Top 5 Financial KPIs for Service Companies

The 5 Top KPIs

Running a service company is tough but it can be successful. The trick is knowing what data to track and putting the work in to enable the tracking. Whether you offer remote services like consulting or IT, or on-location services such as maintenance or janitorial; whether they are one-time services like roof replacements or recurring like pest control, the main ingredient is PEOPLE. There is a lot to worry about in a service business. Often worries about utilization, efficiency, cost control, and profitability fall by the way side, but you can’t let them. These KPIs are crucial to running a successful service business. We are going to cover: Revenue per Employee, Gross Profit by Service, Client Profitability, Employee Utilization Rate, and Effective Billable Cost of Employees.

The Tough Road of Measuring KPIs

Before the KPIs, let’s make this clear – you are probably NOT able to get this level of data now. It will take several months of making operational changes to enable your team to track the data you need to measure the performance of your service business. You can’t end up with a meal without getting the ingredients and cooking them (I love metaphors). Here is a short checklist of the minimum processes you need to engage in to get quality and insightful data.

To Do List

1. Identify your services (and products) and their fixed or hourly prices.
2. Make sure your client invoices are created in a system where you set up these services/products and select each one as you populate the invoice, listing quantity of services (e.g. number of hours) and the price per unit to get to total. Doing so will enable you to parse revenues by hours, clients, projects.
3. Bonus: If you can add a separate field to invoices (which can be hidden from client view) listing the employee name, even better, you will add the ability to assign revenue to an employee easily. If you can use another field for Project #, you will be able to assign revenues to projects easily.
4. Implement a timesheet system for every employee that provides services to the client (not overhead staff).
5. Have them track time by project, client and by services identified above.
6. Split payroll for service employees using timesheets to projects, clients and services monthly. Enter this detailed data into your accounting system, tagging each line with a client, project and service.
7. Split all other cost of good sold whether supplies or services, whether purchased or provided by vendors, to projects, clients and services. Enter this detailed data into your accounting system, tagging each line with a client, project and service.

Recommended KPIs Explained

1. Revenue per Employee

Basic Formula: Revenue / # of Employees

SIGNIFICANCE: Knowing how much revenue each staff generates on average can help you gauge whether there is enough profit left over to cover other direct costs and the admin costs. It also tells you how much profit you will add by hiring new staff and help project growth.

CONSIDERATIONS:

• Exclude admin employees from the count.
• Include anyone working on clients but whose time may not be billable (like account managers).
• Exclude revenues that are not generated by staff like referral or resale commissions, royalties, etc. You want to compare apples to apples.

NEXT LEVEL METRIC:

The formula above provides an average across the company. It is more meaningful to break out the specific revenues associated with each employee. By figuring out revenues generated by specific staff you can get better insights into true profitability of each employee and each client. If you have nonbillable staff on client work, group employees into teams and calculate Revenue per Team. These figures can be used for commission calculations and department revenue targets. Don’t forget to monitor client satisfaction along with revenues.

2. Gross Profit by Service

Basic Formula: Revenues for Service A – COGS for Service A

SIGNIFICANCE: Knowing how much gross profit is generated by each service (or product) helps you determine what part of your business to grow. It also helps you figure out which services are not being charged for or need higher prices. When employees don’t track time, many billable activities are “lost” and so is revenue.

CONSIDERATIONS:

• Just because a service or product has low profitability doesn’t mean it should be cut. It may be a supportive service or a lead magnet for you. Always consider the whys behind the numbers.
• Direct cost and labor (COGS) can be hard to split out by service. The best way to do so is to track time using timesheets and break out other costs based on usage.

NEXT LEVEL METRIC:

You can perform trend analysis and compare various services over time. Are certain services seasonal? Does the profitability change over time? How does bundling services affect the profitability of each?

3. Client Profitability

Basic Formula: Revenues for Client A – COGS for Client A

SIGNIFICANCE: Knowing how much gross profit is generated by each client helps you determine which types of clients to focus on. Most businesses are surprised once they identify their “best” clients using data.

CONSIDERATIONS:

• Just because a service or product has low profitability doesn’t mean it should be cut, it may be a supportive service or a lead magnet for you. Always consider the whys behind the numbers.
• Direct cost and labor (COGS) can be hard to split out by service. The best way to do so is to track time using timesheets and break out other costs based on usage.

NEXT LEVEL METRIC:

You can group clients by client size, location, category, or industry to check whether there are differences in profitability. You can also analyze client profitability by service. Then, look for trends in what types of customers purchase certain services and whether profitability for a service changes across client categories. Data analysis is an art.

4. Employee Utilization Rate

Basic Formula: Billable Hours / Available Hours

SIGNIFICANCE: This ratio shows you what % of time your staff are spending on revenue generating work, highlighting when employees don’t have enough work.

CONSIDERATIONS:

• Employee time tracking is necessary here, even if the price is fixed.
• If an employee worked on billable work but you chose to not bill a client for all of it, include the total worked.
• Employees have to be honest about where time is spent – make it clear that you don’t expect them to allocate full 8 hrs per day to clients. Allow 10-20% for admin time.

NEXT LEVEL METRIC:

Combine this metric with revenue per employee to identify people or processes that need to be made more efficient, and/or understand capacity for more work. You can also compare billed hours to billable hours to figure out how to recapture lost revenues. Furthermore, you can refine this metric by calculating the effective employee utilization rate (it will be higher). For the effective rate, take out from available hours any hours that can’t be spent on billable work because they represent holidays, PTO, training, lunch, etc.

5. Effective Billable Cost of Employee

Basic Formula: Employee Cost / Billable Hours

SIGNIFICANCE: To properly determine pricing for your services, you have to know how much every billable hour of your employees costs you. You should not charge less for your services than what they cost you to provide. This can easily happen if you have fixed prices. Comparing billable costs among employees can identify problem employees

CONSIDERATIONS:

• Employee cost has to be “fully loaded”, including salary, benefits, and any fringe benefits.
• If one employee has a higher cost than others (and salaries are same), it can be due to low productivity. However, it could mean that the clients she works on are more complicated.
• The billable hours have to be taken over the same period that the employee cost is calculated over, for example 1 month. Calculate average cost per year by using average billable hours, or figure out the actual billable cost per month.

NEXT LEVEL METRIC:

Use this ratio to price out new projects. Use timesheets to figure out the number of hours you spend on similar projects for better estimates. Next, add an acceptable gross profit margin to the hourly billable cost to determine the client price. However, keep in mind that the client rates have to also cover other direct costs, rent associated with direct work, liability insurance, etc.

Take this to your accounting team and put them to work!