Managing a professional services firm often involves moving at a frenetic pace. You must be able to seamlessly transition from things like reviewing a client proposal to reporting campaign results to business partners.
While these tasks are an essential part of managing your business, tracking financial metrics is equally important. These financial metrics keep you informed about each part of your firm’s performance, and they are only as reliable as the bookkeeping behind them.
Chances are that you are already tracking a few business financial metrics. However, you may not be confident that you are monitoring the best data points.
Below are 13 metrics a professional services firm can track to support growth and profitability. Some are financial results (lagging indicators that tell you what has already happened); others, such as win rate, are sales measures that act as leading indicators of revenue to come. Three of them (utilisation, realisation and lock-up) are specific to firms that sell time.
How to check your financial health
Thanks to modern software, there are plenty of options for checking the financial health of your professional services firm. You can track various metrics independently or partner with a firm that provides bookkeeping for professional services.
Many professional services firms hand this work to a third-party provider. A good provider keeps the books current and can help you choose software that suits your industry.
You can access this data from anywhere and detect concerning trends early on. This allows you to be proactive in taking control of your firm’s financial future.
How often should you check core financial metrics for your professional services business?
Many professional services business owners wonder how often they should check their financial metrics. You may even find yourself asking these very same questions. The simple answer? Frequently.
You can collect information about all of the best business financial metrics in the world. However, they will not do a bit of good unless you analyse them to gain insights about your firm.
Generally, we recommend assessing key performance indicators (KPIs) at least once per week. Develop a routine and check your metrics on the same day each week. While many of the data points outlined below may not show significant changes on a weekly basis, it is still important to review them regularly.
Some of the metrics below only need checking monthly or quarterly, usually once the month’s books are reconciled. Always compare like with like: the same period, calculated the same way each time.
By routinely checking your business’ financial metrics, you can help increase revenue and improve profitability.
Metrics
1. Revenue
Of all of the business financial metrics, revenue is one that all professional services firms should track.
Revenue is an important data point to track. However, it does not provide a complete picture of your business’ overall performance. When it is paired with additional key performance indicators outlined below, revenue can tell you a lot about your current business model.
2. Annual recurring revenue (ARR)
If you sell retainers or multi-year contracts, track ARR. ARR is the value of your contracted, recurring revenue expressed as a yearly amount. It excludes one-off project fees.
For instance, a client who signs a two-year contract worth $100,000 adds $50,000 to ARR, because that is what the account earns each year. A $5,000 monthly retainer adds $60,000. ARR is a predictable income stream that can help you to grow your business.
3. Profit
Perhaps no metric matters as much as profit. Net profit is what is left of revenue after all expenses for the period. Unlike revenue, profit gives a much clearer view of the health of your professional services firm.
When you calculate profit, account for all expenses, including marketing and sales costs. In a services firm the direct cost of delivery is mostly the salaries, super and contractor costs of the people doing billable work; revenue less those direct costs gives gross profit, and gross profit less overheads gives net profit.
4. Qualified leads: MQLs and SQLs
Qualified leads are prospective clients who fit your target market and have shown interest in your services. Counting them is a leading indicator: it tells you about revenue you may win later.
Marketing qualified leads (MQLs) fit your target client profile and have engaged with your marketing, for example by downloading a guide or attending a webinar, but are not yet ready to talk to sales.
Sales qualified leads (SQLs) are the next stage: your sales team has confirmed a real need, budget and someone with authority to buy. Track how many MQLs become SQLs each month.
5. Customer acquisition cost (CAC)
When a firm’s revenue is high, but profits are low, it is time to assess additional business financial metrics to identify the root cause of the problem. One such KPI is CAC.
CAC is the total sales and marketing cost for a period divided by the number of new clients won in that period. You want CAC to be small relative to what each client is worth to you.
For instance, if you spent $30,000 on sales and marketing in a quarter and won 10 new clients, your CAC is $3,000. If a typical client brings in $20,000 of gross profit over the relationship, that is a healthy return. If the gross profit each client brings is close to the cost of winning them, you need to rethink pricing or how you find clients.
6. Customer lifetime value (CLV)
Most of the business financial metrics on our list are great for all professional services firms. However, our next KPI is geared specifically toward established firms.
Client lifetime value can mean lifetime revenue or lifetime gross profit, so label the measure. We use lifetime gross profit for comparison with customer acquisition cost. The lifecycle of your clients will be heavily dependent on your industry. Some professional services businesses will retain customers for years.
