Understanding financial metrics in your service-based business

Understanding financial metrics in your service-based business

Understanding financial metrics of your service-based business could be complex and difficult to digest. I’ve broken down a high-level overview of basic financial metrics every service-based business owner should know about. Paying attention to key metrics within your business can help define areas of strengths and weaknesses.

If you run a service-based business, your cost of sales are the employees who work directly in the production of the service you provide. Cost of sales should also include any software that you use in the production of services. A portion of the owner’s salary is allocated to this category. In a healthy service-based business cost of sales is at 50% of revenue.

Sales and marketing costs are any expenses directly related to the selling of your services and marketing efforts such as paid advertising. A portion of the owner’s salary would also be allocated to this category as well because as an owner you always have your sales hat on! The metric for sales and marketing varies depending on the kind of revenue stream you bring in, for service-based industries its at 9%-11% of revenue.

Expenses incurred for facilities’ repair and maintenance, rent, utilities are usually fixed costs. This expense should not vary and should remain at around 4% of total revenue.

Administration expenses is everything else that does not fall into the categories already mentioned. Examples of administration expenses include dues and subscriptions, office managers, receptionist, IT, legal, and office supplies. These make up a good chunk of your expenses as well, and should be at 35% of revenue.

So we learned about expenses but what about net income? Net income is what you’re most concerned about as a business owner, the bottom line! A healthy net income figure would be anywhere from 15%-25% of revenue.

Becoming familiar with your company’s key metrics is pertinent for long-term business growth. Identifying irregularities using these key metrics could help you hone in on problem areas within your business. In turn,  you could utilize this to make better financial decisions for your business.

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