It is easy to get lost in the numbers, especially when you don’t know where to look. Most of the time it’s a combination of knowing what data to gather and collecting said data in its complete form.
Having analysed numbers for thousands of professional businesses, there are two high level KPIs that you need to focus on to drive performance within your business. These are Average Rate & Lock-up Percentage.
Continually focusing on these two numbers gives you the framework to drive improvement in profit and cash flow. Average Rate directly correlates to driving the profitability while Lock-up Percentage focuses on improving cash flow.
Average Rate is the calculation of revenue received over professional employee labour paid. This KPI tracks performance of individuals, teams, departments and the business as a whole.
At a very high level, this KPI tracks performance by incorporating productivity, write-offs and recoverability over direct labour costs. As this number increases, so does businesses profitability (margin).
Average Rate = Revenue / Paid hours of direct labour
Lock-up is a term that refers to revenue that hasn’t been billed or collected. Lock-up is a combination of unbilled revenue (WIP) and revenue that has been billed but not yet collected (debtors).
Lock-up Percentage is the rate once Lock-up is divided by annual revenue. This KPI is very important for cash flow. By tracking how many days revenue sits idle and its comparison to revenue as a whole, we can understand how we can release cash.
If you’re struggling to identify which KPIs are important for your business, more importantly if collecting said data in its complete form is also an issue, start tracking Average Rate & Lock-up Percentage. These two key KPIs will set your professional business on the right track.