The Ultimate Guide to the Best Business KPIs for System Integrators

Top control system integrators know how to take the pulse of their business’s financial health to ensure their strategy and system integration business model are on track.

In this video series, you’ll learn about the key business metrics you need to track, how to get them, and, most importantly, why you should care. Once you have your KPIs in hand, you can benchmark them with the industry using the tool for the system integration industry — CSIA Pulse.

Today’s conversation on how to best analyze a company’s financial health is brought to you by the CSIA Statistics Committee. I’m with Clayton & McKervey, a full-service CPA firm helping system integrators and end users compete in the global marketplace.

Today we will discuss some specific KPIs, or key performance indicators, that can help track and measure company performance. Of course, I will also show you how to compute these ratios along the way as well.

I hope that these will shed some light on your own operations. But, of course, please feel free to reach out if you would like an additional resource or set of hands computing or analyzing the results.

To learn more, check out the videos throughout the series.

In a prior video, we mentioned revenue per employee should be analyzed in concert with utilization. Specifically, in that video, we examined two peer engineering companies and reasons for why revenue per employee might vary from one company to another.

Here shortly I’m going to build on an analysis from that video. But for starters, let’s get you familiar with the concept of utilization. To explore this, we’re going to look at one employee of an electrical engineering facility, a control system engineer. That employee had 1,500 hours billed to work in the past year.

The general work year consists of 2,000 available hours. Therefore, that employee was billable or utilized 75 percent of the time. And how did I compute that? Well, I looked at the total hours worked, or hours charged to jobs and divided that by the total pool of available hours. And what does that compute? Well, time spent on billable projects.

So, let’s expand this analysis to see why reviewing this might be important. We will do so by adding in a second employee of the electrical engineering facility and comparing the results of the two.

So, the second employee had 1000 billable hours. They’re the same pool of available hours of 2,000 hours. So that would mean the employee No. 2 was utilized 50 percent of the time, or 1,000 billable hours divided by the 2,000 total available hours.

Remembering the first employee who was utilized 75 percent of the time in comparison. What does it mean? Well, starting at the most basic level of analysis, you could say employee No. 1 was simply more productive than employee No. 2 because their utilization was higher.

They spent more time working directly on a project that was billable to a customer. But stepping back and armed with some insight as to actually what the employees worked on throughout the year, you can begin to make some analysis and judgment calls as to, does this data make sense?

Does, for example, it indicates an allocation matter? Was employee No. 2 asked to work on more administrative non-billable work thus causing their ratio to be lower or was their time not properly captured resulting in a loss of billable hours? Meaning, did you expect them to have a similar result, not a 75 versus 50 percent, and now the data shows otherwise?

Looking at this and this level of detail, you can begin to see and identify potential issues or changes that need to be made to your strategy.

What about a companywide comparison though? Well, let me bring back some figures you might be familiar with from the revenue-per-employee video to show how we can look at this from an entity to entity comparison.

So, from that video, we had two electrical engineering companies, company A, company B. Company A had $6 million in revenue. Company B had $9 million in revenue. They both had 40 employees and that computed 150,000 of revenue per employee for the first company, $225,000 for the second company.

Based upon them both having 40 employees, that would mean that they had an available pool to work of 80,000 hours. And we find out further that the first company billed 48,000 hours to projects to generate that $6 million in revenue, and the second company billed 76,000 hours to generate their $9 million in revenue.

So, with that, we find out that company A had utilization of 60 percent, and company B had utilization of 95 percent. Again, just like in our revenue-per-employee video, at first glance, we might continue to say well, company B just looks better. They had the higher numbers in this.

Ninety-five percent utilization compared to something lower and 225,000 in revenue per employee compared to the 150,000 and yes, I agree. In general, the higher these figures are, the better. But be careful. Make sure you ask and answer some of the following questions or identify some of the following levers that can be pulled to give a more in-depth look first.

