Top Services Industry Financial Metrics and KPIs
As we are moving more into the digital world, the services industry is growing by leaps and bounds. More and more people are joining this industry and want to improve how people use different services on a regular basis. But how do you actually measure success in the services business? What are those KPIs for service companies? What are the metrics? To answer these questions, We bring you the top services industry financial metrics.
If you are a business owner in the services industry, then you know that it can be tough to stay profitable. There are many different factors that go into determining your financial success. Also, it can be difficult to keep track of them all. That’s why we put together this list of the top services industry financial metrics and KPIs. By tracking these numbers, you will be able to make smarter business decisions and increase your profits. Not only that, but you will also be able to benchmark your performance against other businesses in your industry.
But before moving on to the metrics and KPIs, let us show you some global numbers of the services industry.
Overview of the Services Industry
What exactly is the services industry? It’s everything from accounting and legal services to waste management and transportation. If we only start to list down all the professional services, it will take forever.
The services industry is a huge part of the global economy. In fact, it makes up almost 40% of the world’s GDP. That’s a lot! And it’s only going to grow in the future. By 2030, the services sector is expected to make up 60% of the world’s GDP.
The services industry is also a huge employer. In the United States alone, there are over 21 million people employed in this industry. And that number is only going to grow in the future.
What Role Do Financial Metrics Play in Financial Analysis of Services Industry?
Financial metrics play a very important role in the financial analysis of any industry. But they are especially important in the services industry. This is because the services industry is so large and diverse. There are many different types of businesses within this industry. And each one has its own unique financial situation.
By tracking the right services industry financial metrics, you will be able to get a better understanding of your business’s financial health. You will be able to identify areas of improvement and make changes accordingly.
What Are the Most Important Financial Metrics for Services Industry? (KPIs for Service Companies)
Now that we know the importance of financial metrics, let’s take a look at some of the most important ones for the services industry. What we have done here is we have divided all the metrics and KPIs into four categories.
Although you can break down the services industry financial metrics and KPIs into many different categories, these four are the most important. The reason they are of the highest importance is that any services business in the world has employees. It also has revenue, customers, and finally, processes. By tracking these numbers, you will be able to get a good overview of your business’s financial health, growth potential, and profitability.
So, without further ado, let’s begin with our first category on the list.
The first category is employees. This includes metrics and KPIs related to your workforce. It’s important to track these numbers because your employees are your most important asset. After all, it is the employees who provide the services. If they are not happy or if they are not motivated, it will show in the quality of work.
There are many different employee-related metrics and KPIs that you can track. But for your convenience, we have discussed only the ones that most suit the services industry. You will see that some of these metrics are only applicable to the services industry while others can be applied to others as well.
Employee Turnover Rate
The employee turnover rate is the percentage of employees who leave your company in a given year. This metric is important because it shows you how well you are retaining your employees. A high turnover rate is not good for business as it indicates that your employees are not happy with their jobs.
There are many different factors that can contribute to a high turnover rate. It could be because of low wages, poor working conditions, or a bad work-life balance. By tracking this metric, you will be able to identify the reasons why your employees are leaving and make changes accordingly.
To calculate the employee turnover rate, you will need to divide the number of employees who left in a year by the average number of employees you had during that year. For example, if you had 100 employees at the beginning of the year and 20 of them left by the end, your turnover rate would be 20%.
Employee Turnover Rate = Number of employees who left in a year / Avg. number of employees at the start of the year
Time utilization is a metric that shows you how much time your employees are actually working. This is important because it helps you to identify any areas where your employees might be slacking off. If they are not working as much as they should be, it will reflect in the quality of work.
There are different ways to measure time utilization. One way is to track the number of hours worked by each employee in a day. Another way is to track the number of billable hours. Billable hours are the hours that can be charged to a client. By tracking this metric, you will be able to see how productive your employees are and make changes accordingly.
Time Utilization = Billable Hours / Total Work Hours
The billable rate is the percentage of work hours that can be charged to a client. In services businesses, not all work hours can be charged to a client. For example, time spent in training or administrative work cannot be billed.
