KPIs for Each Responsibility Centre increases the power of Responsibility Accounting.  Numbers are our best business friend, moreover, KPIs are our best buddies.

Managing a business comes with many responsibilities, including

• Firstly, preparing and analysing financial reports
• Secondly, evaluating investments and growth opportunities
• Thirdly, monitoring profitability.

As a business owner, understanding KPIs for each Responsibility Centre is crucial.  For example, here are three essential KPIs for each responsibility center.

Cost Centre 

Example 1: Cost Reduction Percentage

This measures the percentage of cost reduction compared to the previous year. Calculate it by subtracting the current year's total cost from the previous year's total cost and dividing by the previous year's total cost.

Example 2: Budget Variance

This variance compares the actual cost with the budgeted cost. Calculate it by subtracting the budgeted cost from the actual cost and dividing by the budgeted cost.

Example 3: Employee Productivity

Here we are looking at employee productivity measures the output per employee. Calculate this by dividing the total output by the number of employees.

Revenue Centre 

Example 1: Revenue Growth Rate

This measures the percentage increase or decrease in revenue over a period of time. Calculate this by subtracting the previous period's revenue from the current period's revenue, finally divide it by the previous period's revenue.

Example 2: Sales Conversion Rate

This measures the percentage of customers who make a purchase. Calculate this by dividing the number of customers who make a purchase by the total number of customers.

Example 3: Customer Acquisition Cost

This measures the cost of acquiring a new customer. Calculate this by dividing the total cost of acquisition by the number of new customers.

Profit Centre 

Example 1: Gross Profit Margin

This measures the percentage of revenue that remains after deducting the cost of goods sold. It is calculated by subtracting the cost of goods sold from total revenue and dividing by total revenue.

Example 2: Operating Profit Margin

This measures the percentage of revenue that remains after deducting operating expenses. Calculate this by subtracting operating expenses from total revenue and dividing by total revenue.

Example 3: Operating Expenses to Sales

This measures the percentage of revenue spent on operating expenses. Calculate this by dividing operating expenses by total revenue.

Investment Centre 

Example 1: Return on Investment (ROI)

This measures the profitability of your investment. Calculate this by dividing the profit of an investment by the cost of the investment.

Example 2: Cash Conversion Cycle

This measures the time it takes to convert inventory into cash.  Calculate it by adding the days of inventory outstanding and the days of sales outstanding, finally subtract the figure for payable days .

Example 3: Residual Income

This measures the profit earned above the required return on investment. Calculate this by subtracting the required return on investment from the actual profit

Conclusion

Responsibility Center Key Performance Indicators are a vital part of your business toolbox.  Make sure you have KPIs for each Responsibility Centre.  Furthermore, the I Hate Numbers podcast covers a range of must-know business topics to help you Plan It, Do it, Profit. For example. financial storytelling, and financial performance cash flow management, budgeting, forecasting, tax, accounts, and more! Furthermore, every episode provides actionable advice from me, Business Finance coach, accountant and educator who explains that stuff in an easy and no-nonsense way.

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In last week's I Hate Numbers podcast episode, I looked at responsibility centres. Now, responsibility in this context is not about being a mature adult, but it's about being accountable for what goes on in your business, where you allocate that responsibility, you make people accountable for areas under their influence and control.

Four key areas were defined. The criteria of those responsibility centres were outlined. So, I suggest folks, bring yourself up to speed. If you haven't had a chance to listen yet, catch up and listen again to last week's episode. On this week's podcast episode, I'm going to be expanding the theme of responsibility centres, specifically looking at the KPIs or key performance indicators that can be used

to measure what goes on in each of those four centres.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. Welcome to another weekly episode of I Hate Numbers. This is the podcast with a mission to help you and your business make more profits, increase your financial awareness, help you win those battles that go on between your ears, save time, save tax, and have the business you aspire to. What's not to love about that?

Let's crack on with the podcast. Now, responsibility centres play a vital role in the financial performance of your organisation, in the financial performance of your business. If we track the right key performance indicators for each of these responsibility centres, then we can measure their success, their efficiency, and the outcomes that we expect.

