CHAPTER 1

Understand and Track Your Firm’s Key Metrics

If you can't measure it, you can't improve it.
Understand and Track Your Firm’s Key Metrics

by Guy Pearson

A quote made famous by Mr. Steve Jobs, but taken from Rob Siltanen:

Here's to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They're not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can't do is ignore them. Because they change things. They push the human race forward. And while some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.

Rob Siltanen

This book is dedicated to the difference makers in the bookkeeping and accounting industry. It’s for those who are committed to helping small business owners make better decisions and make the world a better place; even by only a fraction.

We thought it important to kick off this book with a chapter to helps you understand your firm’s KPIs. It’s going to be what separates the winners from the losers as our industry plots its path forward. 

Accounting is moving from a traditional, reactionary industry that focuses on what’s happened (timesheets, P&L, Balance Sheet) to a forward looking, real time data enabled profession (run rates, lead indicators and OKRs/KPIs).

You’ll notice that there is no focus on anything to do with costs below and perhaps you’ll cry in outrage!

The fact is that when you run a firm, very little of your cost is variable in nature, most is fixed. Especially if it’s not a lifestyle business and you want to build a scalable company. This is not to say that you can’t run a lifestyle business, have part time/casual/hourly team members and be happy. 

I'm just saying that this book is not for those people. It’s for those that want to build the most scalable and efficient firm they can. Those who would like to exit and not simply shut the doors one day. Those who want to make a difference to their clients and are on a mission. Those who can see the automation of all things coming and want to remain relevant. Not just be a process driven number cruncher, but a true advisor.

In order to do that, you need to track and monitor key performance indicators. Here's a summary of what a high performance practice looks like:

Payback: < 12 months
CAC/LTV: 3+
Expansion Revenue > $0 per month
MRR: 3% MoM growth = 42% p.a.
NPS: >30 , will lead to greater referrals and deal quickly with those detractors.
Churn: < 0.5% monthly

If you don't know what some of these numbers mean, if you're not currently tracking them, or if you're not hitting your KPIs... this chapter is for you.

Why Tracking Key Metrics Is Vital For Growth

You cannot grow what you cannot measure. You’ll hear this time and time again, from famous business folks around the world and it’s true. 

Focus is always on the reported stats so it's critical now that we're employing systems that are enabled by clean data and deliver our decision makers the ability to manage by exception - not by distraction.

Understand and Track Your Firm’s Key Metrics

Shaye Thyer

BDO Australia

To move in any direction, you first need to establish where the hell you are. Without it, you can move, but you have no idea if you actually reached the destination you wanted to. This is why a map is useless without a starting point. (Indiana Jones reference - The Last Crusade - Thanks Indy)

So, first things first you need to:

  • Establish a baseline of what your current metrics are today, before you change anything; then

  • Set a goal for what you want those metrics to be in 12, 24, 36 months time; and

  • Make a plan of action to actually shifting those metrics which follows the SMART criteria so you can actually achieve them.

If you don’t constantly track those metrics you will have no idea of progress against the goals you have set or if you’re ahead/behind of your “run rate” towards achieving those goals.

Achieving Goals

So let’s get started and lay the foundation for your business. You’re an entrepreneur, so step up and steer the ship to the promised land for you and your clients.

The Difference Between Metrics and KPIs

A metric is a number, ratio, rate, percentage or measure of data. However, not all metrics are KPIs:

A KPI (“Key Performance Indicator”) is a metric that has been chosen to be key to the business and drives it outcomes, as the name suggests. 

We often get lost in having too many numbers to track, too many ratios, too many targets. We need to keep it simple to get buy in across the team.

Getting To One KPI

I think this is the most underrated goal of business planning and measuring of performance. We focus on too many numbers without linking them to one key driver. 

Take Facebook for instance, MAU (“Monthly Active Users”) is their key driver and then they relate that to time on site, spend, revenue etc. 

It’s how they sell advertising to their customers, it's the number they report on to their shareholders and the indicator they reward team performance on. It’s all aligned. 

Don’t get me wrong, they track millions of metrics. But it’s key to get to one that your entire organization can relate to.

Kpi Client Groups

For your accounting firm the key metric may be number of accounting groups or number of clients you are engaged to look after. 

Your metrics are then all a derivative of this number: 

Revenue per group,
avg. service price per group,
avg. # of services per group,
# of team members per group,
% of groups on X package. 

Planning and Forecasting Your Growth Using KPIs

The great thing about KPIs is that it allows you to set goals that meet the SMART criteria. Which means they are defined and easily measured and have the most important factor of time associated to them. It’s not a “eventual” goal, it’s something that has a hard limit of when it needs to be achieved by.

