This metric is used in order to calculate the value of new business contracts, over a specified period of time. It’s as simple as this, whenever you land on a new business contract, your company benefits from it. This is why a general goal for most companies is to optimize their number of business contracts. Essentially, their profitability should be considered, as some projects are more profitable than others.
Being referred to as the activated new business contracts, this metric is typically utilized on a monthly basis by sales managers or CFOs. Your team can assess which of your current contracts has generated most profit or the other way around.
The formula this metric uses is: (value of new business contract (a) + value of new business contract (b) + … + value of business contract N) / the total of new business contracts landed during a given timeframe.
Financial statements, balance sheets, and income statements speak a lot about a company’s value, whilst displaying if an approach is profitable or not. For example, managing to land on a contract might lead to life-changing results for a small business.An example would be managing to land on a government contract. It’s no secret that these contracts tend to be the most profitable. It’s no surprise that it is quite difficult to accomplish such a target, due to the competitive nature of the field.
When you take on a new contract, you cannot know for sure that it will maximize your profitability or the other way around – it won’t do anything beneficial for your firm. Of course, analyzing the situation attentively before making any rushed decision is a practice each company should engage, but even this cannot fully eliminate the risk, unfortunately.
Making Your Contracts More Profitable
So, the reason why you should use this metric is to differentiate between contracts, so that you will base your decision on this information in the future. In this view, you should determine your exact labor costs. How much work goes into the making and
completion of each action? Only in this way can you be 100 percent sure that your decisions are advantageous, from a profitability viewpoint.
When you aren’t specific concerning the work and costs that each contract entails, this might harm your revenue. At the same time, over the course of time, you should use this information in order to reject future contracts that are a waste of time and resources. In other words, this entails focusing on the projects that generate revenue as opposed to
the ones that don’t do that.
Essentially, this kind of decisions cannot be made on a whim – you ought to make them based on real numbers, which is where these calculation metrics come in. After analyzing accurate, reliable data, you can make better financial decisions for your
company. And these decisions, over the course of time, can significantly impair how your firm will evolve in a couple of years’ time. A KPI target for this metric might be of $17,800 in new business value. However, this is just an approximation, and it can vary by industry and type of company.