The professional services landscape is becoming increasingly complex and interconnected. And as more people and things connect, we’re creating vast, new digital footprints.
If firms want to thrive, they must make sense of this big, fast-moving data. Data can provide real-time access to powerful insights that firms can turn into a point of action.
But you must know which data analysis questions to ask if you want to turn the mounds of data into answers with value. Without a basic understanding of what to ask, data is just a mound of information. The true power of all of this data is in the user - how you build, manipulate, and question it to drive understanding and innovation in your unique circumstance.
Data-driven insights are changing professional services
In 2017, global corporate spending on analytics soared to $43 billion.
Successful firm leaders have always relied on some form of data to help them make decisions. In the past, most data has to be collected manually for firms to understand their customers and market better. Because of the cost, time and difficulty, many firms operated with limited data.
Today, gathering data is easier than ever. Countless tools exist that can deliver rows upon rows of data for your firm (Related: Expert Interview: Does Your Project Management Software Cause Data Overwhelm?).
There’s no mistaking it - data is a powerful tool that’s changing the professional services landscape. But before you can benefit from the powerful insights that come with data, you must first understand what to ask of that data. After all, your data is only as good as the questions you ask.
13 questions for better data analysis
Data has become something that can deliver a competitive advantage to any firm. These key questions to ask when analyzing data can define your next strategy in developing your company.
Here are 14 questions to help you sort through the data at your professional services firm.
1. How did my firm do last year?
When looking for a general understanding of how your firm performed last year, you’re probably referring to “net profit”.
You can calculate your net profit is by subtracting total expenses from total revenues.
Net profit is a calculation that includes almost all financial transactions in your business (before tax). You should care about this number because it demonstrates your firm’s success - there is no point in making tons of sales that don’t generate a profit.
2. Does my company have enough work?
While this might seem like an obvious one, it’s a question you should revisit often. If you want to determine if your company has enough work you should look at work in progress and work in hand.
The simplest way to think of work in hand is how much you have left to do. Work in progress, on the other hand (no pun intended), refers to billable hours and expenses that a firm hasn’t billed yet.
The true value of this question comes when you look at the data over time. 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.
3. What is my net revenue per employee?
The net revenue per employee shows you, on average, how much each of your employees generates. This question will help you understand how effectively your firm utilizes its employees. It can also help you forecast a more realistic range for future annual net operating revenue.
Net revenue per employee is calculated by dividing your firm’s net revenue by the 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.
4. What is my profit to earnings ratio?
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.
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.
5. What is the utilization rate (per employee and overall)?
The utilization rate is the percentage of hours spent on billable projects vs. the total number of hours worked. It’s 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.
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. Looking at this rate over time and comparing rates of various employees will help you set a benchmark for success (Related: 5 Ways to Boost Employee Utilization).
6. What are my aged accounts receivable?
Aged accounts receivable refers to unpaid customer invoices and unused credit memos sorted by date ranges.
To calculate your aged accounts receivable, first, divide your net operating revenue by 365 days. Then, divide your annual average accounts receivable by that number.
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.
7. What percentage of bills have been paid?
Looking at the percentage of bills that have been paid will help you manage cash flow. As you track this data over time, you can easily see how the percentage fluctuates over the year.
8. What percentage of bills have been invoiced?
The percentage of bills that have been invoiced is another important question for cash flow (Related: Business Cash Flow Management – Cash Flow Management Strategies). When you look at bills that have been paid along with bills that have been invoiced over time, you will recognize trends that will help you adjust your billing and invoicing schedule.
9. What is the gross profit margin percentage?
The gross profit margin percentage is a good indicator of your firm’s financial health. Because it’s such a simple number, it makes it easy to compare your business to your competitors’.
You calculate the gross profit margin percentage by first calculating the gross profit (revenue minus cost of labor), then dividing the result by revenue.
When calculated at regular intervals, a stable gross profit margin percentage indicates your firm’s processes are operating well. If the percentage is erratic, with substantial changes from quarter to quarter, there may be a weak spot somewhere in your process.
10. What is the realization rate?
The realization rate measures the difference between recorded time and the percentage of time that is paid by the client. For example, if you record 8 hours of billable time but only 6 of those 8 hours are paid by the client, then your realization rate is 75%.
There are two main reasons why your income won’t match up with the recorded billable hours. Some clients may request a fee reduction. Or, those reviewing billing invoices may write off some of the time recorded.
A 100% realization rate is the goal because any increase in realization rate adds profit to your firm’s bottom line. Keeping a close eye on this rate will help you determine if any new employees or activities are negatively impacting your bottom line.
11. What is the percentage of overtime?
Overtime consistently ranks as one of the biggest ongoing expenses for most companies, and this is no different when it comes to professional services. But tracking overtime isn’t just important because it’s an expense for your firm.
If your overtime percentages are consistently high, that’s a sign you probably need more employees. Remember, if you’re paying time and a half for overtime (which is the law in many states) then it’s cheaper to pay an additional employee for those hours.
12. Who are my least profitable employees?
Looking across the board, is there one employee that is underperforming against the rest?
An employee that is consistently under-ranking the others should be a red flag. At the end of the day, you need to make a profit. Identifying the factors that might be dragging your profit down will help you to generate bigger profits.
13. What is my effective bill rate?
Most businesses can’t bill for every hour of their time, and the effective bill rate also known as employee realization rate—takes this into account. It measures the billable value of all hours worked.
It’s calculated as Effective Bill Rate = (Hours Worked / Hours Billed) x Bill Rate
Get answers to questions you didn’t know to ask
These can be a lot of questions to remember. And while important to ask questions of your data, getting the answers you need shouldn’t take an excessive amount of work. That’s why many firms are turning to practice management software with built-in business intelligence.
BQE Core’s all-in-one practice management and accounting software has built-in business intelligence. Simply ask Core a question and the software will answer.
You can converse with Core Intelligence about anything, from company financials to project management. Plus, Core Intelligence can inform you about other insights you might have otherwise overlooked so that you receive deeper insights beyond just answers.
With Core’s business intelligence, you can make smarter decisions and proactive course corrections to ensure ultimate efficiency. It’s like giving every employee a personal assistant to increase productivity, at no additional cost.
Want more tips to increase efficiency and improve your bottom line? Click below to download a free white paper on predictions for professional services in 2020 and beyond.