The metrics that practices can use to assess health of the business is endless. Go beyond the hard numbers.
Updated 19 August 2016
Most accounting practices track the more obvious financial key performance indicators (KPIs), but there are many lesser-known metrics that can provide valuable insights and highlight areas that need to be improved.
InPractice spoke to some leading consultants and practice coaches to find out their favourite advanced KPIs.
Rob Nixon, CEO, PANALITIX (Former CEO Proactive Accountants Network)
Many firms measure and drive KPIs, but often they are tracking the wrong things.
The metrics need to promote the right focus and behaviour inside the firm.
Which KPIs do you think are important?
If you price upfront – which every firm should do for every project for every client – the efficiency factor is important.
This is a percentage of the maximum budgeted hours spent on a client project. Less than 100 per cent is the optimum number.
By having less time on the project versus more, you free up capacity and drive margin.
If you are servicing your clients properly, another KPI would be the number of projects per client.
The goal would be to have at least an average of four projects per client annually, although most clients will have about two.
Often firms overlook their turnaround time. This measures the days a project is in the office.
It starts when the fee proposal is signed or the first piece of information arrives and ends when the job goes out the door. A fast turnaround is a measure of good customer service.
Aside from the cash balance, a single measure for the firm’s financial performance would be the average hourly rate for the entire team.
This measure adds all the paid hours for everyone – including administration and owners – annually and divides it into billed revenue.
Top-performing [Proactive Accountants Network] firms are well over A$150 and they are typically well over 50 per cent profit as well.
Greg Hayes, Director, Hayes Knight (New South Wales)
Although running an accounting firm is not easy, the business model is relatively straightforward and can be measured using about 10 KPIs.
These will tell you with a high level of certainty how the practice is performing and where issues are.
Which KPIs do you think are often overlooked?
The revenue-to-capacity ratio measures the relationship between expected revenue and the firm’s capacity to produce it.
To establish this, determine your annual revenue budget, calculate revenue capacity (available hours x charge rate per person x efficiency rate), and divide the revenue budget by the calculated available capacity.
The sweet spot for the typical firm is between 90 per cent and 94 per cent. This allows room for growth without carrying excess resources.
Apart from a strong growth phase, less than 90 per cent indicates inefficiency.
A new KPI is partner hours to produce the result. An average of 45 to 50 hours is reasonable; more than 50 is less attractive.
This KPI is important if you are contemplating a sale or adding new partners.
Another one frequently overlooked is rate of net organic growth.
To calculate this, establish the growth in net annual fees from the acquisition of new clients and the sale of additional services to existing clients.
Deduct the value of clients lost and services no longer provided.
This figure ignores revenue growth from fee rate [increases]. Firms that grow systemically are more valuable.
Finally, the labour cost-to-revenue ratio is important. Including a commercial salary for principals and partners, total labour cost should be 51 per cent to 59 per cent of gross fees.
Higher than that shows real profitability is below an acceptable level.
Less than 51 per cent often indicates growth is stagnant.
Peter Knight CPA, Business & Franchise Accountant, Knight Partners
There are plenty of financial metrics, but some of the softer skill areas are also important to track.
I find these are often more exciting for the teams, while partners tend to like the harder, more numbers-based ones.
Whichever you use, try to act like a meerkat and constantly scan the horizon to see what is changing.
Which non-financial KPIs do you use as a consultant?
Tax returns lodged is an increasingly important number, given the interest in electronic lodgment, as it allows you to see any shift in strategic direction.
KPIs and targets for areas such as turnaround time for queries resolved are important, as are measures such as number of complaints, which requires a rule: all complaints are to be sent to partners so they can be tracked.
Share of client wallet and client satisfaction can be useful, but need to be measured carefully to ensure you don’t annoy the clients.
Inquiring about a client’s level of satisfaction is gutsy, but the question needs to be asked.
To build new relationships, measure the number of marketing or networking meetings attended for the teams.
The focus of this is to get to know people at a deeper level, rather than just swapping business cards.
Track the number of mentoring hours, if the firm does mentoring.
If there are several partners, team members can be swapped around.
David Smith, Director, Smithink
To run a successful accounting business, about 10 to 12 areas – such as HR, quality control and marketing – need to be run well and each part of the business needs its own plan and KPIs.
Controversially, I believe management of KPIs should be at a level below the partners, as managers need to be thinking like owners and the partners need to be out with their clients, not managing business processes.
Aside from turnaround time, which other KPIs are important?
To drive business growth, each partner and manager needs their own personal plan with a target for number of new clients per month.
These need to be tailored to fit the individual.
Within an existing client base, there is potential for more fees through better engagement, so a KPI for number of needs reviews per month is useful.
To create future financial performance, introduce an average fee achieved by client group measure that links back to the needs reviews.
We find 46 per cent of clients don’t refer because they have not been asked to, so put a KPI on number of referrals per month.
The number of cross-referrals within the firm also helps. Put referral KPIs not just on the partners, but on teams as well, to ensure they’re used.