You spend your working days working for your clients, preparing financial statements and tax returns, booking their invoices, etc.
But, what about your most important client, i.e. yourself?
Do you take enough care in managing your own business? Do you track your finances well? Are you spending enough time on business development?
In this text, we will cover 15 essential metrics for accountancy business. They can help you manage your accounting firm more easily. Also, by reading this text, you may develop your skills in KPI management and offer additional assistance to your clients. You will not only be your client’s accountant. You will become his/her business advisor.
I hope this text will be pleasant and applicable to you. Sit back and let us get through all 15 measures.
1. Total Revenue
The first metric is your top line: total sales made in a given period. However, the absolute amount of your top line is just the beginning.
2. Revenue Per Invoice
Since you are familiar with accounting terms, you may dive deep to see whether you are charging enough to your clients. For example, you can track revenue per invoice:
3. Billable Rate
How do you come up with the top line of a manufacturing company’s income statement? You take the total quantity of goods sold (in physical measures). Then, you multiply it by the average selling price. But how do you come up with such an equation for your accountancy business, since you do not sell goods? Well, you sell your time, your working hours.
You can calculate the Total Hourly Rate:
Yet, you cannot practically spend all your work providing services to your accounting clients. You need some time for administration, business development, meetings with prospects, etc. Hence, you should calculate Billable Hourly Rate:
You need to make sure that you charge all hours of work done to the clients and manage your hourly rate. This is why you should consider using an automated timesheet software solution for accountancy businesses.
4. Market Share
You should compare sales from your income statement with other accountancy businesses. This way, you’ll be able to come up with an estimation of your market share. You come up with total sales made by your competitors. For example, you may get that number by searching accountancy businesses in your country, state, or region. This is possible by searching through commercial databases. Then you’ll be able to divide the revenue of your accountancy business with the total revenue made by your competitors:
Also, you may compare yourself with the biggest competitor, to calculate Relative Market Share:
Unlike Absolute Market Share, Relative Market Share can be higher than 1 (100%). This is possible in case you are the leading company in your industry.
5. Gross Margin
When you look at the income statement of a manufacturing company, how do you calculate gross profit? Well, you subtract costs of goods sold (COGS) from total revenue. But what about your accountancy business? Where are your COGS?
Firstly, you sell your working hours. In other words, your working hours are your goods. Further on – your costs are yours and the salaries of your employees. Additionally, there are the costs of subcontractors (external consultants). Therefore, gross profit should be calculated using this formula:
In order to compare your gross profit Year – Over – Year, and with your competitors, you should calculate Gross Margin:
6. Commercial Margin
You calculated gross profit. What is the next line of your accountancy business’ income statement?
The next line is commercial profit. Commercial profit is calculated when you subtract the costs of commercial activities. In other words, subtract marketing and advertising costs, costs of business development, costs of education of your employees, etc.:
Just like other profit categories, you can divide Commercial Profit with Total Revenue to get a profit margin:
7. EBITDA Margin
As you probably know, EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is one of the measures of profits an accountancy business makes in its business operations. You should calculate the operating expenses. To put it simply, these are labor costs rental expenses, subcontractors’ fees, and marketing expenses. Then, deduce them, except depreciation and amortization, from operating revenue,
In order to get a better picture of profitability, you should calculate the EBITDA margin:
The EBITDA margin is suitable for comparison. That is, you can track it Year – Over – Year or compare it with the competition.
8. EBIT Margin
EBIT (Earnings Before Interest and Taxes) is the company’s operating profit. To put it plainly, it’s the operating revenue minus operating expenses. The operating expenses include direct operating costs, commercial costs, administration costs, etc.:
In order to get a better picture of profitability, you should calculate the EBIT margin:
EBIT margin is suitable for comparison (Year – Over – Year or comparing with the competition).
9. Net Profit Margin
Net Profit is usually the final line in the income statement. It represents the profit that stays in a company after all expenses are covered. These expenses include income tax and interest. In order to get a better picture of profitability, you should calculate the Net Profit margin:
Net Profit margin is suitable for comparison (Year – Over – Year or comparing with the competition).
10. Effective Tax Rate
We get to a metric you are familiar with, as an accountant. It is an effective tax rate:
11. Churn Rate
The easiest way to make a profit consistently in almost any business is to keep your existing customers. Therefore, you should track what is the percentage of clients you lose each year:
12. Revenue Churn
However, Churn Rate is not enough. Namely, you should track how much revenue you lose. You need to see how much sales you lost.
13. Services Per Client
Why is it important to track the number of services provided per client?
If your client gets only one type of service from you (e.g. payroll services), it is fairly easy for them to switch accountants. Even if you do your work very well, your client can decide to choose a less expensive service provider. How can you stop this from happening?
Well, you should not be only an accountant to your client.
You should be their business advisor. Your client must perceive as a generalist, in contrast to a specialist. Talk with your client about their business. What problems do they encounter? What are their goals? Can you help your client achieve said goals?
14. Days Sales Outstanding
During one of the greatest stock exchange crashes in history (Black Monday of 1987), Volvo CEO famously said:
‘’Cash is king!’’
Do not lose your time manipulating your profit to make it as big as possible. Focus on your cash flow. After you generate sales, you must track whether you collect those receivables. A good metric that will show your efficiency in it is Days Sales Outstanding:
Compare Days Sales Outstanding with the credit terms you provide to your customers. Then, check if you are satisfied with the collection of receivables.
15. Share of Bad Debt in Total Revenue
We’ve described some metrics for the accountancy business. Now, we shall continue with cash management issues. Unfortunately, almost every business that sells on credit, faces bad debt.
You need to make sure to minimize bad debt. In other words, reduce the work you have done, but not collected:
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