E.g. We want to increase our average revenue per group by 10% from ($2,000 to $2,200) in the next 12 months.

As you can see the above example is specific.

The next step is to break the metric down into your run rate of what you need to achieve and how are you going to get there?

If your average service price is $600, then maybe you need to sell 1 additional service to 1 in every 3 clients during this time frame.

You could also look to engage higher value clients. So, it may mean bringing on all new clients at a min fee of $3,000 per annum and calculate where this equals the average increase.

E.g. if you had 100 groups at $2,000 per annum you would need to bring on 25 clients @ $3,000 per annum to reach an average of $2,200 per client group per annum.

As I mentioned in the beginning, we do not focus on operating costs of BAU (“Business As Usual”) here in any of the metrics as they are fixed. You will need to understand capacity and how many team members you need to service the growth for the above to be successful. However, we will cover that later on in the book.

Recapping the KPI conversation, the KPI you set needs to have a plan, a run rate and a budget on how you are going to achieve it. The KPI needs to be communicated and it needs to be simple and held to. Certain folks will hate this, but structure and consistency equals scale and efficiency and hitting goals. 

As we move through the rest of the chapter, we’re going to break down some key metrics that successful firms use to determine the health of their practice.

Revenue Metrics (MRR, ARPC)

MRR (“Monthly Recurring Revenue”) is the rate of recurring revenue in the forward 12 months, broken down to an average monthly run rate. It is not how much you’ve billed this month, that is monthly billings.

ARPC (“Average Revenue Per Customer”) is the sum of all revenue in your firm for a period of time, divided by that period. So if you were lining up with MRR it would be $MRR/#of customers to get ARPC on a monthly basis and multiply by 12 to get an annual rate of revenue per customer for an annual basis. Since we are talking metrics, it’s more appropriate to have a forward looking approach then talking about past figures (e.g. looking back) other than as a baseline.

MRR enables you to change business models

MRR is the resultant metric of moving to recurring billing for your clients. This is forced upon us by the move to cloud as we bundle in software to provide a better client experience. 

Ultimately though it’s a blessing as firm valuations are heavily swayed towards higher multiples on recurring clients and bundled packages. Clients are stickier when tied to a packaged service level offering by a company; not by personal service provided by a single partner/staff member.

Why MRR is key, is that you can look at whether your fixed costs are covered and/or what level of profits you have locked in for the year (foregoing any project/advisory work). The level of assurance to make decisions and plan is then huge. You can go on building your business with the recurring business model with a level of certainty unseen and build the value of your firm, allowing capital to be more readily accessible.

Retaining Metrics (Churn, NPS)

Churn is the # of clients that leave your practice (fired or they quit) as a % of the total number of clients you had at the end of last month.

Churn in accounting is always low and great firms usually create their own churn by sacking/moving on clients that fit their value proposition. Churn usually only occurs for a small number of reasons:

  • lack of service makes a client keen to go through the pain to move (which is decreasing as years go on); and

  • breaking trust; or

  • infrequent change of conditions (e.g. you specialise in their industry and the industry doesn’t change)

The most common is likely to be because of losing trust after a bad experience from the client side. 

To be specific, churn should remain sub 0.5% as a rate per month (6.2% p.a.). Most would still consider this a high rate, some low. 

NPS (“Net Promoter Score”) is a measure of how much your clients like you. It’s determined by how likely they are to refer you. If you’ve ever seen a scale of 1 -> 10 survey post making an online transaction, this is what they are measuring.

Cloudcherry
Image Source: CloudCherry

You can read more online (wikipedia on NPS) but, simply put (0-6 are detractors, 7/8 are passive and 9/10 are promoters). You then take your promoters as a score of 1 and detractors as -1. You simply sum the positives and negatives and you end up with a score.

The frequency and sample size of each survey is up to you. Most companies and general best practice is to do it after value has been received or at an ad-hoc time if it is a recurring customer.

When measuring NPS, you should also provide the ability to leave feedback as to why the score was given so there’s a reason for the result that can be discussed, aggregated and hopefully improved on across the company. At the end of the day, feedback is the greatest gift you can receive from your clients.

Acquisition Metrics (LTV, CAC)

LTV is short for lifetime value can be measured by taking the sum of all revenues ever paid by your clients, per client. It’s calculated by taking your average recurring revenue ($MRR) divided by your churn (% clients lost this month over last months # of recurring clients). 

Now in accounting practices, this MRR/Churn% should be through the roof as accounting businesses (bookkeepers and accountants) do not lose clients frequently.

