The Most Important Metrics for Business Owners

In a recent podcast interview with a good buddy of mine, Marcel Petitpas of Parakeeto asked me if I had to break it down to just a handful of metrics that company owners should be tracking, what would those be. I hope you’ll listen to the full podcast (it was a lot of fun!) but here’s a summary of what I had to say about it:

Build Cash

One of the biggest mistakes a business owner can make is to not keep enough cash in the bank. Cash is easy to run out of no matter how profitable you are, and if you run out of cash, you’re going to go out of business. Cash is a huge pillar of success for any company. You’ve got to have cash. Small issues can become really big if you don’t have enough cash, and big issues become smaller if you do.

We advise business owners to keep 10% of their annualized revenue in the bank at all times. That means, if you’re a $3M company, you want to have $300K in the bank. You also need to have over and above that a tax reserve of 40% to cover your tax payments, whether you pay them quarterly or annually.

Focus on Net Income

We want our clients to have a minimum of a 15% net income, no matter what. With that 15% bottom line we’re really focusing on the gross profit — revenue minus cost of sales. We want the gross profit to be around 50%.

Determine Your KPIs

What drives the revenue for your company? For most service-based businesses it’s full-time equivalents (FTEs). Production is based on FTEs. Each employee drives revenue. You need to know how many FTEs you have and each FTE’s capacity (or what they can truly handle).

With that, you need to determine the following:

• Utilization Rate — The billable hours that you expect an employee to bill throughout the entire year. You’ll want to take into consideration holidays and any unbillable time and then take the final number and divide it by 2080 which represents a 40-hour workweek. The utilization rate will change every month based on the number of days the employee works in the month, the number of business days in the month, holidays, etc. Once you determine the utilization rate per person, extrapolate that for the team.
• Average Bill Rate — You can determine your average bill rate by taking your revenue and dividing it by the billable hours. If you know you’re going to bring in $3M in revenue and you know your average employee is expected to bill 1,500 hours per year (for example) and you have 10 employees, then your average bill rate would be $200 ($3M / 1,500 x 10).
• Effective Rate — The effective rate is simple. Once you have the utilization rate and the average bill rate, you can multiply the two to get your effective rate.
• Effective Cost — Let’s say the effective rate is $100 and we want to maintain a gross profit margin of $50. In that case, you’d want the effective cost to be the difference between the two. To calculate the effective cost, take the producer’s salary and add their benefits, or their burden cost, which is typically about 25%. Divide the total by the 2080 hours and that gives you the effective cost per hour for each employee. If that comes to $50, you have a 50% margin there, which is great.

Determining your KPIs enables you to forecast as well as determine job profitability. You can set goals and look at the amount of revenue coming in on a monthly basis and the expenses to see exactly where you’re going to be months down the road.

Maintain Your Pipeline

A key pipeline metric is contract capacity. Once you know what your team’s capacity is, and we have formulas to help determine that, then you want to look at what you have under contract. How does that compare with the capacity? Do you have enough in the pipeline to cover the next three months? Six months? Do you need to make any adjustments there? Although you could be doing really well today, you want to make sure you’re still going to be doing well tomorrow.

This is a brief overview of the metrics we believe every business owner should track. We focus on these metrics with every one of our Virtual CFO clients and it can make a huge difference when it comes to the financial health of a company. To learn more about these metrics and forecasting, check out my book: Digital Dollars and Cents.

Summit CPA is a distributed accounting firm with a non-traditional approach to accounting. We have an amazing team of CPAs and accountants who provide professional Virtual CFO Services and 401(k) Audits for companies all over the United States — many of which are remote companies as well. We fully understand the accounting, bookkeeping, cash flow management, and business tax nuances that come with being distributed, and we love helping our clients overcome these challenges through our own experience and expertise.