For example, is there an imbalance in overhead? Is our 60 percent utilization company A due to a result of a significant number of non-billable employees or which company utilizes their wage expense most efficiently? And a way that you can look at that is by computing and analyzing the average labor rate per hour, which we will touch on in a future video in the series or even bigger picture. Which entity is doing the right work?

Meaning the results of our analysis could actually point in a different direction from what we’ve been talking about all together when looking under the hood.

Potentially company A is actually being more thorough in their contract selection process, accepts a lower utilization because they intentionally want to bench employees in order to have resources allocated to go after new, more profitable opportunities.

So, it could be that company A actually has the competitive advantage in our analysis. How do we discover answers to any of the questions that we’re posing here? Well, it takes further analysis, and we’re going to address some of these in a future series where we will explore concepts such as realization and revenue-per-billable hour.

But for now, we will actually jump in, in our next video and start talking about gross profit and gross margin, which will shed some light on some of the questions we’ve discussed here.

To summarize, utilization allows you to uncover and see not only how utilized your human resource capital is but the quality of that utilization when compared to other measures. It’s computed by comparing billable hours against the total pool of available hours.

If you are unaware of the Pulse survey or want to find out more, get in touch with a member of the Statistics Committee. Let us know if you found this information useful. Of course, we’re also able to help analyze your data and provide relevant insights. Let us know what you’re thinking and thanks for watching.

Today’s conversation is on how to best analyze a company’s financial health, brought to you by the CSIA Statistics Committee.

I’m with Clayton McKervey, a full-service CPA firm helping system integrators and end users compete in the global marketplace.

Today, we’ll discuss some specific KPIs, or key performance indicators, that can help track and measure company performance.

Most of us are used to carving out time to get a sense of our health during an annual physical. But what about taking a pulse on your business?

Well, the owners we talked to had plenty of insights from working inside the business absorbing information from the shop floor, engineering department or the sales team.

Many may be missing the big picture on how their business is performing, information that could increase profitability or improve cash flow, budgeting, quoting.

To help, we’ll discuss topics related to financial ratios, relatively easy levers to pull in areas such as revenue-per-employee, utilization, gross profit, and more.

We’ll take a look at why these metrics matter and how they interact with one another. You’ll also learn the importance of not viewing these results in isolation, and why it’s important to compare financial metrics against your peers.

Of course, I’ll also show you how to compute these ratios along the way as well.

I hope that these will shed some light on your own operations, but of course, please feel free to reach out if you’d like an additional resource or set of hands computing or analyzing the results. To learn more, check out the videos throughout the series or visit us at ClaytonMcKervey.com.

The lever of financial ratio that I want to discuss here with you is revenue per employee. Regardless of the industry that you operate – manufacturing, professional services, retail — this one’s vital to your operations, especially because it can impact a number of business strategies and directions, such as hiring needs or how marketing dollars are directed or even proposal and billing strategies.

Let’s start off with an example involving two companies to explain this concept. Company A is a custom machine builder. They’ve got $10 million in revenues and 40 employees. Company B is an electrical engineering facility, $6 million in revenue, similar 40 employees.

Revenue per employee of the first entity, the machine builder, is $250,000. Revenue per employee of the second company, the electrical engineer, is $150,000.

How did I compute these figures? Well, I took revenue for the company as a whole and divided it by the number of employees or full-time equivalents. That’s a figure that computes approximately how much money each employee generates on average for the company as a whole.

Generally speaking, the higher the revenue per employee the better. Therefore, in my example, you could quickly say, Hey, the $250,000 custom machine builder is better. If this is the first time examining this figure, though, be careful because there is more to the story than that.

The first consideration is that the nature of the business revenue per employee varies significantly, for example, based upon the intensity of labor involved or materials and supplies in delivering your products and services.

Our first company, the custom machine builder, may inherently have a higher revenue per employee, because included in their sales figure of $10 million are pass-through costs, such as materials and supplies utilized in creating the machines.

Comparatively, the majority of the cost involved in delivering the engineering services for our second company would likely just be the engineers themselves.

