What Are Metrics, and Why Do You Need Them?
Metrics and Key Performance Indicators and KPIs…oh my! (Hey, our HQ is located in Kansas…you may experience a Wizard of Oz reference from time to time. 😉)
Simply put, Key Performance Indicators (KPIs) reveal information about how your business is performing. When you measure your KPIs regularly and understand what they mean, it helps you to ensure that your business remains profitable, efficient and positioned for long-term stability.
In short, KPIs help you:
Quickly understand how your business is performing
Provide an eagle-eye view of your business without getting stuck in the weeds
Identify areas where you need to pivot
Spot trends in current and past performance…are you improving or stuck?
You’ve likely heard the idiom, “When there’s smoke, there’s a fire.”
When you have a fire in your business, what do you do?
You jump in and work to swiftly resolve it! But we don’t have to tell you that. You’ve already experienced fires in your business. They’re no fun at all, and you work to actively find and resolve fires or prevent them in the first place. No one wants to operate from a place of “stop, drop and roll”. It’s stressful and not sustainable. And let’s not even talk about what it does to your blood pressure…
KPIs are your first indicator that there’s smoke. If you’re not measuring them or understand what they’re telling you, you may not even realize that you have smoke…or that a fire is imminent. Yikes.
So what kinds of KPIs are there?
Oh my goodness, we could quite literally talk about this alllll day. But your time is precious. Here’s a high-level view.
Financial KPIs
Financial KPIs help you assess your profitability, cash flow and financial health.
You can track anything from Gross Profit Margin, to Net Profit Margin, to Overhead, to Revenue by Job, to Accounts Receivable Turnover, etc.
Project Performance KPIs
Project Performance KPIs help you measure how effectively your projects are being estimated, executed and delivered.
You can track anything from Estimate vs. Actual Cost, to Project Profitability, to Labor Utilization Rate, etc.
Operational KPIs
Operational KPIs help you focus on internal productivity and job site performance.
You can track anything from Job Cost Variance, to Equipment Utilization, to Time to Completion/Schedule Variance, etc.
Sales & Pipeline KPIs
Sales & Pipeline KPIs help you forecast future work and manage leads.
You can track anything from Bid-Hit Ratio, to Sales Pipeline Value, to Average Project Size, etc.
Client & Employee KPIs
These help you focus on long-term growth, relationships and team performance.
You can track anything from Customer Satisfaction, to Employee Turnover Rate, to Safety Incidence Rate, etc.
As you can see, it is easy to go down the rabbit hole. But not to worry, let’s cut through the noise. We have some suggestions for you…
Which KPIs are best to start with?
Whatever you do, do not get stuck in the weeds here! “Done is better than perfect.” Get started with these core KPIs, and you can build from here.
Gross Profit Margin %
What is it? → Gross Profit Margin is a measure of a company’s financial health and efficiency in producing goods/services
How do you measure it? → (Total Cost of Goods Sold / Revenue) x 100
What does it tell you? → For every $1.00 in Revenue that you collect, how much of that dollar are you keeping to operate your business AFTER spending money on your Cost of Goods Sold?
Example → Total Cost of Goods Sold for the month is $50,000. Revenue for the month is $100,000. (Total Cost of Goods Sold $50,000 / Revenue $100,000) x 100 = 50%. You have a 50% Gross Profit Margin. For every dollar you collected in Revenue this month, you kept $0.50 in Gross Profit.
Payroll as % of Revenue
What is it? → Payroll measures every dollar spent on employees, including: Gross Wages, Overtime Pay, Bonuses & Commissions, Payroll Taxes, Benefits, and Other Costs (Workers’ comp, etc.)
How do you measure it? → (Total Payroll Expenses / Revenue) x 100
What does it tell you? → For every $1.00 in Revenue that you collect, how much of that dollar is being used to pay for payroll expenses? Keep in mind that your payroll expenses likely appear in both Cost of Goods Sold (labor) and Operating Expenses (office support staff). This KPI is designed to bring clarity around how much of your revenue is dedicated toward paying payroll expenses.
Example → Total Payroll Expenses for the month is $40,000. Revenue for the month is $100,000. (Total Payroll Expenses $40,000 / Revenue $100,000) x 100 = 40%. You have a 40% Payroll as % of Revenue Margin. For every $1.00 collected in Revenue this month, you used $0.40 of that dollar to pay for payroll expenses.
Overhead as % of Revenue
What is it? → Overhead is a measure of the company’s costs of additional business expenses not directly used for a job or service. Think rent, insurance, utilities, office supplies.
How do you measure it? → (Overhead Expense / Revenue) x 100
What does it tell you? → For every $1.00 in Revenue that you collect, how much of that dollar is being used to pay for business operating expenses?
Example → Operating Expenses for the month is $20,000. Revenue for the month is $100,000. (Operating Expenses $20,000 / Revenue $100,000) x 100 = 20%. You have a 20% Overhead as % of Revenue Margin. For every $1.00 collected in Revenue this month, you used $0.20 of that dollar to pay for business operating expenses.
Net Profit Margin %
What is it? → Net Profit Margin is the percentage of total income you get to keep after all expenses and taxes are paid.
How do you measure it? → (Net Profit / Revenue) x 100
What does it tell you? → For every $1.00 in Revenue that you collect, how much of that dollar are you keeping as net profit in the business?
Example → Net Profit for the month is $30,000. Revenue for the month is $100,000. (Net Profit $30,000 / Revenue $100,000) x 100 = 30%. You have a 30% Net Profit Margin. For every dollar in Revenue you collected this month, you kept $0.30 as Net Profit.
Starting with these KPIs will give you a solid foundation to understand what is happening in your business. They are relatively easy to implement, and it will be more efficient to fix any issues identified here first before taking a deeper dive into additional KPIs you may want to track.
KPIs - Going Deeper
Your business is like an onion. It has layers. (Shrek reference, anyone? Anyone? I’ve either just really aged myself or made myself seem like a young ‘whippersnapper’. You be the judge.)
Okay, but really. Your business DOES have layers.
If you want to get a true peek into your business performance, you can go one layer deeper on your starting KPIs:
BY PROJECT, track your Gross Profit Margin, Overhead and Net Profit Margin
Compare your current month’s performance vs. last month AND vs. the previous 12 months (aka the “Trailing 12”).
Why go one layer deeper?
Because this is especially helpful for your business when you are in growth mode and building.
Tracking these key KPIs (Gross Profit Margin, Overhead and Net Profit Margin) by project helps you to quickly identify which types of your projects are performing and which are costing you money.
Typically, we find that your performing projects subsidize underperforming projects. You can’t necessarily see that when you track your KPIs and margins on your overall business performance vs. going one layer deeper to look at this data at the project level.
And comparing this month’s performance vs. last month and the previous 12 months helps you to spot trends and ensure that you’re on the path you’re aiming for.
So Now What?
We highly encourage you to begin tracking your core KPIs: Gross Profit Margin, Payroll as % of Revenue, Overhead as % of Revenue and Net Profit Margin.
And if you’re not quite sure how to pull that together, don’t worry. We specialize in just this thing for our clients. We’d love to discuss a plan moving forward to help you get the insights that you need from your business.
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