If you don't measure it, you don't improve. KPIs give you a reliable way of measuring your business performance quickly every month.
This article looks at KPIs for a professional services business, not selling physical products.
Sales are the starting point of profits and cash flow - the lifeblood of the business.
Sales for a professional services business can be measured in a number of ways:
Sales are measured excluding sales taxes collected (GST in Australia, VAT in Britain, South Africa).
You may be achieving high sales but you need to take into account direct costs to generate the sales.
Gross profit = Sales minus Direct Costs (excluding labour).
Direct costs for a professional services business could be:
It's important to measure the gross profit percentage, not only the dollar value.
Gross profit should be measured in the same categories as sales - by division, team and individual, client and client category.
The gross profit on a certain client or category may be higher or lower than the overall average, so it's important to look at gross profit in more detail.
The biggest cost in professional services is labour. Professional services firms sell time, in comparison to retailers or wholsesaler who sell products.
How much revenue, after accounting for direct costs, do employees generate?
Put it another way: How much gross profit do employees generate?
Labour Efficiency is calculated as follows:
Rule of 3
A rough labour efficiency metric is 3. This means an employee should generate 3 times their costs in gross profit.
Example: an employee earning $70 000 should generate $210 000 in gross profit.
The logic is :
Variable costs change from month to month and are often related to sales activities - advertising campaigns, sales bonuses or commission etc.
Why measure the percentage and not the dollar value? Because the increase in spend should lead to an increase in sales.
Our aim could be to spend $1 and get $3 in sales - that is a ratio of 1/3 = 33% of sales.
An increase in dollar spend is not bad if we get the proportional increase in sales.
If we are spending and not seeing the increase in sales, we aren't getting any bang for buck (or return on investment).
Operating costs or running costs need to be controlled and kept within budget in order for the business to be profitable.
Costs should be analysed per division or branch to see that all areas are within budget.
Operating costs are also referred to as overheads. Overheads often need to be apportioned to a division.
Operating costs can be apportioned in a number of ways, for example:
Ultimately, a business exists to be profitable.
Operating profit is the most important measure of profitability - measure it in dollar value as well as percentage of sales.
Breakeven means the sales level where profit = zero.
In other words, all costs are covered, but the business makes no money.
It's good to know that number - sales should be far above this to be safe.
Professional services firms have different needs to a company selling physical goods.
Your most important resource is time. Making the best use time - efficiency and effectiveness - is what will make the difference.