Now, before we dive into what those KPIs are, let's remind ourselves what those four key cost centres are. We have a cost centre, which can be a department or a unit within your business that incurs expenses without necessarily generating revenue. Typically, areas like human resources, accounts, IT, and administration can be suitable

cost centres. We also have revenue centres, and revenue centres are those areas where people are responsible and focus on generating sales and revenue without necessarily being concerned with cost control. Typically we find those areas within sales departments, marketing teams, perhaps, and even retail outlets.

Now, going beyond that, we also have the idea of something called a profit centre, and what we noticed in a profit centre is an area within your organisation where responsibility and accountability is given for generating revenue, and also managing costs, and the combination of those two factors contributes to the company's profitability.

So, this could be at a divisional level. It could be a subsidiary level. It could even be where you are the product manager and the product owner of different products and services within your business. Lastly, we have what's called an investment centre. Now, an investment centre is not where stocks and shares are transacted.

It's where units within your business have control over CapEx expenditure, which is an acronym for Capital Investment Revenues and Expenses and Profitability. Typically, we find these in large research and development departments, people who head up subsidiaries, individual divisions in the company. Now, having reminded ourselves what those four areas are,

let's have a look at what the relevant KPIs are. Now, KPIs, by the way, folks, are key performance indicators. Those are measures that we set on areas that are important for us, areas that we need to do well if we're going to achieve a positive outcome and positive performance. If you visualise your vehicle, your car, as you drive it, on your odometer, your dashboard, you'll have a dial indicating what the fuel level is in the car

and the speed that you're traveling at. Those KPIs for your car are important. It's important to know the speed you're going, just avoid any speeding fines, and it's important to know how much fuel you've got just in case you run out while you are in the middle of a journey. In the context of business, KPIs

serve the same purpose. Let's have a look at cost centres. Now, for a cost centre, here are three examples of KPIs that you might have. The key thing is when you set a KPI for an area of your business, you need to understand and familiarise yourself with what's important for your business, what elements of costs, what element of performance is important for you to measure

what makes the most impact for you, your customers, and the bottom line. Now, in a cost centre, three examples of KPIs that we can set will be the change of costs. So, if we evaluate the change of costs from one period to another, whether those are operational costs, whether those are cost of materials, cost of sales,

even individually in aggregate, when we can look at the percentage change, that will be a good KPI. Now, the KPI by itself, by the way, is of no use to us. We need to set a target, and a measure, and a benchmark, but that's a topic for another time. All we're focusing on today is just identifying some suitable KPIs to have. Within a cost centre,

a budget variation, if we set a budget for that area, and making that individual responsible for that budgetary control, if we compare the budget spend against the actual spend, we can see variants coming out, and that's a good indicator that we can set, also. One other example we can set is something called a capacity usage, and that's where we measure the output, either measured in physical products, the amount of clients that we are serving

against the time that we've got available. So, if, for example, I've got a manufacturing company that's capable of running for a hundred hours per week, and I can produce a certain level of product from that, that tells me, with the time that's actually been spent on production, how much usage have I used of that available capacity. Having dealt with cost centres,

now, let's look at revenue centres. Now, three example KPIs that we can use there is look at the growth in revenue that's occurred. So, we would make somebody accountable and responsible for growing the revenue in that area. So, we're going to be looking at the movement of revenue, you might want to call it sales, you might want to call it turnover,

between one period and the next. Now, that period could be measured on a weekly basis, it could be measured on a monthly basis, or you could look at it on a quarterly, six-monthly, or a year by year basis. Decide the time reference that's suitable for you. Internally in an organisation, the minimum period I would expect would be looking at that performance measured on a month by month basis.

KPI number two is something called a sales conversion rate. That's where we look at the number of leads that we're getting, where we define them as warm leads, or hot leads, or cold leads, and how many of those convert to actual people buying from us. That conversion rate is a good indicator of our success

and the quality of the leads that we're getting. Another suitable KPI could be the cost of acquiring a customer, what we might call customer acquisition cost. What we're looking at here now is the combined of the marketing and sales cost in respect to the number of clients that we're acquiring. If you've got the systems, you might want to also factor in other costs that are linked with that customer acquisition cost.

