There's a reason we're the Number 1 provider of part-time CFOs

Call us on +852 3059 2506

Professional Services and Retail

Professional Services and Retail

Key Performance Indicators in Consultancy Type Businesses

Consultancy type businesses sell skill and expertise in units of time. The areas of skill and expertise are varied from public relations, marketing, engineering, information technology, finance and legal, to name but a few.

Colin Mills of The FD Centre explains, “The most common issue for business owners in these types of businesses is that the people who deliver the expertise are so consumed with solving the technical issue that they skip the business process of selling their time and expertise and then struggle to get paid.” To overcome this there are some simple business processes that need to be in place:-

  • All staff have a charge out rate per hour or per day and there is an assumed percentage of paid time that is chargeable which ensures that the business makes a good profit from each member of technical staff – the ratio of administration staff costs vs technical costs. If the charge out rates fail to cover the costs of administration staff, the business will never make a profit. The business must set a target ratio of administration costs to technical costs and monitor these as a key performance indicator.
  • All new business with existing or new clients is a project and the project scope needs to be established clearly if there is going to be a project price. There are 2 reasons for this; firstly, the business needs to resource the project effectively with staff that have the appropriate skills and availability of time. Secondly, most clients want to have a fixed price broken down into stages so that they can plan their budgets. It is impossible to calculate the value of your pipeline of work. This needs to be closely monitored in all areas. This is the early warning sign that utilisation levels will fall.
  • Your business needs to have terms and conditions which are sent to the client as an engagement letter at the start of the project. Some professions work strictly on a time and expenses basis. Whilst this is clearly attractive for the businesses, the clients will often have an issue with the time spent when it comes to securing payment. Some businesses will work on time and expenses and then provide an estimate of the expected fee, perhaps with caps on overspend or other similar mechanisms. Fixed price contracts are also common, especially in marketing and PR businesses. Finally contingent contracts are also more common now, especially in acquisitions and disposals or planning matters where success and failure are easy to define. Split the revenue and trade debtors of your business by these different contract types.
  • Specialisations are often critical to the USP of the business. One must balance the need for specialisations against the need to move resources between specialisations. The key performance measurement that one needs to look at is the revenue split by specialisation. This is more critical for businesses that cannot easily transfer skills between specialisations.
  • The business must collect data on the use of time by staff. This requires a time sheet system to be implemented. Many consultancy businesses dislike these systems because “it takes too much time to complete when important client work needs to be done”. However, these systems are an essential tool for managing a business, raising invoices and getting paid. Every consultancy business should consider continually running finance for non-finance staff as a course to explain why timesheets are required. The key performance indicator you must focus on is utilisation of technical staff.
  • Finally, the processes for actually raising invoices need to be quick and efficient and in line with customers’ expectations. Many professional businesses fail because they are “too busy to invoice their clients.” A key performance indicator for all consultancy type businesses is ‘billability’. This is the ratio between invoiced work and chargeable work.

Critical Success Factors in Retail Businesses

Unlike other organisations retail businesses are very visible for people to see and a great number of entrepreneurs enter this area of business without any real understanding of the basic business principles of successful retailing.

Coin Mills of The FD Centre explains, “The most common issue for business owners in retail is that they become so consumed with the products they sell that they forget to make a profit and generate cash.” To overcome this there are some basic critical success factors for retail businesses to consider:

  • Have a clear strategy of the types of products you want to sell and who your target customer is. Then work out how you are going to attract customers to your store. Ask yourself “why will my target market look for my business either online or in the locality and are there enough of those people to justify the business.” Woolworths is a salutary lesson to all budding retailers whose potential customers cannot find a reason to visit.
  • You need to have a clear pricing model based on the products you want to sell. To establish this you need to understand the selling prices and the product cost prices to establish the gross margin that needs to be made. Retailers in faster moving product areas can live off slightly lower margins that those in slower moving consumables. However, retailers need to build in promotions into their calculations as these will frequently be required to clear through stock at the end of the shelf life. Frequently these discounts are omitted from the business model. Similarly other direct costs are ignored; a prime example is storage costs and logistical costs.
  • Sales density is driven by putting the right products in the right place in the store. Supermarkets measure revenue by £ per square foot of shelf space. The merchandising team will want to maximise the shopping experience of its customers to spend the most money. However, they also aim to optimise the overall revenue and gross margin of the store by placing those products with the highest margin per square foot in the best places to drive up the gross margin per square foot of the store as a whole.
  • Sales staff are the personality of your business and retail sales staff are frequently low paid and part time. Therefore the need to select good staff and then train them very cost effectively and then motivate them to ‘love’ your customers is critical to the success of your business. Many retailers over-staff their stores to cope with the busy periods. As a result the potential profit of the store is spent on staff costs that are incurred whilst the store is empty. A skilful retailer knows exactly when the stores will be busy and slightly under-resources the store. The ratio of staff costs to store sales is a key performance indicator that every retailer must monitor all the time.
  • The property costs are a major factor in retail businesses. This is mainly because location is frequently of paramount importance to the success of the retail business. The front window is where all of the marketing happens for a retailer. Therefore passing foot traffic or the right socio-economic groups at a time when they are receptive to purchase your products (ie. their leisure time) is critical. If a store is not profitable because of its location, then the store needs to be closed and a solution to the lease needs to be found.
  • For those retailers in fresh produce and high fashion the concept of perishable goods has to be understood. in much the same way as strawberries ‘go off’ if left on the shelf and have to be thrown away at a huge cost to the retailer, last year’s fashionable item will collapse in value if trends move on. Retailers have to play the market skilfully by using promotional discounts and rapid changes in product positioning to ensure that product is sold at its maximum price with the minimum quantity ‘perishing’ to a negligible value. If the budding entrepreneur gets the product wrong or times his purchases badly a huge loss is the inevitable result.
  • Most retailers now have to have an online business strategy. Dependent on the size of the business, this may be a signifcant share of the business. However, having an e-commerce website does not mean that customers will come flocking to buy the products. They still have to be enticed to find you and there is frequently lots of competition for those key adwords on google or the right spiders and links to attract potential customers looking to spend their money. The costs of an e-commerce business are always underestimated – frequently transaction fees, fulfilment costs, storage costs, website creation and ongoing maintenance, advertising, PR to name but a few.

 

fd-heart

Book in for a free financial health check

Book Now
fd-stars

Rate your company finance function in nine minutes

Take The F Score
fd-speech

Do you have a burning finance question? Ask one of the country’s top CFOs now

Ask The CFO
fd-money

Book yourself in for a complimentary 30 minute finance breakthrough session

Book Now