In this video, Chris Lang gives us an introduction into calculating common and basic Key Performance Indicators. This video is specifically geared towards people businesses e.g. consultancies, agencies and professional advisors. Chris covers:

• How to think about margin?
• How do you recover down time?
• How to think about discounts?

I’m Chris Lang. I’m the Founder of Flash Partners.

The things I’m going to run through are utilization, charge rates, overhead recovery, margin estimating, and especially internal estimating.

Utilization is the amount of hours we are budgeting to sell to our clients, obviously maximizing these is the key to the game. The more hours we charge the client, the more money hopefully we should be able to make if we’re charging at the right amount.

Naturally, not everybody will be able to work on what is called billable time to client, a hundred percent of their time. There is always an element of down time, there’s an element of internal time, that is not obviously something that could be billed to the client, but coming up with a budget of how much we should be charging to the client is really important to understanding the cost base and the amount of people we should have in the company and also helps very much in working out charge rates.

Utilization can be worked out by taking all the chargeable employees. So, excluding people like office managers and the likes, working out how many workable hours are for them and then applying a percentage to that based on how much we think will be chargeable to a client.

For example, somebody in a relatively junior role should be looking to charge them about 95 percent of their time, where as a senior manager, it’s much more likely to be closer to 50%. And if we then take their salaries, including their National Insurance and pension costs and divide it by those number of billable hours, we can work out how much we need to charge the client to cover their salary costs.

Following this, we can then work out how much we need to charge in order to cover the amount of overheads the company has. So, paying for rent, rates, lights, heating. If you take the total number of chargeable hours for the company, so add up everybody that you’re going to charge to the client, add them all up, and then use that in order to divide into the total of the overhead costs.

You’ll get an hourly amount that you should be charging the clients in order to recover enough money to cover those costs and the cost of the downtime as well that’s not chargeable to the client. On top of that, we then have to add a margin. Every company in the world exists in order generate a profit, unless you’re a charity of course, there is little point in running a company unless that is the case.

So, adding a margin on to those rates, is how we do that. Bearing in mind, that if you want to get a margin of 20 percent, you need to mark up the charge rate, the salary rate and the overhead recovery rate by 25%. If you’re trying to make 20% you have to increase it by 25% to get to that. If you’re trying to make 25%, you need to increase it by a third and that will get you to the margins the company wants to make, very important that all those elements are included in it and that should then give us an amount that we ought to be able to charge in whole for every person that we charge out to clients, if we charge all of the hours we want to charge for those people, that in theory, would give us an amount that we ought to be able to try and generate from clients.

It is very important to get those rates right, and it’s also very important to make sure that we estimate to the client correctly as well. Making sure that we have enough time in these estimates, in order to deliver the work so that we don’t end up servicing those jobs and therefore over servicing those clients. That is a very challenging thing to do often, sometimes discounting happens, which isn’t necessarily commercially driven or certainly not commercially understood, and reviewing these estimates on an ongoing basis to better understand,

a) how long it takes to actually do the work rather than how long we thought it was going to do before doing the estimate.

But b) also understand the impact of any discount that we apply to that, perhaps an effort to try and surely win the work. These will have impacts on our ability to hit the figure we’re trying to achieve, in order to make that margin with the best in the world if a job takes a hundred hours and we’ve only estimated 50 hours to the client, that is never going to generate enough profit, in order to cover the salary costs, the overheads and make a margin.

Chris is an Associate Chartered Management Accountant. He has 30 years experience of working with companies in the creative sector. In 2007 Chris formed Flash Partners with the aim of ensuring companies in the creative sector have access to the right highly skilled finance professionals they need in order to succeed.

Chris is also a Design Business Association Expert and sits on the Advisory Board of The Alliance for Independent Agencies.

In his spare time Chris is a big Formula Once fan. He also enjoys rugby and travelling.