Professional services organizations can be pretty complex.
Some serve multiple industries, have a diverse mix of customers, and offer a varied portfolio of services that make understanding performance a huge challenge.
If you’re trying to see where your business is strong and where it needs to improve, you’ll need to benchmark your financial data in a few key areas.
Service Performance Insight (SPI), a global research, consulting and training organization, conducted a recent survey of 622 professional services organizations ranging from IT consulting, management consulting, marketing, accounting, legal, and more.
Using its findings, we’ve pulled out the six key performance indicators (KPIs) that you should be tracking to get an accurate view of your business.
By consistently using these metrics, you’ll find exactly what to focus on to improve and grow your professional services business.
In this article, we cover:
- 1. Invoice reissue rate
- 2. Billing cycle length
- 3. Days sales outstanding
- 4. Utilization percentage
- 5. Revenue leakage
- 6. Project profit
- How cloud financial software helps you track metrics
- Final thoughts
1. Invoice reissue rate
Having to reissue invoices because of errors causes project delays that have a big impact on cash flow.
A way of measuring this is reissue rate, which is calculated by dividing how many invoices you’ve reissued by the total number you’ve sent.
Unfortunately, a high reissue rate is a common problem for many professional services businesses.
25% needed to reissue over 3% of their invoices annually. This rate caused nearly 5% more cost overruns and 7% fewer projects being delivered on schedule.
Invoices need to be reissued for many reasons, but time coding errors and fees that were not agreed upon contract are the most common.
To improve your reissue rate:
- Use a timesheet system that only lets your team enter time to active tasks or ones they’ve been assigned to.
- Use a billing system that recognizes your contract amounts, and provides detailed project, task, and resource-status information.
- Use alerts to remind staff to enter time daily and give supervisors full visibility of everything that’s recorded.
2. Billing cycle length
The length of your billing cycle from cost incurred to cash receipt affects the financial health of your business.
If this takes too long, it reduces how much cash you can access, regardless of the revenue you’re making.
Common causes of lengthy billing cycles can be late time entry, adjustments, long project-manager review processes, and complex invoices that are manually created.
Disconnected or generic accounting systems lack billing functionality to keep cycles short. This often creates an admin bottleneck that stalls growth.
Instead, work with a system that’s built to handle complex project accounting and billing requirements.
This will help you to:
- Reduce the approval process by providing real-time financial data to project managers so they know what will be on invoices ahead of time.
- Create a purely digital invoice review process with alerts to keep managers on task.
- Create an audit trail of invoice change requests.
By reducing your billing cycle length, you’ll free up more cash from your revenue.
This improves your value and ability to secure any loans and gives you more financial flexibility.
3. Days sales outstanding
The longer it takes customers to pay after you’ve sent an invoice, the more likely you’ll have bad debt, write-offs, and strains on your financial health.
Even if you schedule reminders and include payment terms in the initial contract, you’ll still get customers taking too long.
You can measure this with days sales outstanding (DSO).
Divide your total revenue for the year by 365 (this is daily revenue), and then divide this by your accounts receivable balance. This gives you the average number of days from billing to payment.
Though the average DSO is around 45 days, the number can vary wildly depending on the work you do.
Common causes to delayed collections are billing disputes, clarifications and customers paying at the last minute.
To improve the collection process, you can:
- Offer incentives for paying early, such as 2% off (though be careful of the impact of this on cash flow).
- Switch your agreed timelines from 30 days to 14, or even 10.
- For large company clients, learn their standard payment process and invoice before they cut their accounts payable checks.
4. Utilization percentage
As a professional services business, you need to track the percentage of time your fee earners spend doing billable work.
This is called utilization, and it directly influences your bottom line.
Average utilization is about 70%, with year-to-year fluctuations within 1% to 2%, but the type of organization affects this a lot.
If timesheets are disconnected from your accounting system, it’s difficult to measure and improve utilization. People struggle to track any details regarding their time entry, and to keep it up regularly.
Time entry needs to be done daily.
You should also track all time that your employees are on the job. That means tracking time when they are training and working on admin tasks.
Making improvements starts with accurate measurement. Once you have that, you can take steps to ensure time entry is easy and billable events are not missed.
5. Revenue leakage
Revenue leakage is when revenue is earned but not realized.
This occurs because of write-offs, which include under-bidding contracts, disputed charges, rework, and discounting. All of these diminish how much revenue you bring in.
Average revenue leakage sits at about 4.3%, which is very high.
It’s important to capture all billable revenue and then write it off if you can’t bill it. If you change that revenue to a non-billable transaction, or don’t account for it at all, you’ll never know your true project performance and can’t accurately bid for future jobs.
To reduce revenue leakage:
- Quote projects based on past project performance, not past contracts.
- Bill your customer for additional work that results in a change, no matter how small.
- Clearly discuss all conditions at the beginning stages of a contract.
6. Project profit
Project profit is the most tracked KPI for service-based companies, with the average margin sitting around 35%.
That being said, the accuracy of this measurement can only be as good as your access to information.
SPI noted a 9% difference in profitability between companies that have real-time project costing and those that don’t.
There also many other factors that influence profit, such as project managers completing 80% of a project with only 20% of its budget.
Late or inaccurate time sheets, as well as under bidding at the beginning of the project also skew results.
To optimize project performance:
- Give project managers the ability to cost projects in real time.
- Review all reports regularly with your team.
- Track percentage of project completion as well as accumulating costs.
- Include expected delivery times in project profit calculations.
How cloud financial software helps you track metrics
Regularly tracking these metrics can completely change how you understand your professional services business. But keep in mind that the accuracy, reliability, and value you’ll get from these KPIs will only be as good as the system you use to generate them.
Since your decisions will be influenced by these metrics, it’s important make sure they’re right.
This is where cloud financial software comes in, bringing you benefits in several areas.
Some solutions bring all financial workflows together, including customer relationship management (CRM), timesheets, expense reporting, and project accounting.
This makes all data much easier to access, cuts out additional admin, and reduces duplication of effort.
Key processes can be either partially or fully automated, saving your teams significant time each month and reducing human error.
From time tracking to your billing cycle, cloud financial software can keep everything ticking along consistently, no matter how complex your business is.
By generating reports and dashboards from real-time data, cloud financial software ensures you’re working with live insights and making decisions based on latest figures.
This lets you see top-level information whenever you need it, rather than having to wait weeks for it to be gathered and presented in the right way.
Deeper reporting and analysis
A quality solution will give you greater control of the data that’s presented.
The ability to slice and dice financial information in ways that work for your individual needs allows you to analyze performance at a deeper level, which helps you make confident decisions.
Keeping a close eye on financial performance is vital for your professional services business, especially if you have complex operations.
If you don’t track these key metrics, it’ll be difficult to figure out where your business needs to improve, and you might miss opportunities for growth.
But consistently reflecting on these KPIs will only help you if the figures they produce are reliable.
Cloud financial software not only improves the accuracy of these metrics, it also streamlines the way your teams work and gives you a deeper understanding of true performance.
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