With technology at your fingertips you can measure almost anything. It’s what you do with that information that really matters.
If you are a service business, measuring and monitoring your Key Performance Indicators (KPIs) will help you determine if you will hit your business goals. By tracking KPIs you know well ahead of time if you're on target.
You may ask, why not just look at my Profit & Loss statement? Financials report historical information. You can't go back and fix what went wrong. By tracking KPIs you can make changes well before you would see the results on an outdated Profit & Loss. Think of it as your KPIs produce the results on the financials.
So what metrics really matter? We recommend viewing the below metrics on a weekly or monthly basis:
Utilization = Billable hours / Available work hours
Realization = Actual Billed hours / Billable hours
Collection = Actual Collected revenue / Actual Billed hours
Here’s what each of these KPIs can tell you.
Overview: Number of hours marked as billable compared to the number of hours you were available to bill
How are you spending your workday? Are you, or your staff, bogged down with administrative tasks? You can tell based on your utilization rate. If you’re constantly getting to the end of each workday realizing you’ve gotten very little client work done, you have a utilization issue.
Constraint: Time Management
How to Fix: Look at your days and determine what you can automate, delegate, or outsource. Automate your meaningless tasks that technology can handle, delegate what isn’t making you money, and outsource what needs a higher level of attention.
In our firm we automate the prospect phase. When a prospect is interested in working with us they complete an online form. Based on the form responses, it generates an email with a link requesting the prospect book on our online calendar. It also sends their info into our CRM and workflow system. ALL of that comes from the bots inside my computer!
Overview: Billable hours worked that are actually billed to a client
When you are under billing there can be several causes. Generally, you are spending too much time on a client matter. Is this because you didn’t know the topic well, you have constant distractions (hello email), or there are other interruptions in your office?
Constraint: Efficiency and Time Management
How to Fix: Use time blocking in your day. With time blocking you block time off on your calendar to work on specific tasks. You don’t let others interrupt you and shut off all distractions (put your cell phone away!).
Realization rates are usually higher in firms who have niched in a specific area. Niching allows you to become the expert in the matter, which in turn means you can finish each client matter faster. You no longer have to allocate time to learn the specifics of different industries or areas.
Law firms that are niched in an area of law make more money and are seen as an expert over attorneys in general practice.
Overview: Of what you actually billed on an invoice, what was actually collected
This is always the worst! You’ve done the work, billed the client, and now crickets. The wait is on.
How to Fix: Look at your collection process. Should you consider collecting a higher retainer? Progress billing? Or is there a way you can require the client to pay when the service is delivered.
If your firm has a low collection rate, consider reviewing your client selection process. Not all clients are created equal! You would be better off with less clients than with lots of clients that don’t pay.
After understanding these KPIs you can see how you are leaving money on the table and how even a little improvement in each area could have a huge effect on your bottom line. I’d recommend looking at these metrics over a rolling 12 months. See if you can pinpoint the missing link. It could be a process that needs to be implemented, better time management, new technology, or extra training for your staff.
Aligned CPA helps service professionals run better businesses. We’d love a chance to talk and see if we would be a good fit for your firm. Contact us for a complimentary consultation today.
I help service based businesses GROW by providing accounting and growth planning services that will take their business to the next level.
I promise you, working with a CPA can be much more exciting than crunching numbers and reviewing last year’s taxes. I look at the day-to-day of your business and help you find ways to perform better, grow bigger and generate revenue with greater ease.