Using LTV + CAC to determine your long term scalability and business performance

Average LTV is a proponent of MRR and churn. So far we’ve focused on churn. To switch focus onto MRR, this is driven by average recurring revenue per client. So, if we can sell to a higher value client LTV will go up. Not rocket science. 

CAC is your cost to acquire one customer and as a measure should factor in all the costs (passive and direct) to bring on a new client in a given month. This means direct costs (google adwords, website hosting, content costs) and passive costs (staff wages for meetings, proposals, follow ups, setup in your systems, onboarding). Basically, any cost that’s required in bringing on a new client. 

E.g. Spend $1k per month on marketing with an agency, $200 for website and charge out rate driven at $2,500 (Partners @ $250 and admin @ $100)  in sales meetings and onboarding 2 new clients. Total cost $3,700. 

CAC = $1,850 per client. 

The baseline for scalable business is LTV:CAC being 3. Meaning that you’ll need to have a LTV of $5,550 (sum of revenue of their lifetime) to run a scalable business. Obviously, better is amazing. 

Ltv Cac Emoji

Your LTV will ultimately determine how much you can spend on acquiring customers. So the higher value customers, who stay for longer (hopefully within your niche) are what you're looking for. 

Growth Metrics (Payback and -ve $Churn)

Payback is the time taken to pay back the CAC (cost of acquiring a customer) from current revenues. Payback is important as it gives you the basis to spend more money on marketing and bring in new business. 

Hyper Growth = 3 months
Growing = 12 months
Slow = 24 months

SUM OF $MRR / $CAC by cohort of customers (e.g. for April). 

If the number drops below 12 months, you should be pushing more money into sales and marketing to drive growth. As you’ll get your money back faster, this is why software companies attract large valuations as they can scale, cheaply and efficiently. 

-ve $$ Churn: this may seem like a strange metric, more commonly in normal business it’s referred to as expansion revenue. It’s when an existing cohort of customers and/or your whole client base average revenue increases per client on average.

This should be the norm for accounting practices, but it’s seldom reviewed or targeted. Expansion revenue is what can drive phenomenal values of growth and increased revenue and usually results from inter selling in a group firm with other divisions (finance etc.). 

Profitability & Putting It All Together

So, we’ve spoken a lot of metrics and KPI, but I think if scale and efficiency is the key, you should get your internal systems ready to receive the growth so you can deliver your services and upsell.  

One of the best measures for this is focusing on profitability per service or package line and focusing on using cloud systems to drive down the cost to serve, and standardising your recurring services as much as possible -- so you can predict and measure (time, cost and capacity) much better than before.

Lack of profitability will highlight one of few leading problems at your firm:

  1. Poor client selection/scope creep;

  2. Bad training of your team/bad systems in place;

  3. Bad client that you should sack.

Controversially, you should also focus on getting the hit rate of profitability being high as an average, rather than client by client unless there are huge blowouts that need to be examined.

E.g. if you boost average profitability by 5% on 90+% of clients, who cares about 10% of clients losing by 5%. Do the maths, it’s a huge uptick, you just need to flag to watch over in the following month.

Now lets take another a look at the KPIs of a high achieving practice again... 

Payback: < 12 months
CAC/LTV: 3+
Expansion Revenue > $0 per month
MRR: 3% MoM growth = 42% p.a.
Project revenue: Great for profits, but is once off
NPS: >30 , will lead to greater referrals and deal quickly with those detractors.
Churn: < 0.5% monthly

Remember to set KPIs that can be measured and the path to achieving them. Remember it’s about progress and run rates, not perfection.

How Do You Track Everything?

The most important thing to use Metrics and KPIs in your business is to be able to measure them; easily and constantly.

We are working hard to put these systems all in place within Practice Ignition, but for the meantime:

Practice Ignition allows you to track MRR, Expansion, Project Revenue, Churn, Payback and CAC/LTV.

You can use a specific NPS only tool to measure customer satisfaction like Delighted or most support tools like Zendesk (and others) now have NPS built in.

The alternative is to measure all of this in excel and dump out of your many systems and spreadsheets. I think it’s important to be aiming for a source of truth that bubbles up all the “real” data.

Regardless what you do, I hope that this chapter will get you on the path to asking “why, how, what, when and what” your business is to your clients and where you want to take it and then come back and ask why another 5 or so times until you hit your core mission and then plan to push forward from there.


NEXT CHAPTER

Embrace The Cloud With Open Arms

In order to become efficient and scale, your systems need to work together. It's impossible without the cloud.

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Understand and Track Your Firm’s Key Metrics
Guy Pearson

10+ years' of experience in professional practice and is a Chartered Accountant. His origin story starts at Interactive Accounting.

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