Learn which business metrics matter most for client services companies and how to track them effectively for sustainable growth.
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Every client service business offers a little something different to its clients and team, but they operate and measure their business is the same way. It doesn't matter if you're selling custom software, marketing, design, or legal services, the fundamentals of the business are the same.
Find out exactly what makes a client services business a client services business in What is a Client Services Company?
There are three categories of metrics you need to know (in order of importance): the critical metrics, the scale metrics and the optimization metrics.
These metrics are the ones you need to know at all times, and you should be calculating them regularly. If you get these wrong, you're out of business.
Net Margin. Net margins are the total revenue minus ALL expenses, including overhead such as rent, utilities, software subscriptions, and salaries of non-billable employees. This calculation is also often called the profit margin. The owners of a business can keep this money (after taxes) or invest it in the business to grow it.
Cash on Hand, Accounts Receivable and Booked Business. When you sign a deal for $100,000, you don't immediately have $100,000 in your bank account. Instead, you have "booked" $100,000 in revenue. Over the course of the project, you send invoices for the work you've done and outstanding invoices are your accounts receivable. When an invoice is paid, you finally have the cash in your bank account. To effectively manage your cash, you need to know your cash on hand, accounts receivable and booked business and have a good handle on when the moeny will come in.
Burn Rate and Runway Your burn rate is the amount of money you are spending each month. Your runway is the amount of time you sustain that burn rate given your cash on hand, accounts receivable and booked business. Cashflow management is a critical skill for growing your business (which is why Treya helps you forecast your cashflow from your sales pipeline).
Once you've mastered the critical metrics, you can focus on scaling your business. These are the metrics you need to know to grow your business sustainably.
Gross Margins (a.k.a. Unit Economics). The gross margin is the difference between what you charge for your services and what you pay your billable people, and is most often calculated on a per-hour basis. For example, if you charge $150 per hour and pay your billable people $80 per hour, your gross margin is $70 per hour. It is also represented as a percentage - in this case, 46.6%. For highly trained practitioners like software engineers, designers and marketers, gross margins are typically around 50-60%. When calculating gross margins for full time employees, they need to include benefits and other overhead in the calculation. It's often desirable to calculate gross margin on a per-project basis.
Utilization Rate. The utilization rate is the percentage of time your billable employees are billed versus the time they are paid for. For example, if you have a full-time employee who bills 20 hours a week, their utilization rate is 50%. Too low of a utilization rate means you're losing money and too high means you're burning out your staff. Aim for 85-90% utilization.
Pipeline Sales Forecast. Sales forecasts are the amount of money you expect to make from your sales pipeline. You'll need to plan for hiring (or sometimes staff reductions) based on how much you expect to make. Treya's sales pipeline management and advanced deal planning is perfect for client services businesses, because sales forecasts take into account when hours are billed to more accurately predict when revenue will come in.
Employee Retention Rate. The employee retention rate is the percentage of employees who stay with your company over a given period of time. This metric makes sense in conjunction with your cost-to-hire...
Cost-to-hire. The cost-to-hire is the amount of money you spend to hire and onboard an employee. This includes any recruiter fees, advertising costs, background checks, equipment purchases, etc. Most, if not all, employees don't immediately start billing at 100% utilization rate, and so you'll also want to include their onboarding costs in the calculation. If you have a high cost-to-hire and a low retention rate, it doesn't matter how successful your sales team is - you're losing money.
Revenue Leakage. Revenue leakage is revenue that you thought you were going to make (booked business), but come billing time, you don't receive it. While there are a number of things that can contribute to revenue leakage, it is primarily due to billing less hours than expected, either through inaccurate sales estimates, under-utilization or poor team planning (e.g. over-allocating someone).
These may not be "life and death" metrics, but they are often leading indicators of them and managing them will make your business more robust and free of surprises.
Sales Cycle Length. The average time to close a deal is the amount of time it takes from the first contact with a prospect to the moment the deal is closed. This metric is useful to know because it identify inefficiencies in your sales process and help you forecast your sales pipeline.
Customer Satisfaction (CSAT) and/or Net Promoter Score (NPS). These metrics are important to know because they help you understand how well you are serving your clients and how likely they are to recommend your services to others. While they are exceptionally important, repeat business and referrals are the true indicator of these numbers.
Employee Engagement and Employee Net Promoter Score (eNPS). Employee engagement is the percentage of employees who are engaged with their work and their company. This metric is important to know because it helps you understand how well you are managing your employees and how likely they are to stay with your company, preventing retention issues and reducing the cost-to-hire. A high employee NPS is a good indicator of a healthy company AND can reduce your cost-to-hire through employee referrals.
Customer Acquisition Cost (CAC) and Lifetime Value (LTV). CAC is how much it costs to acquire a new customer, and you can back into it by tracking how much you spend on marketing and sales and how many new customers you acquire over a period of time. LTV is how much money a customer is worth to you over their lifetime. These are good metrics to directionally gauge the effectiveness of your sales and marketing efforts, but they are very hard to compute accurately for services businesses because the variability in deals and low volume of sales (relative to say, a product company).
Today, Treya helps you track many of these sales-related metrics by providing tools to easily manage your sales pipeline, price projects, schedule team members and more. Treya's long-term mission is to help you track and improve all of these metrics. Check out some of ways to track and improve your metrics with Treya today in Insights and Deals.
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