In your mind, list all of the important metrics you’d like to track about your agency. Now tie each metric to one specific gauge, and your financial dashboard might look the illustration.

That’s what the cockpit looks like in the Piper Lance where I’ve built a bunch of flying time. At first glance it can be overwhelming, with so many things to measure that you almost don’t know where to start. The key, though, is to make the more important gauges larger and then place them in the center. In an “instrument scan” your eyes will always look at those gauges, while occasionally bringing the smaller, less important gauges into peripheral view. You don’t need to check your fuel level every 10 seconds, but you do need to see if you’re starting a banked turn and can’t feel it while in the clouds.

If we did the same thing with your agency’s dashboard, here are the eight gauges we’d see right in the middle so that you never lost sight of how your agency was doing.

These eight are unique because they are significant leading or lagging indicators of how your firm will deliver on its promise. Get these right and you’d have to work very hard at screwing things up. Work on these and the results will follow. Here are five performance metrics and three security metrics.

Performance No. 1: Billings/FTE

Take all employees (billable or not) and divide that number into your yearly fee base. The average, ordinary firm achieves $150–160,000 per full-time equivalent employee. The good firm is $160,000; the excellent firm is $220,000; the stellar firm is $275,000. This metric is useful because it concentrates on realized utilization, folds your hourly rate into the mix, and won’t let you have a bloated administrative staff (that’s because you have to include the entire employee pool and not just the billable ones).

Performance No. 2: Utilization

Let’s simplify this by dismissing markup income from the calculations, especially since that shouldn’t be a big part of your revenue anyway. Take the total hours worked for all employees combined (billable or not), multiply by 46 (weeks, after subtracting holidays and vacations), multiply by 60% (the expected target for the group as a whole), and then multiply by your weighted average hourly rate (even if your clients never see it). That’s what your fee base should be. Now compare that with what it actually is to see how much money you are leaving on the table. Here’s an example. A firm has 20 people, total, and the average employee works 43 hours per week, at a weighted average hourly rate of $180: 20 people x 43 hours x 46 weeks x 60% billable target x $180 per hour = $4,272,480 in projected fees at 60% utilization. If their fees are actually $3,204,360, or three-fourths that target, their utilization is 45% instead of 60% and they are leaving about $1 million on the table. That’s usually from a combination of under-pricing and over-servicing. Go to this free calculator to explore the concept a bit more.

Performance No. 3: Salary Load

To compare your performance with other agencies, we need to compare unburdened salary loads. That is, we don’t count bonuses, taxes, or benefits. Some of these are discretionary and others vary by region. So if Tom makes $80,000 and Sarah makes $82,000, their combined unburdened salary load is $162,000. So add this number up for your firm, being sure to include a reasonable amount for partners, and then compare it with your annual fee base: it shouldn’t exceed 45% of that fee base. So a firm with $4 million in annual fees wouldn’t want to spend more than $1.8 million on unburdened salary load, including principals.

Performance No. 4: Principal Compensation

What should you make? We have a specific formula for this because it’s accounted for in our ReCourses Valuation Model, but in rough terms the number is always in the range of $100,000 (1–4 people at your firm) to $410,000 (21 people or more). Another rule of thumb is to set it at 130% or more of what the highest paid non-partner makes. Whatever distribution you give yourself out of net profit is above and beyond this fixed compensation number.

Performance No. 5: Net Profit After Principal Compensation

Assuming that you are paying yourself what you should, your net profit should be at least 15% of fees but would ideally be in the 15–30% range. Be sure that you measure this against fees and not total revenue. If you issue an invoice for $100,000 but $20,000 goes to an outside contractor, your remaining fees are $80,000.

Security No. 1: No Debt

My own philosophy is to never incur debt for a depreciating asset. There are no sure investments in this business, and there certainly aren’t any solidly appreciating assets. All that to say that ideally you would have no debt at all, including loans, capital leases, or credit lines. If you want a quick way to gauge this, make sure that all your debt doesn’t total more than 60% of your assets. Say you have $500,000 in checking, $800,000 in receivables, and $40,000 in depreciated assets. On the other side of the balance sheet, you have $300,000 in payables. So your “debt” is $300,000 and your assets are $1,340,000. That puts your debt at 22% of your assets. You’ll always have payables, so a realistic goal is 20–60%, where lower is better.

Security No. 2: Client Concentration

To measure this at your firm, group related revenue together, first. In other words, multiple departments of the same larger corporation need to be viewed as one source. From there, determine the percentage of your largest source: it shouldn’t exceed 25% of your total revenue. Here’s some sobering insight: if that client concentration creeps up to 35%+, you’re just as likely to go out of business as you are to weather that storm should the revenue go away. Read more about managing a client concentration issue.

Security No. 3: Months of Cash

Add up all your normal, fixed expenses for the year and then divide by twelve to arrive at your monthly overhead. Aim to never dip below two months of overhead in real money (not money you can borrow). If you have a client concentration problem, aim to never dip below three or four months. As cash builds, it’ll make sense to pull it out so that it’s not left unprotected inside the business, but in some cases you want to leave it liquid in case the business needs it again and you have to loan it back to the company. If you are committed to reacting quickly to a downturn, a few months will be sufficient, but the conservative side of me aims for a much thicker cash cushion.

Finally

Hand this to your controller and see where you stand on all of them combined. If you’re doing well, it’s high-fives all around. If not, put a simple plan together that fixes the offending ratio over time. Do keep looking at the gauges, but glance up and enjoy the spectacular view from time to time, too!