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By Yves Hiernaux, CEO and co-founder at Beebole 

Every business proposition starts with strategy. This might start relatively high-level, but the overarching strategy should be viewed as the life-blood of your business – whether it’s new or established. One way to ensure that strategy trickles down through every segment of the business is to put key performance indicators (KPIs) in place that measure success according to “a high-level measure of system output, traffic or other usage, simplified for gathering and review on a weekly, monthly or quarterly basis.” (Gartner)

Meanwhile, McKinsey data offers a cautionary tale on KPIs. Not all KPIs show an accurate representation of success. Some KPIs contributed greatly to fast recovery of revenues where others became irrelevant and unhelpful. When KPIs become oversaturated, it can be difficult to see the beneficial ones from the duds, which may even result in decision paralysis.

While more is not necessarily better when it comes to KPI measurement, selecting 5-7 truly relevant metrics can set you on the right path. So, how does a budding business define KPIs based on need, and how can they use data to identify opportunities for growth?

Valuing workforce efficiency and effectiveness

Understanding whether workforces are being utilised effectively means understanding the work itself. To sustain growth, the whole organisation has to be billing more profitable hours than managers and partners can handle on their own.

Senior employees who bring experience and strategic planning with them are like gold, but they come with a high price tag. Experience is reflected in hourly billing, so their time can get expensive. To focus their time on strategic work and make the best use of employee time, managers can look at data on billable hours to identify opportunities to redistribute workloads more efficiently.

Where junior staff are suitable for the task, it can sometimes be more cost-effective and time-efficient to allocate more hours to multiple members of staff than to pay a premium for the most experienced person. While keeping employees’ billable hours at a maximum all the time is ill advised, where the metrics are low there could be an opportunity to redistribute activity more effectively. In doing so, burn-out rate can be reduced and productivity can be optimised.

Measuring the total billed hours per project against total billable hours gives managers an understanding of how much work each member is scheduled to work in their contract and how much of that they are fulfilling. Whereas measuring work hours in period shows what they have been doing in more granular detail. Measuring these factors with best practices in project time tracking enables managers to analyse the best performing tasks as opposed to the best performing employees, offering greater insights into which tasks require specific skills.

Operational leadership performance KPIs

Operational leadership KPIs tell us how projects are going; how healthy accounts are, and whether they are making money or not depends on specific figures. Net fee revenue refers to revenue generated through billing time, either across all active projects or per project. If the numbers are low, there is too much time being allocated to non-billable activity.

In order to figure out where the opportunities lie, it is important to know how much revenue each employee is bringing into the company. If their billable time does not correlate with the figure representing their fee, this is a leadership error, not the fault of the employee. Where the data is available, managers ensure that billable work matches what has been promised to clients as well as projected costs for the project.

Paul Barnhurst, founder of The FP&A Guy and corporate finance thought leader recently ran a webinar, KPIs every financial controller FPA professional should master, which touched on the four major categories of KPIs, how to prioritise data and defining KPI strategy. As Barnhurst describes net profit margin, it is often used as a way to benchmark and compare your company’s margins against other companies in your industry. By looking at gross profit by job function leadership teams get a better understanding of which departments they may want to deploy resources to based on likelihood to have an impact on total company profitability. Some job functions will generate direct revenue with measurable profits, whereas for others the benefits are hidden.

An example of this would be the difference between revenue from a $100K budget allocated to a marketing website versus a dedicated SEO (Search Engine Optimisation) campaign. For the same $100k investment, the coding expenses of building a website may only return 20% in revenue, whereas an SEO campaign with fewer overheads is likely to return closer to 70%.

Similarly, revenue and profit per customer type or sales vertical gives business leaders the ability to think objectively about the different parts of the business. By looking at ‘utilisation’ against revenues, it is easy to identify pockets of profitability or loss across the organisation. These insights can alert business leaders when it’s time to diversify revenue streams, or indeed cease operations within an entire market if there’s no evidence to suggest long-term profitability.

Cash KPIs

Data relating to cash flow may look most familiar to business professionals in any industry. This is the universal language of business performance. However, all might not be as it seems as there are several ways to measure liquidity. With a robust calculation of cash-based KPIs, you can establish the company’s cash runway, which is indispensable for forecasting the success of future strategies.

Barnhurst reflected in his recent blog that these ratios are particularly important for lenders and creditors, but they are also indispensable for businesses. They help to get a better understanding of how long it will take to meet their obligations with the cash assets and other short-term assets they have.

A popular way to do so is to focus on ‘collections’, referring to the sum of money collected from billable activity. It is useful to compare this figure with the total billed amount, accounting for all amounts billable within a period on a rolling basis. With accurate data and comparison of these two KPIs business leaders and financial managers can analyse the quality of revenue generated. If bills are routinely being unpaid, investigation will be necessary.

Those who understand business will recognise the need to have money to make money. Once capacity for a solid understanding of business income can be established, benchmarking this against total liquidity is necessary to ensure the business proposition is realistic. This refers to all available cash plus any bank line of credits.

People rarely work for free. In addition to legal policies in place to ensure fair remuneration of labour in Europe and beyond, competition for talent is fierce. Businesses which rely on human capital need to pay close attention to their cash liquidity metrics as there can be no profits without the staff to perform value-generating tasks.

How should businesses prioritise KPIs?

When it comes to measuring success, KPIs are a self-fulfilling prophecy. The measurements you put your efforts into perfecting are the ones that will most likely see results. That’s why making sure you are measuring the right criteria makes such an impact on the overall success of business.

Not every business will benefit from the same KPIs, though. So, in that way choosing the right ones is not one-size-fits all. They have to be tailored to individual business needs, and they must reflect the competition landscape in your particular industry.

There is a harsh irony to setting KPIs; you have to have KPIs in place to know which KPIs are the most important. Luckily, you are not stuck with your choices forever, and can switch priorities to suit prominent trends and the best interests of your business. Making sure you have access to the data will be most important. As a starting point, there are three key areas to leverage to discover the right KPIs to grow your business: workforce performance, operational costs and bottom-line profits.

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