Now, remember folks, this is just the measure. The usefulness of the measure comes in actually setting a target, comes in having a benchmark, and having that, sett in our sights as something that we aspire to do. If you're thinking Mahmood, how could I memorise all this? You can certainly play about the podcast, but if you check the show notes, I've summarised these KPIs in the show notes for you to have a look at as well.

Now, we're coming up to the last two responsibility centres. The penultimate one is the profit centre. Now, in a profit centre, an individual or a group of people are going to be accountable for a profit generation, profit management, and thereby that influences the measures that we think are more important.

Typical KPIs could be a gross profit margin. When we are looking at the gross profit that we generate against the sales that are generated, so GP percents, we could be looking at the operating profit margin. Now, if there's one thing I know about accountants is that if there is one term that exists, we will invent another half a dozen.

So, another term for operating profit margin could be just your net profit margin. So, this is the gross profit less the operating costs in relation to the sales that we've generated. And lastly, we could be looking at the operating expenses, typically, things like salaries. We could be looking at marketing costs.

We could look at all the running costs, the support cost of the organisation in relation to the sales activity. Now, coming into the final stretch, we're looking at, now, investment centres, and when we look at investment centres here, what we're looking at now is those ratios, those KPIs that are relevant in relation to the responsibility our managers have in that area.

Typical ones that are used are ROI, return on investment or return on caps are employed, and that's where we look at the level of operating profit generated in relation to the investment that has been made in that area. Typically, we take into account the fixed assets that we have there. We have taken into account all the working capital employed as well, and we look to see what's been generated from that.

If somebody has control and influence over those investments, then we should make them accountable for them as well. The last two I'm going to look at, one is called a cash conversion cycle. An old-fashioned term for this is a working capital cycle. If we imagine we're a manufacturing company or a retailer, we will have inventory, stock that we have in, either to produce a finished product, or for resale.

We'll have customers that we sold products to. We typically give them time to pay, and we've got supplies that we have from our suppliers for those materials, those products, and they will give us time to pay as well. We can convert those into an equivalent number of days. So, how long does it take us to convert inventory into a sale?

How many days do we wait on average to get paid by customers, and how long do we take to actually pay our suppliers? If we aggregate those up, we add the inventory days to the receivable days, offset the payable days, that gives us a cash conversion cycle. Lastly, again, a potential good measure for an investment centre is what's called residual income.

That sounds quite grand, doesn't it? Effectively, if a manager has got responsibility and is accountable for making those investment decisions, then we are looking to see how they utilise those assets, how they utilise those resources. Now, when we acquire items for our business, there is an implied finance cost that's connected to that.

So, we look at the operating margin that's generated, deduct a figure that represents the associated interest cost that gives us residual income. What we're interested in, if it's positive, that's good news. If it's negative, that's not quite such a good story to tell. Now, as a recap here. If we go back to look at the various KPIs that we've discussed, when we look at things like a cost percentage, that tells us the effectiveness of our cost saving initiatives, and helps us identify areas for improvement.

When we look at budget variances, budget variances track how well the department is managing its expenses, and whether it's staying within budget or overspending. When we look at revenue centres, the revenue growth is significant because it tells us how effective the strategies have been by looking at the movement and the increases, hopefully, increases in revenue over a time period.

The sales conversion metric gives us the insight of the ability of our revenue centre to turn prospects into paying customers, giving us insight to how effective ourselves and marketing efforts are. Customer acquisition cost, again, tells us the effectiveness in cost terms of acquiring those new customers, the strategies that we're deploying to actually acquire that customer and client base.

Now, when it comes to the profit centres, when we look at the gross margins, again, that gives us an insight to our pricing approach, managing our cost approach, our production efficiency, our procurement strategy, and that again, gives us valuable insights. If we look at the operating margin, that tells us how effectively our manager or managers are able to generate profits from the underlying assets at their disposal.

Folks, I hope you found this podcast of use, of value. Is responsibility accounting something that you encounter in your own business? Is it something you're thinking about? Let me know. I'd love to hear your feedback. If you found this podcast of use, I'd love it if you could share it with those who haven't listened to it.

As such, let me know if there are topics in the future that you'd like me to explore and have a look at. Until then, folks, have a good week. See you on the other side. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.