Expenses as Professional Services KPI
Definition, Calculation, Example
Why is expenses an important metric? How is expense calculated and measured?
An expense represents the cost of doing consulting business. Common business expenses include wages, salaries, bonuses, equipment, software, materials, travel, etc. The significant costs in consulting business are the salaries of consultants.
Cost of resources influence the profit of the company and external rates. The salary of a consultant is one of the main factors that affect the labor market.
In general, any agency expense consists of compensation of consultants and overhead costs (cannot be directly related to products or services offered, like rent, advertising, and administrative staff salary).
$$
Expenses\; =\; \underset { number }{ Consultants } \; ×\; \underset { per\; consultant }{ Compensation } \; +\; Overheads
$$
Detailed expenses calculation in a consulting business is a complex subject (see articles by Jason Cohen or Hyam Singer).
A consulting firm has 6 consultants, each of whom costs $170,000 per year. There are 3 employees responsible for marketing, sales, and finances, which brings the total annual overhead costs to $450,000.
The annual expense of the firm is $1,470,000.
The annual expense of the firm is $1,470,000.
$$
Expenses\; =\; 6\; ×\; \$170,000\; +\; \$450,000\; =\; \$1,470,000
$$
Expenses should be planned for the future and measured according to the present. Segmentation can help clarify the following:
- Who are the highest and lowest paid employees?
- What is the labor cost per employee?
- How big are our overhead costs?
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