A simple way to estimate CLV is average annual revenue per client, multiplied by your gross margin, multiplied by the average number of years a client stays. For example, $25,000 a year at a 40% gross margin for four years gives lifetime revenue of $100,000 and lifetime gross profit of $40,000. Compare CLV with CAC: winning clients at a reasonable cost and keeping them for years improves profitability.
7. Utilisation
Utilisation is the share of your team’s available hours that is billable: billable hours divided by available hours, multiplied by 100. It is usually the first number a professional services finance lead looks at, because unbilled capacity is cost without revenue.
For example, a consultant with 1,600 available hours in a year who records 1,200 billable hours has a utilisation of 1,200 ÷ 1,600 × 100 = 75%. Track it by person and by team, and read it with realisation (metric 13): hours that are recorded but then written off or discounted do not earn the revenue they appear to.
8. Win rate
Win rate shows how well your proposals convert. Divide the number of proposals won by the number of proposals decided (won or lost) in the same period, and multiply by 100.
Higher is not always better. A win rate that is very high may mean your services are priced too low. Raising your rates may reduce the win rate but can still increase total gross profit, so watch the two together.
A falling win rate is a prompt to look at lead quality, pricing and how proposals are written. There is no universal ideal figure; track your own trend over time and by type of work.
9. Net margin
Net margin is net profit divided by revenue for the same period, multiplied by 100.
It shows how many cents of each revenue dollar you keep after all costs. For example, $150,000 net profit on $1.2 million revenue is a 12.5% net margin. Include all actual expenses in the accounts, treating owners’ remuneration according to the entity structure. If you want to compare performance after a market salary for the owner, show that adjustment separately as normalised management profit and reconcile it to reported profit. Thin net margins make it hard to fund growth.
10. Cash flow from operations
Operating cash flow is the cash that comes in from clients less the cash paid out to run the business (wages, rent, suppliers, tax) in a period. It can differ sharply from profit, because profit counts revenue when it is earned, not when the client pays. You need positive operating cash flow to pay staff, hire and grow.
An important part of managing cash flow is deciding when you charge clients. If you take on many new clients, carry a lot of unbilled work in progress, or let debtors stretch out, your firm can run short of cash while still reporting a profit.
Lock-up measures how long that cash is tied up: WIP days plus debtor days. WIP days is unbilled work in progress divided by annual revenue, multiplied by 365; debtor days is trade debtors divided by annual revenue, multiplied by 365, with both figures on the same GST basis. For example, a firm with $1.2 million of annual revenue, $100,000 of unbilled WIP and $150,000 of trade debtors has WIP days of about 30, debtor days of about 46 and lock-up of about 76 days. Billing sooner and collecting faster both bring it down.
11. Client retention rate
Winning new clients costs money. Keeping existing clients is usually cheaper. If your client retention rate is low, then it is time to find out why.
To calculate client retention rate for a period, take the number of clients at the end of the period, subtract the new clients won during it, divide by the number of clients at the start, and multiply by 100. For example, if you started the year with 50 clients, won 12 and ended with 55, your retention rate is (55 − 12) ÷ 50 × 100 = 86%.
12. Average churn rate
The churn rate, also called the attrition rate, is the share of clients you lose in a period: clients lost divided by clients at the start, multiplied by 100. It is the flip side of retention; in the example above, churn is 14%.
A high churn rate may be a sign that your sales team is closing deals with clients that are a poor fit for your company.
13. Realisation
Realisation is the amount billed divided by the standard value of the time recorded, multiplied by 100. It shows how much of the work your team records actually turns into invoices, after write-offs, discounts and fixed-fee overruns.
For example, if your team records 1,200 hours at a standard rate of $200 an hour ($240,000 of time) and bills $204,000 for that work, realisation is $204,000 ÷ $240,000 × 100 = 85%. A falling realisation rate usually points to scoping, pricing or project control rather than effort.
Closing
By tracking these KPIs from accurate, up-to-date books, you can follow the financial health of your firm more closely. You will gain key insights into what your team is doing well. Your management team will understand how to improve the client experience and generate additional profit.
Visory runs bookkeeping, payroll, accounts payable and receivable for growing professional services firms, and Visory Insights turns those numbers into a plain-English monthly read, walked through with your Business Performance Partner. Learn more about bookkeeping for professional services, or book a discovery call.
About this article
Written by The Visory Team. Published . General information for Australian businesses, not advice for your situation.
