Many people measure success differently. For some success is directly correlated with how much money they make, while others tie success to happiness. No matter how you define success, it is important that you have a way of tracking it and measuring it over time. This will help you see how your success has grown and can help you identify areas of improvement.
KPI Metric #1 - Profit
The first and most common KPI is profit. Now let’s face it, we can talk about all other performance indicators and numbers but at the end of the day one of the most important metrics we are concerned about is whether we are making a profit or not. Figuring out what your profit is can be done quickly by simply subtracting the money you make minus any business expenses and taxes. Often freelancers will forget about subtracting business expenses from their sales and end up with an inflated profit line.
It is fairly easy to have a couple of really good months and forget to constantly track your profit. Whether it is a feeling of security or being too busy with work to keep up on it, it can quickly slip to the wayside. If your monthly profit does slip below prior months and you don’t catch it in time, you may end up losing money quickly if it isn’t corrected.
An easy way to keep track of profit from month to month is by setting up a formula in Excel that will track your Net Profit Margin. The Net Profit Margin is a quick way to see if you are in a positive or negative trend for profits. The NPM can be calculated with the following formula:
The closer your number is to 1 the more efficient and higher your profit is.
With Indy, you can track and measure how much you’re making through the free invoices tool.
KPI Metric #2 - Growth
Now that you can calculate how much profit you are making it is a good idea to turn your sights toward the future. Another good KPI example is measuring the amount of growth your freelance practice is experiencing. Keeping an eye on monthly, quarterly, and annual growth helps ensure you are on the proper trajectory for hitting your goals.
Now this doesn’t necessarily mean that your growth rate need to be constant, but it should be either moving in a positive trend or staying even if you are content. It is when the growth line looks negative that you might want to look a little deeper into why your profit is shrinking for that month or quarter. It might be as simple as a client of yours decided to push a reoccurring project into the following month. Or it could be that you lost a client and need to find a way to replace their revenue.
Calculating the growth of your business is a little more complicated than the formula for profit, but still manageable, especially if you use a system like Excel. Below are three examples using monthly, quarterly, and annual numbers to calculate growth.
- July’s profit was $4,500 and August’s profit was $5,200. The growth rate is found by dividing $5,200 by $4,500, yielding 1.15. This means that your business experienced 15% month over month growth.
- Quarter 1’s profit was $19,000 and Quarter 2’s profit was $19,000. Once again, divide Q2’s profit by Q1’s, resulting in 1. This means that your growth rate was the same quarter over quarter.
- 2019’s profit was $63,000 and 2020’s profit was $52,000. To calculate growth of year over year, take $52,000 and divide it by $63,000, which is .82. Since the number is below 1 in this example that means that your profit shrunk year over year by 18%
KPI Metric #3 - Billing Average
As a freelancer it is important to give your clients flexibility in the way that you bill them. Some organizations will be more comfortable with paying an hourly rate, while others may prefer paying on a per project basis. Regardless of which way you bill for your services, you need to have a way to measure your overall billing average.
The easiest way to do this is to convert all your billing into an hourly rate and measure it on a monthly basis. So for those clients that prefer a project rate, you will need to track the amount of hours required to complete the project. Once you have that number you will divide it by the total billable amount. Below is an example calculating your hourly billing average with three clients:
- Client #1 Hourly Rate = $30
- Client #2 Hourly Rate = $35
- Client #3 Project Fee is $350 and it took you 8 hours to complete = 350/8 = $43.75
- Overall Hourly Billing Average = 30+35+43.75 = 108.75/3 = $36.25 per Hour
Creating Your Own KPI Template
Keeping track of KPIs can be time-consuming and difficult if you don’t have a proper plan in place. Luckily a simple KPI template can be created using Microsoft Excel that allows you to simply enter your sales numbers each month and it will automatically calculate the metric for you.