Key Performance Indicators (KPIs) are helpful financial tools for engineering firms. They are essential metrics that can help you track and compare your performance with other companies in your industry, identify areas for growth, evaluate your project performance, and indicate where your firm is headed in the future.
These KPIs can significantly impact your business and help you make more strategic business decisions. Before setting the KPIs for your engineering firm, it is essential that you have clearly defined goals for your organization, such as improved operating efficiency, increased sales, or increased value per project. When these metrics are analyzed, you will easily be able to tell how close you are to reaching your primary business objectives and which areas require more work. Here are 10 financial KPIs for your engineering firm.
1. Cost Performance Indicator (CPI)
The Cost Performance Indicator (CPI) is widely used in project management, particularly within engineering firms. It measures the cost efficiency of project-related work, helping firms understand how effectively they are managing and utilizing their financial resources in project execution.
Here's how the components break down:
- Earned Value (EV): This is the estimated value of the work actually completed to date. It provides a quantifiable measure of work performed expressed in the approved budget assigned to that work.
- Actual Cost (AC): This is the actual cost incurred for the work performed on the project up to a particular point.
For example, if an engineering project has an Earned Value of $500,000 and the Actual Cost incurred to achieve this is $450,000, the CPI would be 1.11. If the CPI percentage is higher than 1, the project is well within its budget. If the percentage is less than 1, it is not operating efficiently.
To improve the CPI, look at ways to improve your efficiency or create more realistic budgets for your projects.
2. Days Sales Outstanding (DSO)
This KPI, also referred to as Average Days in Accounts Receivable, measures the effectiveness of the accounts receivable department in collecting payment after work has been completed. This metric is particularly important for managing cash flow, as it directly affects the firm's ability to cover operating expenses, invest in new projects, and maintain financial flexibility.
The higher the day's sales outstanding figure is, the less effective your firm is collecting payment which can significantly affect your cash flow.
A lower DSO indicates that the firm is able to quickly collect payments from its customers, maintaining a healthy cash flow. Conversely, a high DSO may suggest issues with credit policies or customer payment behaviours, potentially leading to cash flow problems.
For engineering firms, which often operate on thin margins and manage large, complex projects that can have long durations, maintaining a low DSO is crucial. It ensures that the firm has the necessary cash to meet its obligations, invest in capital expenditures, or manage any unforeseen challenges.
3. Utilization Rate
This KPI can provide valuable information on how well your engineering business uses its resources. The Utilization Rate is a critical metric for engineering 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). This ratio is usually expressed as a percentage.
The 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. This metric helps firms assess how effectively they deploy their human resources and whether they maximize their potential income.
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 technology.
4. Operating Cash Flow
Operating cash flow measures the amount of money that your engineering firm generates from its day-to-day operations or the amount of cash generated by the firm's regular operating activities.
Operating cash flow is particularly important for engineering firms because these businesses often face large fluctuations in revenue and expenses due to the project-based nature of their work. Reliable cash flow from operations ensures that the firm can meet its short-term liabilities and invest in necessary resources without the constant need for external financing. It also provides the liquidity needed to handle engineering projects' cyclical and sometimes unpredictable nature, making it a critical measure for financial stability and operational viability. By comparing this number to your total capital employed, you will get a sense as to whether your business is earning enough cash to sustain the investments you are making back into your business.
5. Number of Clients & Number of New Clients
By determining the number of overall clients you have and the number of new clients you have obtained within a certain period of time, you can better see how well your company is growing. These KPIs can show you if you are successfully meeting your clients' needs and if you are growing your business as expected.
These KPIs can show you if you are successfully meeting your clients' needs and if you are growing your business as expected.
6. Percentage of Revenue from Existing Clients
By calculating this KPI, you will be able to determine how much money is being earned from your existing clients and, therefore, how satisfied they are with the work that is being performed for them.
This KPI shows how frequently existing clients return to your business and how much of your revenue is generated on new clients.
7. Project Margin
One of the main benefits of tracking project margin is its ability to help you understand whether a specific project has been financially successful for your engineering firm or not.
This KPI can help you determine the project margin before you begin a project, showing you whether the project will give you the expected financial results.
8. Net Profit Margin
Also referred to as the "bottom line," this KPI measures total net profit as it relates to revenue.
Measuring this KPI is vital to ensure that your business is turning a profit and that the projects you are working on are earning you money. Ideally, you want your net profit margins to be above 10%
9. Break-Even Point (BEP)
The break-even point measures the number of projects you need to complete to cover your business's costs. Once the break-even point has been met, you will start showing a profit.
This KPI is valuable because it shows exactly what it will take for your engineering business to be profitable.
10. Return on Assets (ROA)
Tracking your ROA is important for an engineering firm because it gives you valuable insight into how efficiently your company uses its capital.
If you specialize in manufacturing, you may have many assets; if you are primarily a consulting-based firm, you may have very few. Nonetheless, it can show you where you stand in terms of profitability among other similar firms within your industry.
Final Thoughts
By looking into some of the most important KPIs for engineering firms in-depth, you can obtain a better idea of how your business is performing, how closely you are following your goals, and identify any issues limiting your success.
At Enkel, we understand that these KPIs are important. We can help you manage your books so that you always have access to the most up-to-date financial information. Our team of experts understands that the health of your business depends on accurate and timely information, and we are here to provide it. Contact us today to find out how we can help.
