Peter Drucker, the world’s most influential management thinker, is known for one of the important quotes in business management. He said:
“If you can’t measure it, you can’t improve it.”
Certainly, you can’t manage your accounting business until you do not know where your business stands at present. If you do not have performance indicators to measure various aspects of your business, it’s difficult to understand the direction in which it is going.
Let’s consider some simple questions here to understand why it is important for your accounting firm to have Key Performance Indicators .
- What do customers think about your services?
- Which services generate highest returns?
- What are the number of prospects in your sales funnel each month?
- How many of these prospects get converted into paying customers?
- What is the recurring revenue of your accounting firm each month?
- Is your accounting firm achieving the monthly sales target?
- What is the cost you incur for acquiring a single customer?
Thus, to take decisions in respect of any aspect of your business, you first need to have an understanding of its current situation.
Meet Kapoor and Co Chartered Accountants
Say for instance, Kapoor and Co accounting firm concentrated all its efforts in acquiring increased number of clients. More clients, more revenues.
Since there is no system in place to track customer data, they focus on increasing revenues by getting more clients.
Failing to achieve the desired revenues, they decide to record customer data through a CRM system. On analyzing the customer information that they have now, they identify that it’s not the client acquisition but client retention that is an issue.
The customer churn rate for Kapoor and Co is high.Thus, Kapoor and Co tries to understand the underlying reasons and takes necessary actions accordingly.
Thus, Key Performance Indicators help you understand how your accounting firm is performing against the set objectives.
They are like the scorecards of your business that measure the progress of your accounting business towards its goals.
These enable you to set targets for various facets of your accounting business in order to achieve the set goals.
Further, they help you to take requisite action in respect of circumstances that may affect your business
So, let’s have a look at some of the key performance indicators for accounting firms that you must implement in your business.
Key Performance Indicators for Accounting Firms
All measurements cannot be called as Key Performance Indicators (KPIs). KPIs are the ones that are important to business and hence influence its results. Thus, in order for KPIs to be effective these must be:
- simple, well defined and measurable
- communicated across the firm and
- relevant and achievable
Thus, here are some of the Key Performance Indicators that new age accounting firm must track:
1. Net Promoter Score
Net Promoter Score (NPS) is a metric that measures the likelihood that your customers will recommend your products or services to family, friends and others.
It’s a measure used for evaluating the customer loyalty by businesses across industries, including the accounting industry.
In order to calculate the NPS, businesses undertake a customer survey. This survey includes both quantitative and qualitative questions for the customers to answer.
But, NPS is calculated based on the qualitative question. Such a question asks customers to rate their likelihood of recommending the business to their family, friends etc on a scale of 0 – 10.
Then, responses thus collected are divided into following categories:
These are the responses with rating between 0 – 6 (unhappy/unsatisfied customers).
These are the responses with rating 7 – 8 (either become promoters or switch to competitor firms).
These are the responses with rating 9 – 10 (happy, satisfied and loyal customers who are willing to recommend your business).
Not considering the Passives, the percentage of detractor responses are subtracted from Promoter responses to get the Net Promoter Score. Thus, NPS is a metric that ranges between -100 to 100.
Higher NPS means more customers are likely to recommend your business which translates to increased referral business. However, lower NPS alarms you of the possibility of increased customer churn.
2. Customer Lifetime Value
Customer Lifetime Value (LTV) is a metric that measures the revenue that a business can expect to generate from a customer over the lifespan of the customer.
LTV is usually measured against the Customer Acquisition Cost (CAC). This is done to understand the time it will take for the business to recover the amount it invested to acquire the customer.
Further, the longer the customer chooses to stick to your business, the greater the LTV.
There are different ways in which LTV is calculated by businesses. Here’s one of the ways you can estimate LTV for each of your customers:
Customer Lifetime Value (LTV) = Average Purchase Value x Average Purchase Frequency x Customer Lifespan
Average Purchase Value
It is calculated by dividing total revenue of a business in a given year by the number of purchases made during the year.
Average Purchase Frequency Rate
This is nothing but the total number of purchases in a given year divided by the number of unique customers in that year.
Average Customer Lifespan
It is the average of the period customers continue to avail your services.
3. Customer Acquisition Cost
As the name suggests, Customer Acquisition Cost (CAC) is the amount of money spent by a business to get a customer.
The cost of earning a customer includes all the sales and marketing expenses that a business incurs to get a customer on board.
This is a very important metric as it helps you to know the amount you’re spending to get a customer against the revenue generated from rendering your services to them.
Thus, businesses would always seek to lower the cost of acquiring customers so that they can enhance the profitability.
CAC is usually compared with LTV. LTV to CAC ratio helps a business to know the revenue earned from customers over time versus the amount spent on marketing and sales to attract a customer by the business.
Further, such a metric helps to understand the time it takes for a business to recover such marketing costs.
4. Customer Churn Rate
Customer Churn Rate is nothing but the rate at which customers stop buying products or services from you. It is the percentage of customers lost by your business during a given time period.
This is an important metric for your accounting business since it gives you a true picture about the number of customers your business is able to retain.
Higher customer churn rates certainly impact the profitability of your business and hinder its growth. Where growth rate shows the number of customers earned by your accounting firm, churn rate reflects the number of customers lost by it during a given period.
Businesses must always strive for higher growth rates. If your accounting firm is losing more customers than gaining during a given period, it is certainly going to hit your profits.
This is because it costs 5 to 25 times more to earn a customer than to retain existing customers.
Thus, Customer Churn Rate = Number of customers lost during a given period
Number of customers at the beginning of the given period
5. Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue is a metric that shows the expected or predictable revenue that your business can earn each month.
Given that it’s difficult to acquire new clients than to retain the existing ones, more and more businesses look to maintain steady MRR.
Businesses across industries today are shifting to subscription based models with accounting industry too on the verge of taking the leap.
Hourly billing no longer is a good metric to evaluate the success of your accounting business.
With retainer fee and value based pricing taking over, your accounting firm should focus on MRR. It is a crucial metric because once your accounting firm earns new customers, there is no continuous marketing cost you have to incur to acquire new customers.
Thus, once your monthly recurring revenue meets these expenses, you can see the profits earned by your firm.
Monthly Recurring Revenue is calculated by the following two ways:
- MRR = Total of monthly payments made by all customers
- Or MRR = Average Revenue per Account (ARPA) divided by the total number of customers
6. Average Revenue Per Customer (ARPC)
Average Revenue per Customer is the revenue that your accounting firm is able to earn from a single customer. Where there is a shift to subscription and value based pricing, service businesses are providing different prices for different service offerings.
This is where ARPC comes as a useful metric as it helps you keep track of revenue your accounting firm is able to earn from each new customer. Thus, it further allows you to analyse which service offerings constitute the highest revenues for your accounting business.
Average Revenue per Customer = Total Revenue of the business/Total number of customers