Are you a strategy consultant, marketing consultant, IT consultant, management consultant, HR consultant, or operations consultant who has ever wondered what numbers you should track?
These numbers are your key performance indicators. Key performance indicators provide instant feedback on how well your firm is performing.
These critical numbers act as your business's levers. If you pull on them correctly, you can make it rain money in your firm.
Today, I will provide four key performance indicators you should leverage to scale your firm faster, smarter, and consistently.
A Key Performance Indicator is a measurable value that demonstrates how effective a company is at achieving key business objectives or activities. As a consulting firm owner, you want to identify and track 3 to 5 KPIs. The goal is to focus on improving these specific numbers over time.
When choosing your firm's KPIs, you want to ensure that their characteristic includes:
- Be quantifiable – you must be able to measure the results numerically
- Reflect the firm's strategy and goals – the KPIs must align with your desired direction
- Propel the firm towards success and increase profitability faster and smarter – as you begin to receive the numerical results of your chosen KPIs, they must enable you to make wise business decisions that ultimately lead to achieving your desired level of success.
- Easy to track – Your KPIs should be easy to track every week.
As a virtual CFO, I love measuring things. It is engrained in me. Therefore, I want you to understand that ONE of the ways your firm can experience maximized growth, is by adopting the love of tracking and measuring.
As a consulting firm owner, what you measure and track will be slightly different from most businesses.
You can break your KPIs down into three categories:
- Customer KPIs
- Financial KPIs
- Project KPIs
Accounts Receivables Days Out – this is the number of days on average it takes your clients to pay their invoices. The goal is to keep the number of days as lows as possible. This KPI directly affects your cash flow. Therefore, a more extended A/R period means the longer your bank balance is low and cash is few and far between.
Annual Revenue per Billable Consultant – Annual revenue per billable consultant measures the total revenue divided by the number of billable consultants employed by your firm. A key indicator of financial success is clarifying how much revenue your firm is earning per consultant. You want to compare this number by your total labor cost to determine the overall impact on your firm's bottom line.
Average profit margin per project – these numbers identify whether you are using all of your resources to their advantage. Project margin is the percentage of revenue that remains after paying for the direct costs of completing a project. For example, do you have a consultant taking too long to complete a project, and therefore you have to pay them more money which cuts into your profit. Or perhaps, your out-of-pocket cost was budgeted too low, and you have to spend more money to complete the job, which again reduces your profit. Keeping project margins high is essential as it ultimately drives overall profits. To achieve a high-profit margin goal – you want to:
- Price your services for profitability,
- Proactively forecast the project.
- Monitor your cost per project closely
Operating Cash Flow (or Net Cash on Hand) – To remain solvent in business, you must monitor your cash flow closely. Operational cash flow measures the amount of cash generated by a company's regular business operations. This key number indicates whether a company controls the money cycle. Monitoring your fixed and variable costs is one way to improve your operating cash flow.
Project Overrun – Project Overrun is the percentage of the actual cost that is above the budgeted cost per project. Anytime a project goes over budget in either time or costs, that cuts into your profitability. If your projects are consistently going over budget in either time or cost, this could indicate a problem with internal efficiency or management. Project Overrun can also result in client dissatisfaction and potential future income.
Using key performance indicators for your consulting firm could mean the difference between accelerating your firm's growth or operating with blinders on. As a virtual CFO for consultants, developing and monitoring KPIs are one of the main reasons our consulting clients grow faster. Below is a guide that will complement today's episode on key performance indicators.
In The Red: 7 Costly Mistakes Keeping Consultants from Life In The Black.
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