Thus, the nature of the business has a big impact on how we consider and conclude on our analysis.

Second consideration is the age of the business or the stage of its lifecycle. For example, the engineering company is younger, it could possibly be hiring new employees in order to grow. And, therefore, the computed $150,000 figure is actually low compared to what it would look like once that entity matures.

Or a third very important consideration is utilization. Are employees being fully utilized and billed to jobs? Because this alone can have a significant impact on the assessment of which company is better.

Taken alone, your revenue per employee, while useful and comparing internally over time, is even more valuable when comparing against your peers.

Let’s look at it from a comparative example. We’ve got the electrical engineering company that we discussed initially with $6 million in revenue and 40 employees. But now we add a second engineering company with $9 million in revenue and 40 employees as well, which generates $225,000 of revenue per employee.

You can see that a comparison to peers is more relevant for management in order to draw conclusions and formulate strategy.

With our peer-to-peer analysis, we can begin examining, for example, is one entity more efficient with its employee base? Or are they able to generate the higher revenue per employee by delivering their services in a specific geographic area that’s just paying more for those services? Or is it an indication that your reputation is too new and unknown, and therefore an indicator that you need to educate the marketplace on your skillset in business in order to obtain higher value contract.

Or, in looking at this analysis against peers, if you find out everything else is equal, maybe you’ve just undervalued your sales price.

As you can see, there can be multiple explanations, but the level of this analysis can only be obtained by comparison against your peers.

Of course, this ratio should not be taken alone, as it should be understood in comparison to other metrics, such as utilization and gross margin, which we’re going to explore in this video series.

To summarize, revenue per employees is a means to measure your company related to its ability to generate additional revenue compared to its personnel.

And further, this figure compared to industry peers gives you an ability to generate ideas about what levers to pull and how to change your strategy related to either how you price your products or how you spend your marketing dollars.

As mentioned, comparison against peer and industry data is critical

As a CSIA member, you have access to the Pulse survey, which allows you not only to enter and track your own data for important metrics, but also to find out how your peers are performing, thus providing access to this critical data.

If you are unaware of the Pulse survey, or want to find out more, get in touch with a member of the Statistics Committee.

Let us know if you found this information useful. Of course, we’re also able to help analyze your data and provide relevant insights.

We’ll also explore some other more in-depth figures in a future series, such as direct labor related revenue per employee and average billable rate, all based upon your feedback.

Let us know what you’re thinking and thanks for watching.

Today’s conversation on how to best analyze a company’s financial health brought to you by the CSIA Statistics Committee. 

I’m with Clayton McKervey, a full service CPA firm helping system integrators and end users compete in the global marketplace.

Today, we will discuss some specific KPIs or key performance indicators that can help track and measure company performance.

Of course I will also show you how to compute these ratios along the way as well. I hope that these will shed some light on your own operations. But of course please feel free to reach out if you would like an additional resource or set of hands computing or analyzing the results.

To learn more, check out the videos throughout the series.

In this video, we will be exploring another important barometer of financial performance – gross profit and gross margin. Again another simple ratio but extremely important to understand. This one can certainly enrich your analysis of the other metrics discussed in this series.

So gross profit, what is it? It is a metric used to assess a company’s financial health and business model by revealing the amount of money left over from sales after deducting the cost of goods sold.

So let’s kick it off with an example. We’ve got an assembly manufacturer company. Last year, they had revenue of approximately six million and cost to sales of 3.6 million. So that would mean that gross profit was 2.4 million and gross margin was 40 percent. So how is this figure viewed externally?

Well, the company generated 2.4 million in direct profit from their sales which means they now have that amount of money that can be utilized to cover operating expenses, provide cash flow to buy new equipment, service outstanding debt or even pay bonuses back to the owners of the company.

Looked at differently, it means that for every dollar of sales the business is generating, on average 40 cents is in direct profit. So how did I compute these? So for gross profit, I took sales, less my costs, equals gross profit and my gross margin, I started with that last figure gross profit, divided it by sales to arrive at my gross margin.

