Credit Risk Measurement

Every line of business should have an organized way of bookkeeping. This is the only way to determine clearly if the business is earning or not. Bookkeeping has evolved into something of higher technology, and yet, the essence is the same. The spreadsheets contain the assets and liabilities and expenses of the company and this will also show any assets that are liquidated. Debits and credits are there as well. In essence, there may have been changes and yet the principles are still intact. What technology made easier is for the calculation of these numbers. There is no more need to manually compute things so the margin for error is lesser. As in every company, one has to know the basics of accounting and measure its effectiveness through checking the process against an accounting scorecard.

The first thing that the scorecard should contain is the revenue of the company. Definitely, this is the net income of the company once all necessary costs have been subtracted. These costs include capital for raw materials, salaries of employees, non-productive hours, and other non-tangible items that the company needs to pay for. A simple glance at these numbers will show a business leader whether the revenue is satisfactory or if there is a potential area of improvement and cut costs.

Another thing that needs measurement in the scorecard is the yield. A sad fact of reality is that several mangers look at sales, and yet, they do not look at what could have been made if the wastes and defective products are controlled. For example, if a single cloth can make two shirts, the ideal ratio or yield should be 1:2. However, some are only able to produce one shirt out of this cloth due to human errors. These are the processes that need to change so the number of defects can be reduced. Once this is addressed, a significant change will be very visible in terms of yield.

Next, the scorecard should show information on product costs. This figure will show managers if the company is within the recommended expenditures and if the sales are actually converting into income once raw materials are converted into output. If a product is not likely to sell, and this is only adding weight to the company’s expenses and not on the income from profit, this product may need revamping or may even need to be totally eradicated.

Of course, budget should always be present in any given scorecard that has something to do with accounting. This gives managers a high-level picture as to whether the company is overspending on overhead expenses or if the company is not spending enough on its processes to come up with quality products and services.

Ideally, an accounting scorecard should not be very complex. It should be easy to understand so there is not much analysis that needs to be done. The scorecard is something that was designed to tell executives of what is going on at a simple glance. Keeping it simple is better.
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It is inevitable for all businesses to have a systemized way of keeping track of your financial records, or bookkeeping, so to speak. Bookkeeping is something that businesses should never be without because this is an organized method of keeping track of finances, to determine whether the business is indeed earning. For decades now, companies have used accounting sheets for efficient bookkeeping. However, the advent of technology has paved the way for accounting to become techie, so to speak, as well. Still, no matter how techie a company’s accounting system may be, it would still be important to keep track of this very system’s progress, to check if it is indeed aligned with corporate goals and objectives. One way to do this is to employ accounting KPI or accounting key performance indicators. This way, there would be smaller room for marginal errors here.

If you are not too sure about which KPIs to include here, well, do not fret altogether. Technology may have changed certain aspects about the method, especially when it comes to calculation of figures. However, the underlying concept remains the same. Thus, you might find the KPIs used here to be quite familiar. And one of these is revenue.

In fact, the revenue of the company itself is one of the first things that you should include as KPI. In its most basic form, revenue can be defined as the company’s net income once overhead expenses and costs are subtracted. Although overhead expenses and costs can differ from one company to another, these would typically include the capital used by companies for raw materials, the salaries of the workforce, the number of non-productive hours, and the many non-tangible items that any business has to pay for. By including this in your list of KPI for accounting, all managers have to do is look at these figures, and revenue is easily determined. Managers can also check for areas that need improvement.

Another KPI that you can include is yield. It is actually a common mistake amongst managers to look at merely sales figures. They do not really take the time to look at the measures that could have been undertaken to control waste and defects. For instance, let us say that it takes a web content editor two hours to edit ten articles. This is already the fastest that the editor can go at, to ensure quality assurance for the articles produced. However, because a computer virus was able to penetrate the computer network, the editor’s PC is also affected. The network has to be shut down, to eradicate the virus before it spreads to other PCs. Consequently, it took the editor five hours edit just ten articles. This could have been avoided with the simple installation of antivirus software. Making significant changes, therefore, will ensure more yield for the company.

Budget, as always, should be one of the accounting KPI as well. With this on your scorecard, you can easily determine if the company is spending within the budgetary constraints, or if it is already overspending. Thresholds have to be determined here as well. In the scenario mentioned above, it is ideal to get the best brand of antivirus software in the market today. However, it would be more practical to just go with a not too famous brand that still offers the same features that the best brand offers. This is just one of the ways that a company can avoid overspending.
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