Speaker 1: Hey YouTube, IgniteSpot here. We are running a brand new video series called Ask the Accountants where you get to ask your questions and we will answer them one video at a time. This week's question is from Lindell Danzee Black. She had watched a video we did a while ago on KPIs, which stand for Key Performance Indicators, and she was wondering what kind of KPIs should she be tracking for a training and consulting firm? This is a great question for a lot of reasons, but most importantly, it's specific to her and her situation. That's exactly what we're hoping for from you guys. We want to know how we can help you personally. So in a consulting business, you want to be thinking, what should we be tracking? Now a KPI, again, is a Key Performance Indicator. You can track a thousand numbers in a business, so you have to be careful you're not tracking the wrong numbers. Start by asking yourself, what's the most important performance measure we should be looking at? Now, in a consulting company, if you think about it, we have consultants running around. They are doing work with clients face to face, which means that we want to know how effective they are. So our biggest cost in the business is going to be labor. It's going to be the cost of our consultants going out and doing that work. So we really need to keep hold of that cost as well as their performance. So there are two KPIs I suggest you track, Lindell. The first is gross margin. Now gross margin is really easy to track. All you do is you add up all of your income for a period of time. Usually this is done over a month or a year. This is just the summation of all of your invoices you've generated for that period. Next add up all of your costs of goods sold. Now in a consulting firm, most of your costs of goods sold are going to be the wages of your consultants. You'll also have probably some maybe software costs or travel expenses or whatever, just because of what you do, but most of it's going to be labor for your people. Now subtract that cost from your total income generated and you'll come up with what we call gross profit. Now you're really close. Gross profit is almost there. What you do is you divide that gross profit by your total income generated for that period and that will give you a percentage. That percentage is your first KPI in a consulting business. It's what we call your gross margin. So let's do a little example. Let's say over the course of a month, your consulting firm generates $100,000 in billable income. That's really good. Now once you look at all of your costs for labor and again, software and whatever else you incur just to provide that service, we're not talking about rent or insurance, but the actual cost to create your service or product. Again, that's going to be labor for you, possibly software and travel. Let's just assume that adds up to $40,000. When I subtract from my $100,000 of income, my $40,000 of costs, I have $60,000 left. This is what we call your gross profit. From there, divide your $60,000 by the original $100,000 and you get 60%. 60% is your gross margin. Your job as the CEO of a consulting firm is to increase that percentage. Now there's only two ways to do that. Either charge more for the work that you do or don't incur as much cost for the work that you provide. As you do that, your business is going to get more profitable. This is a huge number for you because you are managing people and people are incurring a lot of costs. You want to keep that cost under control. The second KPI I would track or key performance indicator would be utilization. This isn't so much a financial term that you learn in accounting school. It's more just a common sense performance metric. It's how well am I utilizing my people. If John is a consultant and I get him for 40 hours a week to do his consulting work, I want to make sure as much of that 40 hours of time is being used in the field doing billable work. We want to do that with clients charging by the hour and incurring income for our company as well as providing great services to our clients. If he's at his desk and he's doing a lot of administrative work, that's not billable time. That's not being utilized as a consultant. So you're going to want to track how much time is actually being billed versus not billed. We call that utilization. And again, your goal is to make that number as high as possible. You want to get as close as you can without burning your staff out, right? Everybody needs time for breaks and utilization and everything else. But in a consulting firm, we want high utilization. All right, guys, that's it for this week's Ask the Accountant. If you have questions about your business related to finance or accounting, ask them in the comment section down below and I'll pick the very best and make a video just for you. Oh, and if you like this video, don't forget to subscribe to the channel. We're going to be creating a lot of content to help you get more profitable in your business and give the video a thumbs up. That really helps us out a lot.