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 allow you to stay apprised of various components of your firm’s overall performance. The practice of tracking this data is often referred to as online bookkeeping.
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, we have compiled a list of 13 key financial metrics that your business can leverage to help facilitate growth and improve profitability.
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 service providers find that allocating this responsibility to a third-party provideris the most pragmatic approach. These teams specialise in online bookkeeping services and can help find the perfect software for 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 detailed below may only need to be checked monthly or quarterly. Others, such as annual recurring revenue, can only be assessed yearly.
By routinely checking your business’ financial metrics, you can help increase revenue and improve profitability.
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)
When you’re organizing your online bookkeeping services, it is also important to track ARR. ARR is a metric that quantifies income from annual services.
For instance, let’s say that a particular client signed a two-year contract for $100,000. The ARR for that client would be $50,000 because that would represent how much you earn from that account per year. ARR is a predictable income stream that can help you to grow your business.
When it comes to key business financial metrics, perhaps none is as important as profit. This data lets you know what your net income will be after expenses. Unlike revenue, profit gives a much clearer view of the health of your professional services firm.
When you’re calculating profits, make sure to account for all expenses. This includes customer acquisition costs and costs of goods sold (COGS). If you offer ongoing service, COGS can be substituted for the cost of creating and maintaining your software.
4. Qualified Leads: MQLs and SQLs
Qualified leads are target clients that are primed to make a purchase. These buyers are already actively seeking information about your services and are deep in the sales funnel.
There are various types of lead-related business financial metrics available, depending on which types of services you provide.
Marketing qualified leads (MQLs) are buyers that fit your defined target audience to a ‘T’. Consumers in the MQL phase are aware that there is a solution to the problem they are facing. However, they are not completely aware of your product offering.
Sales qualified leads (SQLs) are the B2B variant of MQLs. An SQL is a person with the authority to make a buying decision. Once you identify clients that are SQLs, it is time to present them with quality content to close the deal.
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.
CACrefers to the average amount spent to obtain new clients. Ideally, you want to have a low CAC and a high purchase rate per consumer.
For instance, let’s say that your CAC is approximately $15. This means it costs your firm $15 to acquire a single customer. If the average client is spending $100 AU, then your CAC to purchase ratio is good. However, if average purchase amounts and CAC are nearly even, then you may need to reevaluate your business strategy.
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.
CLV outlines how much a client spends on your services throughout their lifecycle. The lifecycle of your clients will be heavily dependent on your industry. Some professional services businesses will retain customers for years.
In order to calculate CLV, subtract CAC from the amount of total revenue earned from that customer. Acquiring customers cheaply and retaining them for years can help your business improve profitability.
7. Proposals Sent
One of the more basic business financial metrics that we recommend tracking are proposals sent. Contrary to popular belief, the goal is not to send out an absurdly high number of proposals. Instead, you should focus your attention on targeting quality leads.
If you find that your “proposals sent” metric has dropped, review your lead-generating practices. Meet with your sales team and seek out their feedback. Is the issue that they are not getting enough leads? If not, perhaps they need to refine their outreach practices.
8. Win Rate
Win rate is a great KPI that can be used to hold your sales staff accountable. In order to calculate win rate, divide deals closed by the total number of proposals sent.
Much like the proposals sent metric, the higher the better is not necessarily what you’re aiming for. If your rate is over 90%, then your services may be priced too low. You do not want to sell your business short and hinder profitability. Increasing your rates slightly may reduce the win rate, but it will lead to higher revenue in total.
On the other hand, win rates below 50% are a sure sign that something is awry with your sales practices. Once a high-quality lead is identified, your sales team should be able to close a good number of the deals they present. An ideal win rate is approximately 70%.
9. Net Margin
Unlike win rate, some business financial metrics are a bit more difficult to calculate. Net margin is a prime example. However, it is an important KPI to track.
Net margins translate your revenue to actual profits. In order to calculate this figure, you must have a firm grasp on CAC and COGS. Unhealthy net margins can prevent you from scaling your business.
10. Cash Flow from Operations
Your business must maintain a positive cash flow to meet deadlines, hire new staff, and grow. Firms without strong cash flow are not flexible, which can hinder performance.
An important part of managing cash flow includes deciding when you are going to charge clients. If you take on a large number of new accounts and do not charge anything upfront, your firm may quickly have a cash flow deficit.
11. Client Retention Rate
Acquiring new clients is costly. Retaining existing customers is much more efficient and practical. If your client retention rate is low, then it is time to find out why.
In order to calculate client retention rate, subtract the number of clients at the end of a period from the number of clients obtained during the same period. This will yield the number of starting clients. Next, multiply that figure by 100. This will be your client retention rate.
12. Average Churn Rate
The churn rate is also referred to as the rate of attrition. Professional service firms use this metric to determine how many clients cancel services during a given period of time.
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. Revenue per User (RPU)
RPU is one of the best business financial metrics for professional service businesses. As the name implies, RPU indicates the amount of income generated on a per-client basis.
You can utilise this metric to project future profits as you scale your business. You can also make decisions about possible pricing adjustments to ensure net margins are sustainable.
By incorporating these KPIs into your online bookkeeping services, you will be able to more effectively track the financial health of your firm. 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.
If you want to optimise your ability to leverage these metrics, consider bookkeeping for professional services from Visory. Our experts can supercharge your financial back office and give you the tools needed to grow your business! Contact us to learn more about customised online bookkeeping for professional services.