Measuring accounting and finance KPIs guarantees enterprise success. It ensures financial health, better decision making and identifying trends and risks on time. These KPIs lead you towards growth and profitability while maintaining transparency through the financial close process.
The well-defined KPIs help measure progress toward strategic goals, ensuring financial performance supports broader business objectives. That's why we'll identify the essential financial and accounting KPIs and the metrics tied to them. They may vary from one company to another, so it's important defining them for all activities leading to successful financial close.
What Are the Essential Financial KPIs?
While there are many balance sheet KPIs and ones related to finance in general, we'll stick to the ones relevant to the financial close, including:
- Time to Close: This KPI measures the number of days it takes to complete the financial close process. The ideal Time to Close is less than or equal to 1, indicating that the actual closing time is equal to or shorter than the target period.
- Close Quality: This KPI combines multiple metrics to give an overall indication of the quality of the accounting process towards the financial close.
- On-time Reconciliations: This KPI tracks whether reconciliations are completed within the designated timeframe and it's related to Time to Close.
- Close Cycle Time Per Entry: As a metric, it tracks the closing time for each entity in a multi-entity enterprise, while as KPI, we aim for a lower close cycle time per entity.
- Manual Journal Entries per Close: This one measures the number of manual adjustments made through the process, indicating inefficiencies if the number is higher than expected.
- Number of Reconciliation Adjustments: This KPI tracks how often balance sheet reconciliations require corrections, so frequent adjustments mean data quality issues.
- Finance Team Overtime During Close: This one tracks the additional hours needed to finish the closing and may indicate the need to automate some of the processes for higher efficiency.
Metrics and KPIs to Track for Success in Financial Close
For finance professionals involved in the financial close process, focusing on specific accounting metrics and balance sheet KPIs is crucial for ensuring accuracy, efficiency and compliance. In the following sections, we'll extract the most relevant metrics for financial close:
Key Accounting Metrics for Financial Close
Accounting is an essential part of financial close processes, as it provides structure and accuracy. Financial close involves financial statements, recordings and data reviewing. Measuring the right metrics leads to smooth closing and reporting.
Here are the metrics in accounting that lead towards the balance sheet KPIs, eventually resulting in successful finance close:
- Revenue Recognition: Ensures that revenue is accurately recorded in the appropriate accounting period. The focus is on the timing of revenue recognition, completeness and accuracy of recorded revenue.
- Expense Accruals: Captures all expenses incurred but not yet paid at the end of the accounting period. In general, accrued expense is equal to the estimated amount of unpaid expense.
- Reconciliations: This one verifies the accuracy of account balances by comparing internal records with external statements.
- Journal Entry Accuracy: Measures the percentage of journal entries that are correct and do not require adjustments, following this simple formula: ({Number of Correct Entries}/{Total Number of Entries})*100
- Close Cycle Time: Tracks the duration of the financial close process from the end of the reporting period to the issuance of financial statements, measuring the number of days to a complete close.
Measuring these metrics is easier when leveraging software. It automates repetitive tasks while ensuring accuracy.
Balance Sheet KPIs for Financial Close
The balance sheet is essential for the financial close because it provides a snapshot of a company’s financial position at the end of an accounting period. It eases the decision-making, reconciliation, and audit readiness. So, aiming for the defined KPIs ensures a successful close.
Let's now see what balance sheet KPIs are essential for the financial close process:
- Working Capital: Indicates short-term liquidity and operational efficiency.
- Accounts Receivable Aging: Analyses the quality of receivables and potential collection issues.
- Accounts Payable Aging: Assesses the company's payment practices and potential cash flow issues.
- Inventory Valuation: Ensures accurate valuation of inventory at the end of the reporting period.
- Fixed Asset Reconciliation: Verifies the accuracy of fixed asset balances, including additions, disposals and depreciation.
- Debt Covenant Compliance: Monitors adherence to debt agreement terms and calculates relevant financial ratios.
While there are many, these KPIs are the ones to consider for a successful close.
The financial close is an essential part of the enterprise working through the whole year. The close ensures all costs, expenses and profits match perfectly while maintaining accuracy and reliability. The described metrics and KPIs reflect the company's financial stability and efficiency, too.
Also, proper revenue recognition, expense accruals and debt covenant compliance are crucial for meeting regulatory requirements. Financial departments deal with many challenges while maintaining financial health in short and long-term scenarios. Additionally, tracking the accounting metrics and balance sheet KPIs contributes to audit readiness, keeping the journals clean and consistent.
Best Practices for Financial Close
Besides the metrics and KPIs tracking, we also suggest to:
- Establish a clear close calendar with defined roles and responsibilities
- Implement a standardised reconciliation process across all accounts
- Regularly review and update accounting policies and procedures
- Conduct pre-close activities to identify and resolve issues early
- Perform analytical reviews to identify unusual fluctuations or discrepancies
- Document key judgments and estimates used in financial reporting
By focusing on these specific accounting metrics and balance sheet KPIs, finance teams can streamline the financial close process, improve accuracy and provide timely, reliable financial information to stakeholders.
Conclusion
Tracking metrics and KPIs in finance, especially accounting metrics and balance sheet KPIs ensure a straightforward financial close. The easiest way to track them is using dedicated software, just like Aico. Not only will you have perfectly matched financial close activities, but you will also track only the relevant metrics that lead toward the yearly finance KPIs.