Spring is right around the corner! This means that many businesses are organizing their financial statements in order to prepare a 2015 tax return. This is the perfect opportunity for a business to review its Key Performance Indicators (KPIs) to help develop future business decisions.
A KPI is a type of performance measurement that evaluates the success of specific business functions. What KPIs a business decides to focus on usually depends on the type of industry they work in (what are the standard KPIs?) as well as internal business goals. KPIs also vary depending on if the business produces physical products or offers services.
Choosing the Right KPIs
You need to choose the right KPIs for your business. Businesses that sell products should typically focus on sales figures, manufacturing cost, and profit margins. On the other hand, service oriented companies usually look at areas such as pricing, staffing, and cash flow. A company can review their pricing strategy against their top competitors to see if they are charging enough (or too much) for their services.
They can also weigh the cost of doing business versus the revenue generated per client. A company can also look at their staffing performance reports to identify their top performers and revenue generators. Additionally, a company can review their cash flow to see if they are staying consistent with their billing and collecting procedures. Again, KPIs will vary depending on the type of company and you need to identify the areas that most affect your business.
Run and Review Reports
Creating and reviewing reports takes time, and we all know time is money. Before a company even starts to run their business reports, they should ask themselves what reports they really need. A lot of companies end up wasting a lot of time (and money) running and analyzing reports they don’t even end up looking at, and completely skip over the reports that they should be paying attention to. For service companies, the most important business decisions center on pricing, scheduling, and staffing, so naturally, these are the reports they should be generating.
Consider Labor as a KPI
The main product of a service-based business is its workforce. In these types of businesses, labor is typically the largest expense. If you consider labor as a KPI, you can better manage staff costs to help improve your overall business performance. Service business owners need labor data to make critical decisions. A weekly and monthly report on labor should include:
- Utilization - the percentage of time (out of 40 hours) each employee spends on client time
- Realization Rate – the amount of revenue each employee earns in dollars per hour
- Gross Profit Margin – the gross profits per client per person
These reports can be used to identify who the top performers are and decide on ways to reward them for their outstanding efforts. The data can also be used to see if there are opportunities to hire new staff or if the current staff needs to be reorganized or even downsized. Employees are a crucial part of a service business organization. Make sure to make the best informed decisions about staffing needs by tracking labor KPIs.
For additional tips on how service businesses can improve their KPIs, download our whitepaper “Key Performance Indicators (KPIs) for Service Businesses.”