Are you an accounting firm that's busy helping your clients manage their finances but neglecting your own?
While traditional financial statements are important, there are other metrics you should be tracking for your own firm. One way to do it is by using common key performance indicators (KPIs).
For instance, are you aware of which clients are bringing in profits and which ones are costing you money? Do you have a solid understanding of client retention rates? Are you able to keep clients for the long haul, or do they leave for another firm after a short time?
If you're unsure about the answers to these questions, it's possible you're not tracking the right KPIs, or any at all. In this blog post, we'll explore some essential KPIs that every accounting firm should be tracking to evaluate their financial health and overall performance.
What is KPI In Accounting?
KPI stands for Key Performance Indicators, which are measurable values used to determine how well a company or organization is achieving its goals and objectives. In the context of accounting firms, KPIs are used to evaluate the performance of the firm and can include metrics such as revenue per employee, client retention rate, profitability, utilization rate, and many others.
If you’re unsure how to track KPIs for your practice, you may not see the value in setting up reporting. Yet key performance indicators for accounting staff and clients alike can provide your firm with the information you need to make good management decisions. The KPIs your accounting firm tracks should be customized for your firm’s size and goals, and provide you with real-time answers to the questions above, as well as others.
Examples Of Accounting KPIs You Need To Track
New client growth rate
The new client growth rate is particularly important for firms that are in the startup phase or are looking to grow their firm. It’s helpful to pinpoint exactly how much you wish your firm to grow in order for the KPI to be useful.
¿How should you measure it? For example, your goal may be to increase your clients by 50%, making it a trackable number that can easily let you know if you’re on target to reach your goal.
Revenue per employee
This metric measures the amount of revenue generated by each employee in the firm and can be used to evaluate how efficient the firm is at generating revenue.
¿How should you measure it? Suppose you are generating $10 million in revenue in a year and have 50 employees. The revenue per employee would be calculated by dividing total revenue by total employees, so
This means that on average, each employee in the firm generated $200,000 in revenue for the year.
Client retention rate
This KPI measures the percentage of clients who continue to do business with the firm over a given period of time and can be used to evaluate the firm's ability to provide high-quality service to its clients.
¿How could you measure it?
There are many ways to calculate the retention rate but one of the most often used is measuring it over the course of a year. This means dividing the number of clients within a year period by the number of clients you had one year ago. For example,
This means that the firm was able to retain 90% of its clients over the course of the year.
Job Profitability
****As an accounting firm, you know exactly what we are talking about with profitability as this is accounting basics to evaluate a company’s overall financial performance. That is why we are taking a step forward in this case. Job profitability allows firms to take a look at their menu of services, identify the ones that are more profitable to the company, and specialize. It's basically finding your strengths and letting go of what may keep the wheel rolling but isn't growing your firm.
Utilization rate
This KPI measures the percentage of time that employees are actively working on billable projects, and can be used to evaluate the firm's efficiency and productivity.
What Makes the Best Accounting KPI Metrics?
As the accounting sector continues to evolve with the emergence of new technology, it has become more complex and dynamic than ever before. This means that tracking performance using accounting KPIs is crucial in evaluating the success of your accounting firm.
With changing standards and regulations, managers must use new metrics to monitor how well their department is adapting to these changes. While this article covers the most common examples of accounting KPIs, it's essential to customize your own set of KPIs based on your company's unique needs and goals. In doing so, it's important to consider key factors such as industry trends, customer needs, and the company's financial objectives.
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Establish SMART Goals – Before developing KPIs, your firm should have a clear view of the goals it wants to achieve and where you want to go. Using the SMART framework for goals - meaning they should be specific, measurable, achievable, relevant, and time-bound - you can make sure your KPIs are bound to your company's vision, and you'll be able to track if you are moving closer to that or not.
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Monitor Performance – There is no point in having KPIs and not checking on them regularly. And as obvious as it seems, this happens quite often. Establishing a process and protocol to track that progress, by defining moments, or even the time of day, you should monitor your KPIs can help you gain training in analyzing this information and make decisions faster based on data.
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Align with Processes – Make sure you understand your employees' work and where KPIs fit in their ongoing process. The idea is not to create additional work for the sake of a new KPI but to give them actual useful tools for their daily work.
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Consider Context – KPIs need to be evaluated within the context of your entire firm and the information you can gather from the tools you are using. External forces may have an impact on KPIs that are beyond your control, making it difficult to manage them effectively.
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Ensure Data Reliability – The accuracy of KPIs is entirely reliant on the accuracy and reliability of the underlying data. Utilizing business intelligence software can assist in retrieving, analyzing, and reporting data to be utilized as inputs for accounting KPIs.
Why Tracking Accounting KPIs is Important for Your Firm
Measuring KPIs is as important for your client's success as for your own company, it’s funny how many accounting firms forget about this. Ones you put your KPIs to work, you’ll see the valuable insights they can give you on your firm's strengths and areas for improvement. We understand, that daily work sometimes just takes over, but it is important to remember that you should practice what you preach.
Kevin Mitchell, CPA
Senior Manager and CPA with over 20 years of experience in accounting and financial services, specializing in risk management and regulatory compliance. Skilled in managing audits and leading teams to deliver exceptional services. Proud father of two.
References:
Key Performance Indicators Every Accounting Firm Should Track. (n.d.). OfficeTools. https://www.officetools.com/blog/key-performance-indicators-every-accounting-firm-should-track/
I. (2021, October 7). 30 Best Accounting KPIs and Metric Examples for 2021 Reporting. Insightsoftware. https://insightsoftware.com/blog/30-best-accounting-kpis-and-metric-examples-for-2021-reporting/
