Key Performance Indicators (KPIs) provide quick, “consumable” charts and reports CEOs and owners can use to make data-driven decisions vs. relying on gut instincts. KPIs should be designed to make it easy to understand, measure and compare the drivers of your business on a month-to-month basis.
Key Performance Indicators to Track for Service Businesses
Why are Key Performance Indicators important? KPIs allow CEOs and owners to start building a successful business and provides a clear picture of the business’s standing. By starting with the end in mind, you can create reports that answer questions like:
Pricing: Am I charging enough for my service?
Staffing: Who are my best employees and how can I reward them?
When should I hire new staff or let go of current staff
Cash Flow: Am I doing a good job on billing and collecting?
These three areas can make or break service businesses. Creating measurable and achievable KPIs is the first step in having your fingers on the pulse of your company.
The Best KPIs for Service Businesses Are Labor KPIs
Since roughly 80% of costs goes to payroll, the most important KPIs to track for service businesses relate to labor.
Labor KPIs show:
- How long it will take an employee to reach full productivity after they start
- When it’s the right time to hire so you aren’t early or late
- How long will it take to fill the slot (job posting, interviews & paperwork)
By following your leading indicators, you will be able to avoid creating a strain on your company.
For example, let’s say you hire a new client which requires more work from your employees. If you planned on hiring a new employee to take on the bulk of the work, but start the process too late, you will end up incurring overtime costs for current employees.
However, if you hire too early, you won’t have a full 40-hours worth of work for the new employee which changes the productivity you could get from them.
It is a delicate balancing act if you don’t have the right KPIs set in place to help make decisions like this for your company. Don’t be left in the dark making decisions on a whim. Use your KPIs to show you the best paths possible for your company to take.
Some Important KPIs to Track Regarding Labor
Utilization Rate
This shows how much billable time an employee spends on a client in a 40-hour work week. You will be able to see if clients are taking too much of your employee’s time and figure out why they are requiring extra time.
Revenue Per Hour
Total revenue divided by the total number of hours paid.
This also tells you:
- How well sales are being managed
- If you are pricing your services right
- How well the hiring process is being managed
- How well your services are being managed
Gross Profit % or Gross Margin
Shows how efficient the business is as it delivers your services. Gross profit is shown as a percent to help make sure increases in revenue don’t mask service delivery problems. Gross Profit % shows how much profit was made on the work provided, as a percentage of the total revenue. It tells you how well you priced your jobs, managed people and controlled out of pocket expenses.
You can slice and dice the information any way you want if you set up KPIs. For example, by client, job, team, profit center and city.
ROI on Total Labor Cost
The % of net income as compared to the total human capital cost. It shows the profit on the investment in your people – the profit earned on the total cost of your staff. ROI on labor costs also shows you how effectively you manage your most important asset, your people. It shows the effectiveness of your human capital strategy. The trend shows your ROI on your people over time and whether you need to focus on your company or people strategy.
Labor Cost Per Employee
The total cost of your labor divided by the number of full time equivalent (FTE) employees. Full time salaried employees are equal to one FTE at 40 hours of work.
This dollar figure shows changes in cost per employee and gives visibility into hidden costs like overtime, health insurance, PTO, etc. Profitable companies that share profits want an increase in cost per FTE. That may also mean low turnover as higher-paid, experienced people have higher billing rates. Higher profits drive bonuses which increases cost per FTE – in this case higher trending costs can be a good thing.
Budgeted Hours vs. Actual Hours
Did you get the job done in the time that you budgeted for? If not, this affects the pricing of the job. If it takes longer than you think, you need to charge your clients more for the work.
These KPIs can tell you a lot about how you are running your business. KPIs will tell you if you need to make changes to a specific area and which areas you should try and fix first.
KPIs Need Accurate, Up-To-Date Monthly Reports to Pull From
Key Performance Indicators rely on your monthly reporting package to pull data from when producing the reports. In addition to labor and cash reports, these reports are important to show how your business is performing.
Some of the reports that are used to pull data from are:
- Income Statement & Balance Sheet
- P&L by Month, Quarter and Percent of Income
- Income by Customer
- Sales Tax
Ask yourself questions before producing a report to see if you really need it.
- What information do you need and at what time?
- Who needs to see the report?
- How often does the report need to be produced?
GrowthForce specializes in producing KPIs for service businesses that helps them gain insight into their company’s financial health by looking at easy-to-scan charts and graphs. We can show you visibility into problems before they happen and show how to make informed decisions based off your KPIs. KPI understanding and insights are part of understanding the true cost of management reporting.
We customize the reports so you have a quick snapshot into the financial well-being of your business. When you work with GrowthForce you can count on accurate and up-to-date books. Let us help you make confident decisions based on reports you can trust to help grow your company.
