7 Best KPIs to Track in Your Service Business
You’re probably aware that to help your business grow and thrive, it’s essential to keep an eye on your numbers. But what numbers should you be looking at?
Your business’s financial statements can tell you a lot, including how much revenue you earned and how much your expenses were. But tracking key performance indicators (KPIs) can help you dig deeper into your business performance and help you compare your results to industry averages.
KPIs measure how effectively you’re running your business and achieving your objectives. Some KPIs look at the overall performance of your business, while some drill down into specific aspects of your business, such as payables, receivables, debt, cash flow, revenue, and expenses. There are also non-financial metrics to measure things like customer satisfaction, employee experience, and conversion rates.
Of course, there are hundreds—perhaps even thousands of potential KPIs to track. So which ones should be on the priority list for your service-based business?
7 Most Important KPIs for Service Companies
Key performance indicators for service businesses usually focus on areas such as pricing, staffing, cash flow, collections, and operating expenses.
1. Utilization
The main product of a service-based business is its people. Whether you’re a solopreneur or have a team of employees working in your business, it’s important to know how much time you’re spending serving clients and thus generating revenue.
Utilization measures the percentage of time (out of 40 hours) each employee spends on client work.
Utilization = Billable Hours / Total Work Hours
2. Revenue per FTE
Revenue per FTE (full-time equivalent) shows how much income you earned per employee, on average.
To calculate this metric, you first need to calculate your FTEs, or the number of employees you have on an aggregate level, including part-time and full-time employees. Each full-time employee is one FTE, and each part-time employee (assuming they work 20 hours per week) is 0.5 FTEs.
For example, say you have a 40-hour workweek with two full-time employees and three part-time employees who work 20 hours per week. You would have 3.5 FTEs, calculated as 2 + (3 x 0.5).
Then you can calculate your revenue per FTE with the following formula:
Revenue per FTE = Total Revenues / FTEs
3. Working Capital Ratio
Your working capital ratio measures your business’s ability to meet its current, short-term obligations.
Working capital ratio = Current assets / current liabilities
Current assets include cash, accounts receivable, and inventory. Current liabilities include accounts payable, accrued expenses, and other debts you expect to pay within the next year.
A working capital ratio of 1.5 to 2.0 is usually considered reasonable in the service industry. This means for every $1 of current liabilities, you have $1.50 to $2.00 of current assets available to pay those obligations, and you’re on firm financial footing. A working capital ratio of less than 0 could be a sign that you’ll have trouble paying bills and meeting other financial obligations in the near future.
4. Net Profit Margin
Net profit margin is an important metric for telling you what percentage of your revenue is profit after deducting all expenses. In other words, it tells you how efficient your business is at turning a profit.
Net profit margin = Net profit / Revenue x 100
A net profit margin of 5% to 10% is considered average for service businesses.
5. Customer Acquisition Cost
To grow your business, you need to attract more customers. Most service businesses do that by spending money on marketing and paying salespeople commissions and bonuses.
Knowing your customer acquisition cost (CAC) is a key metric for understanding the total sales and marketing costs required to earn a new customer.
Customer acquisition cost = Total marketing and sales expense / Total number of new customers acquired
The average CAC can vary greatly among industries, even for service businesses. For example, for digital marketing companies, the average CAC is $87, in real estate it’s $213, and in professional services it’s $810.
Rather than benchmarking your metrics against industry averages, it’s helpful to track your KPIs over time and look for ways to improve your CAC. You might do this by focusing your marketing on the right target audience and improving customer retention.
6. Customer Retention Rate
Most service companies rely on repeat customers for their success. After all, it’s usually less expensive and time-consuming to keep existing customers happy than to attract new ones.
Customer retention rate = (# of customers at the end of a period – # of new customers acquired during the period) / # of customers at start of period x 100
According to HubSpot, a 5% increase in customer retention can increase company revenue by 25-95%. So if you calculate this metric and don’t like the result, start looking for ways to improve customer service and value—even small changes can deliver a ton of return on investment.
7. Days Sales Outstanding
Do you deliver your service and collect payment later? If so, days sales outstanding (DSO) is a key metric for your business.
This metric measures how long, on average, it takes for you to collect money once you’ve delivered a service.
Days sales outstanding = (Accounts Receivable Balance / Total Sales) x # of days in the period
A healthy DSO depends on your payment terms. For example, if you expect clients to pay you within 30 days of sending an invoice, a DSO of 25 to 35 is right on target. However, if your DSO is 60 to 90, you might want to start collecting payments in advance from certain customers or tighten up your collection policies.
The KPIs mentioned above are just a small sample of the metrics you might track in your business. The right KPIs for you depend on your strategic goals and the stage your business is in. If you need help selecting key metrics for your service business or tracking them from month to month, schedule a call with me! I can help you identify the metrics that matter most to you and tools for monitoring them.