This metric is important because it shows you how efficient your employees are. If they are spending too much time on non-billable work, it will impact your bottom line. By tracking this metric, you will be able to see where your employees are spending time and make changes accordingly.
To calculate the billable rate, you will need to divide your revenue by the number of billable hours worked. For example, if you had $100,000 in revenue and 10,000 billable hours, your billable rate would be 10%.
Billable Rate = Revenue / Billable Hours Worked
Employee Engagement Rate
The employee engagement rate is the percentage of employees who actively participate in the services. This metric is important because it shows you how motivated your employees are. A high engagement rate means that your employees are happy with their jobs and are more likely to be productive.
There are many different factors that can contribute to a high engagement rate. It could be because of good working conditions, fair wages, or a good work-life balance. By tracking this metric, you will be able to identify the reasons why your employees are engaged and make changes accordingly.
Now, when it comes to calculating this metric, there is no one right formula. Since every company is different, you will need to come up with a way that suits your business. In any case, you just have to see that the employees should genuinely be involved and not faking it. Because that would completely defeat the purpose.
Employee Satisfaction Rate
The employee satisfaction rate is the percentage of employees who are happy with their jobs. This metric is important because it shows you how well you are doing as an employer. A high satisfaction rate means that your employees are happy with their jobs and are less likely to leave. This in turn affects the overall employee turnover rate as well.
There are many services businesses that track this metric by conducting employee surveys. This is a good way to get an accurate measure of employee satisfaction. You can also track this metric by looking at the number of complaints or grievances filed by employees. A low number of complaints indicates a high level of satisfaction. Another way to track this metric is to look at the number of employees who take advantage of company perks or benefits.
Now that you know the different employee-related metrics and KPIs, it’s time to put them into action. Start tracking these numbers and see how they change over time. You might be surprised at what you find.
Now, we move to the second and most important category in services industry financial metrics. It’s Revenue, of course.
Revenue is like the air and water for any business, including service businesses. Whether you belong to the BFSI sector or a small business providing dog grooming services, revenue is what keeps you going. It’s important to track your revenue on a regular basis so that you can make informed decisions about your business.
There are two ways to track revenue: top-line and bottom-line.
Top-line refers to the total revenue that the company generates. This is the number that you usually report in financial statements.
Bottom-line, on the other hand, refers to the net income or profit of the company. This is the number that tells you how much money your company has made after all expenses you paid.
Both top-line and bottom-line numbers are important, but most companies focus on the bottom line because it’s a more accurate measure of profitability.
Return on Investment (ROI)
You may have heard a lot of services companies talking about ROI. But what is it exactly? Return on investment, as the name suggests, is the percentage of profit that you make on your investment. It’s important to track this metric because it tells you how well your business is doing. If you’re not making a profit, then there’s no point in investing more money into the business.
Being in the services industry, you’re probably not selling any physical products. So, how do you calculate ROI? The most common way is to divide the net profit by the total investment. For example, let’s say you invest $100 in your business and make a profit of $50. This means that your ROI is 50%.
Now, there are different ways to calculate ROI, and the formula may vary depending on the industry. But this is the most basic and commonly used method in the services industry.
Return on Investment = Net Profit / Net Investments X 100
Return on Equity (ROE)
Another important metric to track is ROE or return on equity. This is the percentage of profit that you make on your shareholders’ equity. Equity is the portion of the company that belongs to the shareholders. It’s important to track this metric because it tells you how well your business is doing in terms of shareholder value.
There are different ways to calculate ROE, but the most common way is to divide the net income by the average shareholder equity. For example, let’s say your company has a net income of $100 and average shareholder equity of $500. This means that your ROE is 20%.
Return on Equity = Net Income / Average Shareholders’ Equity X 100
In the services industry, it’s important to track project efficiency. This is the percentage of projects that you complete on time and within budget. Another definition of project efficiency is the project overrun. Project overrun is the amount of money that you spend on a project over the original budget.
