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 your business uses its resources.
A low utilization rate may indicate that better measures need to be implemented to ensure efficiency. In contrast, a high utilization rate could mean that your firm successfully meets deadlines or may have reached its optimum capacity level.
To improve your utilization rate, you could hire more employees, provide job training to enhance efficiency on the worksite, and purchase newer equipment.
2. Net Revenue per Employee
Your Revenue per Employee takes a detailed look at how efficiently each of your employees is performing.
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.
3. Effective Multiplier
The Effective Multiplier KPI takes a look at the revenue earned by the firm for every dollar spent on employees.
This indicator is important to track because it will show exactly how much the return on your labor investment is. A high effective multiplier may indicate a low level of absenteeism among employees or that your employees are working efficiently. A low result could point to high levels of sick time or inefficient processes.
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, there are often highly long payment periods of a few 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 on money owing, and you should be following 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 is also referred to as Average Days in Accounts Receivable. It looks at how effective the accounts receivable department is at collecting payment after work has been completed.
The higher the day's sales outstanding figure is, the less effective your firm is collecting payment which can significantly affect your cash flow.
7. Overhead Rate
Overhead rate details how much money your architecture firm is spending on non-project-related expenses such as indirect labor.
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 give 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.
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 to compare 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 you regarding 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.