Key performance indicators are essential metrics that, when appropriately tracked, can provide valuable insight into the health of your architecture firm's business. These top KPIs can show you how your firm is performing and where it is headed in the future; they can also determine how your resources are being utilized and ensure that nothing is wasted.
The performance indicators that provide the most value to an architecture firm can be broken down to look specifically at project performance, cash flow, and overall profit.
Project Performance KPIs
1. Utilization Rate
Also known as the operating rate, this KPI can provide valuable information on how well an architectural firm uses its resources. It is a critical metric for architectural firms, reflecting the efficiency and productivity of their workforce. It is calculated by dividing the number of billable hours (time spent on projects that can be charged to clients) by the total number of hours worked (both billable and non-billable). It is usually expressed as a percentage.
Utilization Rate is important because it directly impacts profitability. A higher Utilization Rate indicates that a larger proportion of the staff's time is spent on revenue-generating activities rather than on non-billable tasks such as administrative work, training, or downtime. A low utilization rate may indicate that better measures need to be implemented to ensure efficiency, such as making decisions about staffing, workload distribution, and the scaling of operations. It also aids in forecasting revenue and planning for growth.
2. Net Revenue per Employee
Your Revenue per Employee takes a detailed look at how efficiently your employees perform on average. Net Revenue per Employee indicates the average amount of net revenue generated by each employee within the firm. This metric is calculated by dividing the total net revenue of the firm by the total number of employees. Net revenue typically refers to the firm's total revenue minus the direct costs associated with generating that revenue (such as subcontractor fees, cost of materials, etc.).
It gives a good indication of your business's overall performance. A low net revenue per employee figure may mean that your business is overstaffed, or there may be ways to improve individual performance. A high figure could indicate that it's time to hire more employees to take on all of the extra work.
For architectural firms, Net Revenue per Employee provides insights into several key aspects:
- Productivity: This metric helps gauge the productivity and efficiency of employees by showing how much revenue each contributes to the firm. A higher value typically indicates more efficient or productive employees.
- Operational Efficiency: How well the firm manages its resources, including human capital.
- Financial Health: By understanding revenue contributions on a per-employee basis, firms can assess their financial health and stability. This is particularly useful for planning purposes, such as expansions, hiring, or investments in new technologies.
Overall, this metric helps architectural firms make informed decisions about managing their workforce, optimizing operations, and achieving sustainable growth.
3. Effective Labour Multiplier
The Effective Labour Multiplier KPI measures the revenue earned by the firm for every dollar spent on employees. It is calculated by dividing the total revenue generated from architectural services by the direct labour costs associated with those services. Direct labour costs include the salaries and benefits of the employees who directly contribute to billable work. This multiplier provides an indication of how much revenue each dollar of labour cost generates.
For architectural firms, the Effective Labor Multiplier is significant for several reasons:
- Profitability: Provides a clear view of how effectively a firm is converting labour into revenue. A higher multiplier indicates that the firm is earning more revenue per dollar of labour cost, which is a sign of good financial health and efficient management.
- Pricing Strategy: Helps firms adjust their service pricing to ensure they cover costs while remaining competitive. It also aids in deciding whether to take on a project based on the expected labour costs and potential revenue.
- Resource Allocation: By analyzing the effective labour multiplier across different projects or departments, firms can identify areas where labour is not used efficiently. This helps reallocate resources to maximize profitability.
- Budgeting and Forecasting: Firms can use historical Effective Labor Multiplier data to forecast future revenue and make informed budgeting decisions regarding hiring, expansions, and other investments.
Overall, the Effective Labor Multiplier is a crucial metric for architectural firms to monitor and optimize to ensure they are not only covering their labour costs but are also maximizing their profitability from the labour employed.
This indicator is important to track because it will show exactly how much the return on your labour investment is. A high effective multiplier may indicate a low level of absenteeism among employees or that your employees work efficiently. A low result could point to high levels of sick time, inefficient processes, or overstaffing. To improve the effective multiplier KPI, identify absenteeism issues early on, give realistic schedules and deadlines for projects to avoid overtime, and invest in employee training to increase productivity.
4. Effective Cost Rate
The effective cost rate takes a look at the actual cost of each individual employee.
It gives a true and accurate picture of how much it costs to employ one person on an hourly basis. This KPI is important because it shows precisely how much each employee should be paid to remain profitable. A high effective cost rate may mean you are overpaying for an employee's services, while a low cost rate may mean that you are underpaying and, therefore, may not be hiring the most well-trained or skilled employees.
Cash Flow KPIs
5. Aged Accounts Receivable
In the architecture industry, payment periods are often several months or more. Reviewing your aged accounts receivable regularly will allow your firm to collect your payments on time and, therefore, significantly improve your cash flow.
A high aged accounts receivable rate means that it takes your business a long time to collect money owing, and you should follow up with clients earlier. A low rate means that your payments are coming in in a timely fashion.
6. Days Sales Outstanding
Days Sales Outstanding are also referred to as Average Days in Accounts Receivable. They measure the effectiveness of the accounts receivable department in collecting payment after work has been completed.
The higher the days sales outstanding figure, the less effective your firm is collecting payment, which can significantly affect your cash flow.
Profit KPIs
7. Overhead Rate
Overhead rate details how much money your architecture firm is spending on non-project-related expenses such as indirect labour.
Knowing this KPI can give your firm a good indication of your overall profitability. The lower the overhead rate, the higher the profit margin. By managing your indirect expenses carefully, you can keep your overhead rate as low as possible.
8. Profits to Earnings Ratio
Your profits-to-earnings ratio gives a good indication of how effective your architecture firm is at completing projects and turning a profit.
The higher your profit-to-earnings ratio is, the more profitable your business is. If this indicator is low, you may need to look into ways of increasing profitability by reducing overhead, reducing overtime, and increasing employee efficiency.
9. EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization allows you to measure your firm's cash flow.
This KPI will enable you to measure the overall success of your business and give you an excellent method for comparing your success against other companies in the industry. Analyzing EBITDA is easy; the higher the rate, the more profitable your firm is.
Analyzing and improving your metrics can completely change how successful your architecture firm is. These top KPIs can give you an immediate idea of where your business stands and flag any issues that may be pushing your firm in a negative direction. This will allow you to make the necessary changes early on to avoid any problems in the future.
At Enkel, we understand the importance of measuring your KPIs and ensuring that your business operates as efficiently as possible. For more information on how to improve your finances and manage your bookkeeping processes, contact us today.
