One of our Core customers, Josh Blumer, a principal and architect at AB design studio in Santa Barbara, Calif., recently shared with us how tracking Key Performance Indicators has made a huge impact on his business.
"Having fundamentally good reports and KPIs changes the way your business runs," he says. "Every business owner knows there's key things we need to look for to see how things are going. If you can look at your KPIs in real time and see a project going in a negative direction, you can make the necessary corrections and avoid costly mistakes."
So what are some of the most important KPIs every architecture and engineering firm should know? We put together a list of the top 8 for you:
The overhead multiplier 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. A way to reduce the overhead rate is 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). Be concerned about an overhead multiplier higher than 1.75 and 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. It illustrates the efficiency and overall performance of an employee. It compares 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%.
Effective Cost Rate
An effective cost rate is the actual cost of each person's employment. In combines your firm's overhead multiplier to the employee's hourly salary to give you a true picture of what it costs to employ that person on an hourly basis. 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). This metric is important because it can help you determine what you should bill for that employee's services to stay profitable.
The net multiplier is the ratio of net operating revenue to total direct labor (the formula is net operating revenue / 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. It's a good gauge of your firm's financial health.
Work in Progress
This refers to billable hours and expenses that a firm hasn't billed yet. It is important to track this as an asset on the balance sheet and as revenue on the income statement. It helps managers understand how far along work is and acts as a booster when applying for loans.
Aged Accounts Receivable
Engineering and architecture firms should do their best to collect all outstanding invoices within 60 days of the invoice date. Anything exceeding 90 days should be followed up with so that you don't lost any revenue you're owed. You can determine your aged average accounts receivable (or the average number of days it takes you to get paid from the invoice date) by using the following formula: annual average accounts receivable / (net operating revenue / 365 days).
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. It indicates your firm's effectiveness in completing projects profitably. The higher the number, the more profitable your firm is.
Net Revenue Per Employee
The net revenue per employee is calculated by dividing the annual net operating revenue by the number of employees. This metric helps you forecast a more realistic range for future annual net operating revenue.
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.
How to Track KPIs Easily
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.
"If you give somebody a dashboard with 4 or 5 meaningful KPIs that help them align themselves with your business and profit goals, you're giving them a great opportunity to succeed, and success breeds more success," Blumer says.
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