As accountants, we’re used to thinking in terms of quantifying successes rather than qualifying them. We like numbers, that’s why we got into this gig. But business owners get into business because they have great ideas, game-changing products or much-needed expertise to offer.
To help you out, we’ve created a three-part series on the numbers you need to be aware of. Undertaking an inventory of key performance indicators (KPIs) is an important step in truly assessing your company’s financial strength and sustainability. Moreover, those metrics become a roadmap for growth, help to define your goals, and can illuminate better strategies to reach the next levels of growth. While some of these percentages may seem familiar at first glance, other KPIs may benefit from your accounting team’s insight.
For service-based businesses:
Taken together, these particular KPIs represent the sum of success for service-based businesses. Is each employee or department within a desired profit margin? Is one department significantly under-performing? Can you afford to hire another employee? Are labor costs too high? By subdividing important data, you’re able to process each piece of the puzzle that contributes to long-term success.
For service-based companies, the impetus is to build for efficiency and find apt comparisons to similar businesses. While there’s no warehouse of goods taking up space and capital, there are employees who produce valuable albeit intangible work product. Assessing costs and revenue for service-based companies may seem easier with fewer moving parts, but an accounting team can help an owner shine some light on metrics that can widen the gap between cost and profit.
KPIs for service-based companies:
Revenue by Employee: Dividing the labor costs by your number of employees and finding the ratio of revenue to a single employee
Revenue by Department: Assigning revenues to particular departments to see differing income performance
Net Income by Employee: The company’s net income divided by the number of employees
Utilization: The rate of billable hours versus available time (or a fixed number of hours per week)
Labor as % of Revenue: The cost of your labor in relation to your total revenue
Break-Even Billable Rate: The minimum rate to charge customers to cover your company’s fixed costs. This is calculated using total billable hours, not total available hours.
Rate Spread: The difference between your average billable rate charged to customers and the break-even billable rate.
Accountfully has worked with businesses of all types to identify pain points and thoughtfully re-orient companies on better paths to success. Giving business owners the resources to track existing KPIs is critical to the success of businesses large and small—and the economic eco-system surrounding them. With data in hand, you can make decisions on attainable objectives that represent success and sustainable growth. Want to read more about KPIs?
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