So let’s explore the type of analysis that you can perform with this figure. So as I started off, I had my assembly manufacturer. I had year one’s data. Now I’m going to add in year two. In year two, the assembly manufacturer grew by adding a half million dollars in revenue from the year prior and its cost increased to 4.2 million.

So from this figure, gross profit for years two is $2.3 million and gross margin would equate to 35 percent. So what does that mean? My assembly manufacturer grew their sales. All things considered, a good thing. However, overall profitability derived from the actual sales less their costs declined.

So the manufacturer now wants to look at and forecast year three. By looking at this analysis over the past two years, what values, levers or insight can be analyzed and pulled? Well, management could take a look at the following.

Was for example there a new product offered in the second year that was new to the company and therefore had a significant element of learning involved in the delivery of a certain product or machine? And for example, is that same type of learning expected to repeat into year three if we sell that same product again or during year two, did something deviate from plan as I was building one of my machines that caused the material to be scrapped?

And again looking at this from a year two to year three perspective. Am I expecting that sort of material to be scrapped again if I have to build that same machine or looking back at year one and two, do I find out by looking at this hey, year two, the lower growth profit, is actually more indicative of what’s to come and therefore was I possibly missing a cost from my first year?

Even more significantly, did something deviate from a customer’s original scope of work whereby additional time and material was needed to finalize that product known as scope creep and was that scope creep actually properly identified and billed?

As you can see, the power of this analysis expands, the more data you have, especially the frequency in which that data is reviewed, as items such as scope creep can sometimes only be billed if they’re identified timely.

So let’s expand this by pulling in a comparison. So we’ve got two manufacturing companies, manufacturer A and B. Manufacturer A has 11 million in revenue, 10 million in costs, 1 million in profit, equals 9 percent gross margin.

Manufacturer B has 12 million in revenue, 10.2 in costs and therefore 1.8 million in profit which would give them a 15 percent gross margin.

Further, let’s say both companies operate in the same general area, designing and building similar products.

So manufacturer B, while they only have 9 percent more revenue, they actually have close to 80 percent more profit comparatively or looked at alternatively, the second company has an additional 800,000 in gross profit with just one million dollars more in sales. Lastly, let’s say that the industry average for the product set I’m delivering is actually closer to what the second company is achieving at 15 percent.

If you were the first company armed with this level of data, what questions and analysis could you start to take a look at in addition to the things that we’ve already discussed such as scope creep, waste or even learning on a new type of machine?

Well, for starters, this could indicate that your competitor does a better job of either buying material at lower prices or selling the same product at a higher price. But management in detail could look at the following three things relative to sales, purchasing and operations.

Let’s look at that from the vendor side. Let’s say for example our machine builder uses a lot of robots for the machines that they build and to purchase those robots in the past, you use a number of different vendors.

Well, could you achieve a better price by consolidating to just one vendor or what about buying your biggest cost item those robots used or their products that you are continuously using and therefore could buy in bulk or larger quantities to obtain better pricing or lastly, are there actual quick pay discounts that you could be taking advantage of?

From the sales side, if you were to analyze your data at a deeper, more project or customer-based level, do you actually have a competitive advantage that you didn’t know about, with a specific type of project build or customer base whereby you have opportunities to learn and leverage the knowledge from one group to all of your projects or finally, is there a value proposition missing from your sales process?

Let’s say that while company A and B are in the same industry both delivering machines, only the second company that has the better gross profit is delivering some value add thing such as warranty, installation, support and training or even spare parts, that you could be adding into your mix or from an operation standpoint, you could review some of the following.

What levels of overhead are you carrying? And more importantly, what’s included in your cost to sales?

If you are unaware of the Pulse Survey or want to find out more, get in touch with a member of the Statistics Committee.

Let us know if you found this information useful. Of course we’re also able to help analyze your data and provide relevant insights. Let us know what you’re thinking and thanks for watching.

