The methods of maintaining business books have changed over the past few years. They are different to the way they were 5 or 10 years ago. Due to this fact, bookkeeping for small businesses needs different KPIs (key performance indicators) today. KPIs for bookkeeping help manage the business and measure the performance of a business. Let’s understand the importance of internal KPIs for bookkeeping.
Internal KPIs for Bookkeeping
Previously, bookkeeping KPIs followed the lead of accounting processes. They were concerned with each employee’s revenue and utilisation rates (the percentage of billable hours). It may have even included write-off rates (for hours worked that could not be billed to clients or that clients refused to pay for). Bookkeepers in Melbourne use effective KPIs for bookkeeping. KPIs for bookkeeping:
• are quantifiable and achievable
• match your business goals
• focus on areas that are important to the success of your business
• Average Revenue Per Client
It is easy to calculate KPIs. Your total revenue is divided by the number of your active customers. Do you have a small number of high-paying customers or a huge number who pay a low monthly fee? You can boost this KPI without acquiring new customers by providing more services to your current customers.
This KPI can also be demonstrated as the Average Gross Profit per Client. Use the same calculation, but subtract the direct costs (mainly wages) of servicing the clients. This may need more time to compute, depending on the tools you use, but it will provide you with a more accurate view of each client’s value.
• Acquisition Cost
How much does it cost you to reach a new client? Acquiring a new client with word of mouth can be very low. On the other hand, having part or full-time staff members dedicated to marketing is likely to have higher costs. Divide these expenses by the number of new clients each month and as a result, you will know what each client costs you. Now divide the calculated cost of acquisition by your average revenue per client to get the recovery months.
• Lifetime Value
Knowing the lifetime value of your client is important. It helps you focus on maintaining long-term relationships. With average gross profit per client, you can calculate lifetime value. Divide average gross profit by the monthly churn rate to get your client’s lifetime value.
• Customer Value
To get your client’s value, you need to multiply the lifetime value with the number of clients you have.
The simplest KPIs to build for your company are financial ratios, which may be generated from your company’s financial accounts. Any KPI you create should adhere to the ‘SMART’ acronym:
• specific
• measurable
• achievable
• relevant
• timed.
Understanding Financial Ratios
A ratio is a way to compare one number to another. A ‘financial ratio’ is any ratio that contains one or more financial figures. Ratios can help you track and enhance the operation of your organisation by simplifying financial data. Accurate measurements of business performance will help bookkeepers provide the right information to Melbourne accountants at the time of tax return lodgment. Use ratios to:
◦ Evaluate how your business is doing.
◦ Identify areas of underperformance.
◦ Discover the possibilities for improvement.
◦ Assess the impact of a change in one aspect of your business on others.
◦ Set goals for your business.
Using Ratios in Your Business
In financial analysis, ratios may be expressed as the rate, ratio or percentage, based on your preference. To offer useful meaning, financial ratios must be compared with, for example:
• the trend of your outcomes over the past years
• the outcomes by other competitors
• general business standards or industry benchmarks
• budgeted results
• the impact of economic conditions.
Ratios and Benchmarks
When you analyse figures from your financial ratios, you can use them for business benchmarks. It will help you evaluate how your business is doing by making comparisons with other businesses in your industry. You can use this detail to enhance the financial performance of your business.
Conclusion
The blog outlines important KPIs for bookkeeping. You can also track the business performance with these KPIs. Moreover, reach a Reliable Bookkeeping Services provider to know how your business is doing.