Key Performance Indicators (KPIs) are a pertinent part of measuring the successes and failures of a business. Measuring, tracking, and benchmarking KPIs allow business owners and leaders to keep a finger on the pulse of how their business – or individual departments – is performing at any given time.
Good KPIs should be easy to calculate, easy to visualize, and easy to compare to other benchmarks. "Net Profit" and "Sales Growth" should be KPIs that are already tracked, so this list includes a few new options to add into the rotation that could make a difference in long-term profitability and revenue.
The Realization Rate is here to show a business owner who its most profitable clients and employees are. It is a comparison rate between the actual amount invoiced to clients or customers to the chargeable time spent working on the client.
An example would be if a service employee with a billable rate of $100 works on a job for a client. This is a regularly occurring job that is billed annually at $400. This year, the employee spent six hours to complete the job, which translates into $600 of billable time. In this example, the realization rate is 67% ($400 divided by $600).
This is an important KPI to track because low realization rates indicate that a company is not maximizing its revenue on projects that it is working on.
Accounts Receivable Aging
The Accounts Receivable (AR) Aging KPI reflects the rate at which a business is successfully collecting payments due from its customers. Without healthy cash flow, a company can risk losing its flexibility when it comes to expanding, taking on new opportunities, or keeping up with its own expenses.
The AR Aging report indicates how much money a client or customer owes and how long the balance has been outstanding. This will bring to light any outstanding payments due and also highlight customers that may require payment term adjustments due to frequent slow payments.
Work in Progress
Oftentimes, the management or company leaders will inquire about the status of projects that are in the works within a company. Work in Progress is measured by comparing billable hours to date to total hours budgeted for a project.
A good Work in Progress report will give leadership a birds-eye view on the status of a project and recognize strong points or potential red flags within the project that need to be addressed. Having more visibility to projects can avoid drops in a project's Realization Rate and potentially lead to any necessary contract renegotiations or other adjustments to ensure positive revenue and higher levels of productivity.
The Utilization Rate is defined as the percentage of an employee's time spent that is actually billable to a client. For example, if an employee worked 40 hours in a week and they spent 24 billable hours working on a service for a client. Their Utilization Rate for the week would be 60% (24 billable hours divided by the 40 total hours worked).
The Utilization Rate measurement is a piece of data that can be used to ensure that the time spent on client work is done efficiently and clients are being billed properly. however, a high Utilization Rate is not always a good thing. If an employee is maintaining a 100% Utilization Rate in a 40 hour week, there is a possibility that for a particular job or per a client contract, the client is only to be billed for 30 hours a week. This brings inefficiency to light that will require attention from management to possibly provide further assistance to the employee or renegotiate with the client. This affects the Realization Rate mentioned above and shows how KPIs can work together to show what is actually happening within a company.
Tracking the right data can help direct a company to higher profitability and improved revenues. The problem that many companies in the service industry run into is not tracking employee data closely to find where processes can be dialed in and improvements can be made. If you are an owner or CEO of a service company and are looking for assistance with your accounting and bookkeeping, look no further than AccountingDepartment.com. Reach out today for more information!