surveys to track employee satisfaction, as this KPI for accounting staff quantifies how they feel about the work environment within your practice.
How practice management software can help you track accounting KPIs
Integrated accounting practice management software can help you track your accounting practice KPIs by providing best in class practice reporting within seconds rather than days or even weeks.
You can quickly extract information on your financial health or practice performance and present it visually through smart KPI dashboards, rather than having to collate and format this data. By using our intuitive KPI accounting software, your data is simpler to understand, saving you time on the analysis and monitoring of your practice performance.