Measuring Efficiency in a Service Firm

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Measuring Efficiency in a Service Firm

By Brian Bach, Michigan CFO Associates

To properly run a business, management must have a way to measure operations. In retail, it might be sales per square foot; in manufacturing it might be units produced per hour; in distribution is might be shipments per day. In service firms, they typically use utilization & realization, as it’s a straight forward way to measure the efficiency of their staff and operations. The key to a profitable service business is knowing how efficient you are in utilizing your staff to generate revenue.

There are 3 components needed to properly measure utilization & realization:

Actual Hours – number of hours actually worked;

Charged Hours – number of hours charged against a client, project or job;

Billed Hours – number of hours billed to the client

Utilization & realization are expressed in percentages so you can compare them across staff with various activity levels.

For example, let’s assume an employee works 40 hours, is able to charge 29 hours to projects and was able to bill 19 hours, in a given week.

Measuring Utilization:

This ratio is Charged Hours (29) divided by Actual Hours (40) = 72.5%. Essentially, this number tells management that approximately ¾ of this persons time is being charged to a project (or being productive in revenue making activities) and the other ¼ is administrative, paid-time-off or some other non-chargeable activity.

Utilization % measures the productivity of your staff towards working on chargeable (and hopefully) billable projects. The higher the %, the better your staff is utilized working on projects having the potential to generate revenue.

Measuring Realization:

This ratio is Billed Hours (19) divided by Charged Hours (29) = 65.5%. Essentially, this number tells management that given the total number of hours charged to a project, only approximately 2/3 of charged time was actually billable to a client.

Realization % measures the revenue capacity that was captured from charged hours during a given period of time. A high % mean projects were properly quoted and work was completed for the allotted number of hours billed.

Using These Tools:

These two ratios are important tools in helping management measure productivity (utilization) and revenue capture (realization) by each employee and as a firm overall. Use these ratios to set goals and measure them on a consistent basis. If management’s goal is improving profitability these can be key metrics in determining if improvements are being achieved.

Today’s article for our commercial cleaning industry friends is brought to us by Brian Bach, Director at Michigan CFO Associates in Clinton Township, Michigan.  They provide outsourced CFO & Controller services for small businesses, contact them at 586-580-3285www.michiganCFO.com  Thanks, Brian!