Professional service organizations can be quite complex.
Some serve multiple industries, have a diverse customer mix, and offer a diverse 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 compare your financials in a few key areas.
Service Performance Insight (SPI), a global research, consulting and training organization, recently surveyed 622 professional services organizations ranging from IT consulting, management consulting, marketing, accounting, legal and more.
Using its findings, we’ve come up with six key performance indicators (KPIs) you should track to get an accurate picture of your business.
By consistently using these metrics, you’ll find what you need to focus on to improve and grow your professional services business.
In this article we discuss:
1. Invoice reissue rate
Reissuing invoices due to errors causes project delays that have a major impact on cash flow.
A way to measure this is the reissue rate, which is calculated by dividing how many invoices you reissued by the total number you sent.
Unfortunately, a high bounce rate is a common problem for many professional services businesses.
25% need to reissue more than 3% of their invoices annually. This rate resulted in almost 5% more cost overruns and 7% fewer projects delivered on schedule.
Invoices need to be reissued for many reasons, but time coding errors and fees not agreed upon in the contract are the most common.
To improve your bounce rate:
- Use a scheduling system that only allows your team to spend time on active tasks or tasks that have been assigned.
- Use a billing system that recognizes your contract amounts and provides detailed project, task, and resource status information.
- Use notifications to remind staff to enter time each day and make everything logged visible to supervisors.
2. Payment cycle length
The length of your billing cycle, from expenses to cash receipts, affects the financial health of your business.
If it takes too long, it reduces the amount of cash you can access regardless of your income.
Common causes of long payment cycles include late entry, adjustments, lengthy project manager review processes, and complex manually generated invoices.
Decoupled or shared accounting systems lack billing functionality to keep cycles short. This often creates an admin barrier that prevents growth.
Instead, work with a system built to handle the accounting and billing requirements of complex projects.
This will help you:
- Reduce the approval process by providing real-time financial data to project managers so they know ahead of time what will happen on invoices.
- Create a clean digital invoice review process with reminders to keep managers on task.
- Create an audit trail for invoice change requests.
By shortening your billing cycle, you’ll free up more cash from your income.
This improves your value and ability to secure any loans and gives you more financial flexibility.
3. Days sales are outstanding
The longer it takes customers to pay after you send an invoice, the more likely you are to have bad debts, write-offs, and your financial health.
Even if you schedule reminders and include payment terms in the initial contract, you will still have customers for a very long time.
You can measure this with days sales outstanding (DSO).
Divide your total income for the year by 365 (this is daily income), then divide that by your accounts receivable balance. This gives you the average number of days from billing to payment.
While the average DSO is around 45 days, the number can vary dramatically depending on the work you do.
Common reasons for collection delays are billing disputes, clarifications, and late-paying customers.
To improve the collection process, you can:
- Offer incentives for early payment, such as a 2% discount (though be careful about the impact on cash flow).
- Change your agreed timelines from 30 days to 14 or even 10.
- For large corporate clients, learn their standard payment process and invoicing before they cut their payable checks.
4. Usage percentage
As a professional services business, you need to track the percentage of time your billers spend doing paid work.
This is called utilization, and it directly affects your bottom line.
The average utilization is about 70%, and the year-to-year variation is 1% to 2%, but the type of organization affects it a lot.
If schedules are disconnected from your accounting system, it’s difficult to measure and improve utilization. People find it difficult to keep track of any details about their time entry and keep it organized.
Time entry must be done daily.
You also need to constantly monitor that your employees are on the job. That means tracking time as they train and work on admin tasks.
Making improvements starts with accurate measurements. Once you have this, you can take steps to ensure that time entry is easy and billable events are not missed.
5. Income leakage
Revenue leakage is when revenue is received but not realized.
This is due to write-offs that include bargaining agreements, disputed charges, rework and rebates. All this reduces the amount of your earnings.
Average earnings leakage is about 4.3%, which is very high.
It’s important to collect all payable income and then write off if you can’t pay. If you turn that income into an unpaid transaction or don’t account for it at all, you’ll never know your true project performance and can’t accurately bid for future work.
To reduce revenue leakage.
- Find projects based on past project performance, not past contracts.
- Pay your client for extra work that makes a difference, no matter how small.
- Clearly discuss all terms at the initial stages of the contract.
6. Project profit
Project profit is the most tracked KPI for service-based companies, with an average margin of around 35%.
That being said, the accuracy of this measurement can only be as good as your access to information.
SPI observed a 9% difference in profitability between companies with real-time project costing and those without.
There are also many other factors that affect profitability, for example, project managers complete 80% of a project with only 20% of its budget.
Late or inaccurate time sheets, as well as the presence of bidding at the beginning of the project, also skew the results.
To optimize program performance;
- Enable project managers to cost projects in real time.
- Review all reports with your team regularly.
- Track project completion percentage as well as cost accumulation.
- Project profit calculations include expected delivery times.
How cloud financial software helps you stay on track
Regularly tracking these metrics can completely change the way you understand your professional services business. But remember, the accuracy, reliability, and value you get from these KPIs are only as good as the system you use to generate them.
Since your decisions will be influenced by these metrics, it is important to make sure they are correct.
This is where cloud financial software comes in, providing you with benefits in several areas.
Integrated systems
Some solutions integrate all financial workflows, including customer relationship management (CRM), schedules, expense reporting, and project accounting.
This makes all data much easier to access, cuts down on extra admin and reduces duplication of effort.
Automation
Key processes can be 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 consistent, no matter how complex your business is.
Real-time insights
By generating reports and dashboards from real-time data, cloud financial software ensures you’re working with live insights and making decisions based on the latest numbers.
This allows you to see the top-level information when you need it, rather than having to wait weeks for it to be collected and presented in the right way.
More in-depth reporting and analysis
A quality solution will give you more control over the data presented.
The ability to slice and dice financial information in ways that suit your individual needs allows for a deeper level of performance analysis that helps you make confident decisions.
final thoughts
Keeping a close eye on financial performance is vital to your professional services business, especially if you have complex operations.
If you don’t track these key metrics, it can be difficult to figure out where your business needs to improve, and you could be missing out on opportunities for growth.
But consistently reflecting on these KPIs will only help you if the numbers they produce are reliable.
Cloud financial software not only improves the accuracy of these metrics, it also streamlines the way your teams work and provides a deeper understanding of actual performance.