Numbers to know

Brian Fling of Blue Flavor has a pretty good article out on pricing a project. I agree with a lot of what he has to say (and I disagree with some of it). But it reminded me of a post I've been meaning to write about numbers you should know if you're in the design/consulting business.

The big four metrics for us are utilization rate, margin per project, time usage and cash-flow velocity. These are the basic numbers we look at almost all the time--at the end of a month, when we're doing proposals and when we're wrapping up projects. Together they give us a good sense of how the business is operating, what's going well and where we can improve.

Utilization Rate

Utilization rate is the percentage of time a person spends doing billable work. Brian suggests 75% in his article, and that's a pretty good rate. If you're a one-person company, you need to factor into your utilization rate the amount of time you spend doing business development, accounting, maintaining your blog and other day-to-day chores. Managing, coaching and mentoring--along with business development and that other stuff--can be major non-billable time commitments for a multi-person company.

Jess and I have much lower utilization rates than our other employees. That extra time is invested in developing our practice, management, recruiting and other things that come with having staff. A lot of consulting companies expect 100% utilization (or more). We're pretty happy with 80%; more than that and we think our practice starts to suffer.

Margin per Project

This is the percentage of the total project budget that would be realized as profit. We don't have a fixed margin per project, but our rule of thumb (which Jess used at Fujitsu) is that if the margin is less than 50% there has to be a solid rationale for taking on the project. Calculating margin means you have to know each person's hourly costs (their salary plus their share of expenses).

One reason we want high-margin projects (aside from the obvious one, profits) is so that we don't have to work as much. This gives us time for professional development--whether its conferences or just a group lunch--and internal projects that improve our consulting practice.

We also look at actual profit per project after projects are complete. Unfortunately, the anticipated margin and the actual margin are often different. Profit per project gives us a bottom line perspective on everything we do.

Tracking inventory

Something Chan Suh said once really stuck with me: "in an agency your saleable goods expire every hour."

I'm a nut for time tracking. We don't do it as well as we could, but I suspect we're better than a lot of other companies. Everyone thinks it's a hassle but, as Chan says, time is your inventory. Tracking it is the only way to understand if you're making money on a project-by-project basis. (We use Clicktime which has a very handy profit-per-project report.)

The other thing I've started doing is sharing everyone's numbers--hours worked and utilization rate--each month. It keeps us honest and helps our staff understand how the business works. (I admit this isn't really a metric on its own; it's more like an enabling practice. But still really important.)

Velocity

This is Jess's metric and we've been looking at how we can use it more effectively. Basically, cash-flow velocity is how fast you can convert a billable hour into cash. There are lots of ways of doing this, from streamlining project management to improving invoicing processes to requiring up-front deposits from clients.

What I've learned is that regular billing cycles--monthly or bi-weekly--are better than milestone billing. (Clients like milestone billing because your payments are tied to deliverables. Which is great, except when the clients take three weeks to approve the deliverables or change the project approach.)

Whatever billing system you use, the thing to remember is that you want to deliver quality work and get paid as quickly as possible. It sounds mercenary, but it doesn't have to be. Our accountant just suggested offering a 1% discount to clients who pay within 15 days. Some large companies offer direct deposit or wire transfer to vendors. Even friendly reminders when invoices get to 30 days due are a huge help (most people don't like to be late).

Anyway, these are the fundamentals that we rely on in our business. They don't tell us everything, of course. You'll notice that there's nothing about client satisfaction here, arguably the most important metric of all. But these numbers keep us from making stupid mistakes like overcommitting our resources or taking projects that don't pay well.

(A indispensable book is David Maister's Managing the Professional Service Firm from which most of this is cribbed.)