This post is brought to you by BQE Core
Your world revolves around projects. And while you know it’s important to keep these projects running smoothly and profitably, it’s not always obvious what you should be tracking to ensure the outcome you desire.
The growth and ultimate success of your firm will be determined by the consistency of results. And those results can only be achieved if your team consistently meets desired goals and targets.
Effective key performance indicators (KPIs) are important metrics to make sure that you can accomplish any business objective.
Whether you’re managing 3 or 300 projects, KPIs can help provide an immediate, comprehensive snapshot of your projects’ status and health. This real-time knowledge helps you continuously improve project management workflow, meet deadlines with confidence, and maximize your time.
The overhead multiplier (OHM) is the cost of non-project-related expenditures (such as indirect expenses including indirect labor) expressed as a percentage of total direct labor.
This is one of the most vital KPIs because it’s required to accurately determine a firm’s profitability. A lower overhead multiplier means a higher profit margin and vice versa. Some firms choose to calculate overhead multiplier every quarter, while others do it annually. To calculate OHM, follow the formula below:
OHM = Total Indirect Expenses / Total Direct Labor.
If you want to reduce the overhead, you’ll need to manage indirect expenses more carefully. Aim to keep your overhead rate at or below 175% of total direct labor (also expressed as 1.75). If your overhead multiplier greater than 1.75, you should take immediate action to resolve it.
The utilization rate is the percentage of hours spent on billable projects vs. the total number of hours worked.
Utilization is important for firms that charge their time to clients and need to maximize the productive time of their employees because it helps determine the overall productive use of an individual or firm.
The utilization rate illustrates the efficiency and overall performance of an employee by comparing an employee’s billable and non-billable value of their time entries. For example, if an employee logs 40 hours a week and 30 of those hours are billable, her utilization rate is 75%. To calculate utilization rate, follow the formula below:
Utilization Rate = Hours Worked/Total Available Hours
If your rate is too high, you likely need to add more resources. When your rate is too low, it could mean you are not bringing in enough work.
An effective cost rate is the actual cost of each person’s employment and the work that they do.
This metric is important because it gives you a true picture of what an employee costs on an hourly basis and it can help you determine what you should bill for each employee’s services to stay profitable.
When you’re driving a car and look at your dashboard, your fuel gauge shows approximately how much gas is left in your tank. It doesn’t give you the exact number of gallons left, because you don’t need that information to make a decision about when you need gas. In most circumstances, you only need to know if your tank is running low.
The effective cost rate is similar to the fuel gauge in a car. It shows you the average cost of an employee. Costs vary from job to job and project to project. Looking at the individual costs can give you valuable information about that job, but what about your employee’s overall performance?
To calculate the overhead cost rate, combine your firm’s overhead multiplier to the employee’s hourly salary. For example, an employee with an hourly salary of $60 working at a firm whose overhead multiplier is 1.75 would have an effective cost rate of $105 (60 x 1.75 = 105).
If your effective cost rate is high, it’s a sign you’re paying too much or your employee is spending too much time on non-billable work.
The net multiplier is the ratio of net operating revenue to total direct labor.
If you think of direct labor as an investment, the net multiplier is a measure of your return on this investment. It shows you how many dollars of revenue you generate for every dollar you spend on direct labor and measures your actual performance. To calculate net multiplier, follow the equation below:
Net Multiplier = Net Operating Revenue Total Direct Labor
The net multiplier is a good gauge of your firm’s financial health. Your net operating revenue should be greater than total direct labor. If total direct labor is greater than net operating revenue, you should investigate why your cost is so high.
Work in progress (WIP) refers to billable hours and expenses that a firm hasn’t billed yet.
It’s the value of the work you have done that hasn’t been billed yet. While it’s a basic KPI, it’s important to track so you can forecast expected revenue. It can also help managers understand how far along work is and acts as a booster when applying for loans.
Track this as an asset on the balance sheet and once invoiced, track this as revenue on the income statement.
You want to make sure you have a consistent cash flow. When forecasting, if one week’s WIP looks significantly lower than others, that could be a signal not everyone is making the most of their time.
An accounts receivable aging is a report that lists unpaid customer invoices and unused credit memos by date ranges.
This is a valuable tool when trying to determine which invoices are overdue for payment. Calculating your average aged accounts receivable will show you the average number of days it takes you to get paid from the invoice date. To calculate your aged accounts receivable, use the following formula:
Aged Accounts Receivable = Annual Average Accounts Receivable / (Net Operating Revenue / 365 Days).
Architecture firms should do their best to collect all outstanding invoices within 60 days of the invoice date. If your average aged accounts receivable is greater than 60 days, it might be a signal that it’s time to reexamine your invoicing process and have a better way of collecting what’s owed to you.
The profit to earnings ratio indicates a firm’s effectiveness in completing projects profitably.
The profit-to-earnings ratio is determined by dividing the profit (after expenses and salaries have been accounted for but before non-salary distributions and taxes) by the net operating revenue. To calculate your profit to earnings ratio, use the following formula:
Profit to Earnings Ratio = Profit Before Distributions and Taxes / Net Operating Revenue.
The higher the number, the more profitable your firm is. If your profit to earnings ratio is low, you could be spending too much internally.
The net revenue per employee shows you, on average, how much each of your employees generates.
This metric is a meaningful analytical tool because it measures how effectively your firm utilizes its employees. It can also help you forecast a more realistic range for future annual net operating revenue. To calculate your net revenue per employee, use the following formula:
Net Revenue Per Employee = Company’s Net Revenue / Current Number of Employees.
Compare your net revenue per employee against that of other companies in the same industry, or use it to look at changes in your own company. If your average goes down, this means you’re generating less revenue per employee.
For example, imagine you had 10 employees and made $100,000 in revenue last year. This year, you have 20 employees, but you still made only $100,000 in revenue. You have twice the workforce, but your revenue is stagnant. This is clearly a problem.
While it may seem daunting to track all of these KPIs, they’re crucial to the financial health and success of architecture and engineering firms.
The easiest way to track these metrics is by using a platform like BQE Core. Core offers project management, time & expense tracking, billing, accounting, and business intelligence in one unified platform, which allows it to aggregate all your data and present KPIs to you in real time, so you and your team can make more insightful business decisions.
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