It’s important to track this metric because it tells you how well you’re managing your projects. If you’re constantly going over budget or missing deadlines, then it’s time to reevaluate your project management process.
You can simply calculate your project efficiency when you divide the original budget with the actual budget. For example, if you have a project with a budget of $100 and you end up spending $120, then your project efficiency is 83%.
Project Efficiency = Actual Cost / Original Budget X 100
Cost of Goods Sold (COGS)
The cost of goods sold (COGS) is the direct costs associated with the production of the goods or services that you sell. This includes the cost of materials, labor, and overheads. COGS is important because it tells you how much it costs to produce your product or service. By tracking this number, you will be able to see if your business is making a profit or not.
To calculate COGS, you will need to add up all the direct costs associated with producing your product or service. For example, if you are a manufacturing company, your COGS would include the cost of raw materials, labor, and factory overhead.
Being a services business, your COGS would include the cost of labor and other direct costs. Once you have calculated your COGS, you can then subtract it from your revenue to get your gross profit.
Gross profit is the difference between revenue and COGS. This number tells you how much money your company has made after paying for the cost of goods sold.
To calculate gross profit, simply subtract COGS from revenue. For example, if your company had $100 in revenue and $80 in COGS, then your gross profit would be $20.
Net profit is the final measure of profitability. It tells you how much money your company has made after paying all expenses.
To calculate net profit, you will need to subtract all expenses from revenue. This includes operating expenses, interest, taxes, and depreciation. For example, if your company had $100 in revenue and $50 in operating expenses, then your net profit would be $50.
Operating expenses are the costs associated with running your business on a day-to-day basis. This includes things like rent, utilities, salaries, and office supplies.
To calculate operating expenses, simply add up all the costs associated with running your business. For example, if your company had $50 in rent and $20 in utilities, then your total operating expenses would be $70.
Let us show some examples of a few services businesses and how their operating expenses vary from each other.
Type of Business: Consulting Firm
– Rent: $2000
– Utilities: $500
– Salaries: $15000
– Office Supplies: $1000
Type of Business: IT Services Company
– Rent: $5000
– Utilities: $1000
– Salaries: $25000
– Office Supplies: $2000
As you can see, the operating expenses for a consulting firm are relatively low when compared to an IT services company. This is because the overhead costs for a consulting firm are lower than that of an IT services company.
Similarly, higher operating expenses don’t mean that a company is less profitable. It all depends on the revenue that the company generates. This obviously varies from business model to business model.
EBITDA is a measure of profitability that tells you how much money your company has made before paying for taxes, interest, and depreciation. To calculate EBITDA, you will need to add up your revenue and then subtract your COGS, operating expenses, interest, taxes, and depreciation.
For example, if your company had $100 in revenue and $80 in COGS, $50 in operating expenses, $20 in interest expense, $30 in taxes, and $40 in depreciation expense, then your EBITDA would be $60.
As you can see, EBITDA is a very useful metric for measuring profitability. It is especially useful for comparing companies with different capital structures. For example, two companies could have the same net profit, but one company could have a higher EBITDA because it has a lower interest expense.
Similarly, two companies could have the same EBITDA, but one company could be more profitable because it has a lower tax rate. This is why EBITDA is such a useful metric for financial analysis.
Now that we know what EBITDA is and how to calculate it, let’s take a look at some of the other important financial metrics and KPIs for services businesses.
Revenue per Employee
Revenue per employee is a measure of productivity. It tells you how much revenue each employee generates for your company.
To calculate revenue per employee, simply divide your total revenue by the number of employees. For example, if your company had $100 in revenue and five employees, then your revenue per employee would be $20.
This metric is especially useful for companies that are labor-intensive. For example, a company that provides home health care services is going to have a very different revenue per employee than a company that provides consulting services.
But how can you improve your revenue per employee?
There are a few ways.
First, you can try to increase your prices. This will obviously have a direct impact on your revenue per employee.
Second, you can try to increase your sales volume. This will also have a direct impact on your revenue per employee.