Today’s conversation on how to best analyze a company’s financial health brought to you by the CSIA Statistics Committee. I’m with Clayton & McKervey, a full-service CPA firm helping system integrators and end users compete in the global marketplace.

Today we will discuss some specific KPIs or key performance indicators that can help track and measure company performance. Of course, I will also show you how to compute these ratios along the way as well.

I hope that these will shed some light on your own operations. But of course, please feel free to reach out if you would like an additional resource or set of hands computing or analyzing the results.

To learn more, check out the videos throughout the series..

So far in this series, we’ve touched on a number of levers that can be pulled as a result of assessing profitability figures. Today we’re going to switch to one that has to do with liquidity or the flexibility your business has to continue covering costs in an unforeseen event or an intentional event where the cash inflow dries up or changes significantly for a short period of time.

Specifically, we’re going to evaluate a ratio called days cash on hand, which evaluates daily cash flow for operating expenses. To get started, let’s look at an example. Today our custom machine builder is sitting on a cash balance of $900,000, and our machine builder has annual expenses of payroll, rent, utilities, office supplies, auto, et cetera, that total $3.65 million.

So, with the $3.6 million in total operating expenses, our average daily cash outflow would average about $10,000. So, circling back to our on-hand cash balance of $900,000 and $10,000 of average daily cash flow, the machine builder would be able to continue operating for 90 days with today’s cash.

So how is that computed? I took my cash on hand, divided it by my operating cash flow daily.

Why is days cash on hand important to understand other than the obvious that we don’t want to run out of cash? Well, it’s crucial to consider when, for example, evaluating a new customer contract that doesn’t provide an upfront deposit or when considering your ability to afford a new piece of equipment and determination of whether external financing may be needed or also your evaluation of whether to hire employees and increase your overhead.

So, let’s expand on this analysis by adding a competitor into the mix from the situation that we’re just reviewing. So, let’s say the second machine builder has operating expenses of $2.6  million, resulting in an average daily cash spend of about $7,100, and they’ve got a cash balance of $2 million.

So that would equate to about 280 days’ worth of cash that they have on hand. So comparatively, this would indicate that the competitor has about three times as much cash on hand to continue operating as our first company. That’s clearly more ideal, right? While this sounds like a good thing, it isn’t necessarily.

Yes, one could say that the competitor would simply last longer if something happened. However, it doesn’t mean that cash is being utilized in the most effective way.

The company with 90 days of cash on hand may have less cash because they’re investing in areas that are generating higher returns than simply if the cash were to just sit idle. Particularly interesting could be pulling in the industry standard data to say what that average is as we identify here what if for example the industry average is 120 days’ worth of cash on hand.

Could that indicate that our second entity that had close to 280 days of cash on hand is not properly reinvesting in their business to remain competitive and relevant? What other levers could be adjusted? Well, depending on the industry year-end, it could take a long time for you to potentially collect cash.

So maybe you need to evaluate renegotiating payment terms with customers and optimize the invoicing process to increase your days cash on hand.

Second, increasing sales with normal margins will of course also bring more cash into the organization and increase your days cash on hand.

The third lever to evaluate is how days cash on hand is tied directly to operating expenses. So, we need to be able to make sure that we track operating expenses closely in each area of the business and find ways to trim back if we’re looking to increase our days cash on hand.

To summarize, days cash on hand allows you to understand an important leverage indicator of your business and, on average, the number of days that an organization can continue to pay its operating expenses provided the amount of cash currently available.

As a CSIA member, you have access to the Pulse Survey, which allows you not only to enter and track your own data for important metrics but also to find out how your peers are performing, thus providing access to this critical data.

If you are unaware of the Pulse Survey or want to find out more, get in touch with a member of the Statistics Committee. Let us know if you found this information useful.

Of course, we’re also able to help analyze your data and provide relevant insights. Let us know what you’re thinking and thanks for watching.

This video series was produced in conjunction with Wipfli, formerly known as Clayton and McKervey and derivative material is published on the Wipfli website herehere, here, and here.