Key Performance Indicators
As accountants and financial professionals practising in a modern day age where hi-tech tools are easily available in some form or another, we have no shortage of numbers. I would say that one of our main problems is to ensure that we have in hand the right numbers at the right time. This is the real challenge we face in creating useful Key Performance Indicators or KPI’s as we love to call them.
Albert Einstein was not famous for his financial wisdom but some of his profound thoughts definitely apply to the world of finance just as much as to they do to the world of science and one such example is “Not everything that can be counted counts, and not everything that counts can be counted.”
This leads us to conclude that just because we can measure something does not mean that we should do so. As accountants we will do our best to maximise the performance of our own businesses, our firms, but we need to focus on the challenge which we face. We need to make sure that we:
- Count the figures that count – the good KPI’s;
- Get the right numbers right – good data integrity;
- Develop specific KPI’s relevant to our own situation; and
- Drive improvement based on the right KPI’s.
Abraham Maslow once declared that “If your only tool is a hammer, then every problem will look like a nail.” Our firm’s KPI’s can be hard to measure if we are thinking about measurement in the wrong way. We cannot make do with a single tool or just one KPI. We actually need a whole toolkit or set of KPI’s to achieve our objectives but due to our constant deadline orientated work overloads and time constraints we often attempt to use the usual data sources for KPI’s which are very often not the best source of data for proper and educated decision making.
Mark Twain must have been reading into the future when he said that “Most people use statistics like a drunkard uses a lamp post, for support not illumination.” In our attempt to create regular management data we normally generate weekly reports which are ultimately nothing but a scourge because they have to go out week in week out. These reports are often taken for granted and ignored by management even though the KPI’s contained in them may be very salient and important to our firm. Sometimes they might even be ignored and lost!
KPI’s is definitely one of the most over-used yet least understood terms in modern business development and management. Wikipedia defines KPI’s as financial and non-financial metrics which are used to help an organisation define and measure progress towards its organisational goals. In plain jargon-free English, KPI’s are defined as measures that help you understand how you are doing against your objectives.
Purpose and Categorisation
KPI’s have a simple purpose; to highlight our success or failure vis-Ã -vis the targets that we have created for our firms. KPI’s are an actionable scorecard that keeps your strategy on track. They enable you to manage, control and achieve your business targets. KPI’s are categorised into the following areas:
- Staff Productivity
- Net profit per partner = Total net profit / number of partners
- Net profit per professional staff = Total net profit / number of professional staff
- Net profit per department or sector = Total net profit / number of departments or sectors
- Average fees per partner = Total fees / number of partners
- Average fees per manager = Total fees / number of manager
- Average fees per professional staff = Total fees / number of professional staff
- Gross margin = Total fees billed – direct labour costs
Staff Productivity KPI’s
- Staff wage cost to total fees % = Total staff costs / total fees
- Chargeable Value or Utilisation % = Time spent on chargeable work / standard hours worked
- WIP Recovery % = Total value of bills / values of work done at selling prices
- Average charge out rates (COR) = Total of all charge out rates / total number of staff
- Multiples = Chargeable value generated by all fee earners / direct cost of actual or standard labour
- Gross margin = Total fees billed – direct labour costs
- Fees per Euro of salaries = Total fees / total salaries (including partners’ notional salaries)
- Revenue yield per productive hour = Totals fees / total productive hours (excl. leave, CPE, etc.)
- Average fees per staff = Total fees / total number of professional staff
- Average fees per admin staff = Total fees / total number of admin staff
- Average fees per partner = Total fees / total number of partners
- Annual productive hours = Total productive hours worked per person per annum
- Professional staff cost % = Total prof staff costs / total fees generated
- Admin staff cost % = Total admin staff costs / total fees generated
- Working capital lock up = ([Total of WIP at SP + Debtors ] / Total fees ) x 365 days
- Debtors ratio = (Debtors balance / total fees) x 365 days
- Asset turnover = Total fees billed / total assets
- Current ratio = Current assets / current liabilities
- Quick ratio = (Current assets – WIP) / current liabilities
- Annual fees trend = Total fees billed per annum compared to prior year(s) fees
- Top clients fees ratio = Total fees generated from 10 top clients / total fees generated
- Average fees ratio = Total fees generated from all clients / total fees generated
- Average fees ratio trend = Annual average fees ratio compared to prior year(s) ratios
- Total clients ratio = Total number of clients / total number of professional staff + partners
- Employees to partners ratio = Total number of employees / total number of partners
- Support staff ratio = Total number of support staff / total number of staff
- Marketing costs per inquiry
- Marketing costs per new client gained
- Marketing hours ratio to total available hours
- Fees per marketing hour
- Trend in client satisfaction index based on client surveys
Use of KPI’s by SMPs
In May 2013, the author carried out a survey on the use of KPI’s amongst the members of the Small and Medium Practitioners Committee (SMPAC) of the MIA and this survey yielded the following results. All SMPAC members used KPI’s in their firms. These members used KPI’s mostly for financial management and benchmarking, however KPI’s were also used to a lesser extent for practice management and for setting strategic plans. The most popular KPI used was fee growth followed by average charge out rate and gross margin. WIP recovery, chargeable value (or utilisation) and admin staff cost ratio came next followed by average fees (per partner and per staff) and professional staff cost ratio. SMPAC members were also asked to list other KPI’s that they were using. The most popular measure was fees per department, followed by fees per manager, fees as percentage of employee costs, average job turn round time, new clients per period and profit per department.
The results of this survey about the use of KPI’s clearly confirms that partners in Maltese non-Big 4 audit firms do appreciate the value of KPI’s as an important tool for the proper running of their firms.
Arthur Nielsen once declared that “The price of light is less than the cost of darkness.”
Audit firms need to invest in the systems and the skills base which facilitate the generation of the right data for the calculation of the right KPI’s which are important to the firm and that will make a difference. It’s useless to collate the data unless we have the resources to analyse, interpret and actually act on it. KPI’s should be used to create constructive dialogue within the firm and to force people to challenge assumptions.
The real question is not if can we afford the cost of the investment into producing KPI’s but rather if we can afford not to.