Finally, you can try to decrease your costs. This will have an indirect impact on your revenue per employee because it will increase your margin and therefore your profitability.
But the Best Way to Improve Your Revenue is to Hire Oak Business Consultant
Being in the industry for more than a decade, we know what it takes for a service business to succeed. When you come to us for financial analysis, we will take a comprehensive look at your business and give you actionable steps to improve your revenue.
Not only that, but we will also help you implement the changes necessary to achieve your desired results. As the leading provider of financial analysis for service businesses, we at Oak Business Consultants are here to help you grow your business! We have the knowledge and experience necessary to provide you with actionable steps to improve your revenue and increase productivity.
Along with the expert financial analysis, we also offer a wide range of other services, including financial planning, service business financial modeling, creating business plans for service businesses, and more.
So, if you’re looking for expert financial analysis and guidance, look no further than Oak Business Consultants! We are here to help you grow your business and achieve your goals. Contact us today to learn more about our services or to schedule a consultation.
Revenue per Project
Revenue per project is another important metric for services businesses. It tells you how much revenue each project generates for your company.
To calculate revenue per project, simply divide your total revenue by the number of projects. For example, if your company had $100 in revenue and five projects, then your revenue per project would be $20.
This metric is especially useful for companies that work on a project basis. For example, a web design company is going to have a very different revenue per project than an accounting firm. Additionally, this metric can be useful for companies that have a mix of project-based and recurring revenue.
The key to improving your revenue per project is to optimize your pricing criteria. This will obviously have a direct impact on your revenue per project. However, it’s important to make sure that you’re not pricing yourself out of the market. You also need to make sure that you’re providing enough value to justify your price increases.
If you’re not sure how to do this, we recommend hiring Oak Business Consultant who specializes in financial analysis for service businesses. They will be able to help you determine the right price for your services and guide you on how to increase your prices without jeopardizing your business.
Our third category is linked with the first two in that it’s a measurement of productivity, but this time we’re looking at customers instead of employees. In the services industry, customer satisfaction is key to success.
A company with a high number of satisfied customers is usually a company that is doing well. On the other hand, a company with a low number of satisfied customers is usually a company that is struggling. The metrics that we are going to discuss below also fall in the revenue category. But we chose to discuss them in this category because these services industry financial metrics are also linked with customers.
Customer Churn Rate
The customer churn rate is the percentage of customers who cancel their subscription or service within a given period of time. For example, if you have 100 customers and five of them cancel their service within the month, then your customer churn rate would be five percent.
A high customer churn rate is a sign that your company is not doing well. It means that you are losing more customers than you are gaining. And it also means that you are not providing enough value to your customers to keep them around.
There are a few ways to improve your customer churn rate.
You can try to increase the value that your customers receive from your service. You can do this by adding new features or by providing a better level of customer service.
This is why it’s important to constantly be measuring your customer churn rate. If you see that your customer churn rate is increasing, then you need to take action to improve it.
The last category in the services industry financial metrics that we’re going to discuss is “processes”. This category includes all of the metrics that have to do with the internal workings of your company. Processes include things like On-time service delivery, Unscheduled downtime, Safety incidents, and more.
We are going to discuss these metrics and KPIs very briefly. If you want to learn more about these metrics, we recommend connecting with our experts.
On-time Service Delivery
It’s important to track this metric because it tells you how efficient your company is. If you’re not able to deliver your services on-time, then your customers will be unhappy. And if your customers are unhappy, they will likely leave for another company.
This metric tells you how often your company’s services are down. It’s important to track this metric because it can have a big impact on your bottom line. If your services are down, then you’re not generating revenue.
This metric is important because it tells you how safe your company is. If you have a lot of safety incidents, then that’s a sign that something you need to change. It affects your bottom line because it can lead to lawsuits, lost customers, and more.
These are the top services industry financial metrics and KPIs that you should be tracking. If you’re not already tracking these metrics, we recommend connecting with our expert financial analysts today. We can help you set up a system to track all of these metrics and KPIs so that you can make better decisions for your business.