Service-based business owners have no problem focusing on new customers and serving current customers. But many don’t know how to take their business to the next level. If you’re looking to grow your business, you must pay close attention to your financials and key metrics. Key metrics are financial numbers that you need to hit in order to reach your overall goals. When planning with clients I always tie a goal to a metric or target. How else will you know you achieved the goal?
Here is a list of 4 key metrics that are important to track in your service-based business.
Sales Close Ratio. You get this number by dividing the number of sales proposals made by the number of proposals you closed. This tells you the percentage of proposals you win. Obviously, you want this number to be high, but not too high. Chances are if you’re closing 90%-100% of proposals you make, you are walking away from money on the table.
Project Margin. This metric measures the profit you will make on each project you undertake. It is the percentage of project revenue - direct costs you will pay to complete the project. The higher the number the better!
Profit margin metrics will help you with making profitable proposals and driving overall profits. I recommend determining your lowest acceptable project margin. Then, when you are giving new proposals be sure to never go below your minimum.
Monthly Operating Expenses. Your operating expenses are the expenses you have every single month. Why should you know this number? Because this is what you will have to spend each month just to keep the doors open. You’ll spend this even if you have zero collections. I suggest taking your annual operating expenses and dividing by 12. This gives you a monthly average.
You can also use this number as a target for how much you should have in savings. In an ideal world having 3 to 5 months cash set aside would be sufficient. In reality, it takes dedication and time to get that built up.
Billable Utilization. This rate will help you track productivity. On an annual basis you’ll divide the employee’s total billable hours by 2,000 hours. This gives you each employee’s productivity. You should monitor this to determine if you have space to add more client work or if it’s time to add more employees.
However, I don’t think this number should be monitored by itself. An employee can have a low utilization rate but it’s out of their control. You must also look at overall profit, prospects in the pipeline, and marketing budgets.
Why are these numbers important for growth? Because growth cost money! Your business goals must be aligned with your resources (time, money, and energy) or you’re setting yourself up for failure.
If you’re struggling to monitor and track your financial information, contact us and we can schedule a free consultation to see if we can help get you on track.