Ratios - One More Time |
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Dear Dave
I recently attended a mini-course in finance you presented for ACEC Minnesota
and really enjoyed it. We’ve begun to create some reports using
the multipliers and ratios you recommend all firms track and are a little
confused on a few. In particular, I’m trying to understand the difference
between the Breakeven Multiplier and the Effective Multiplier. Also, you
used the term Net Service Revenue which I’m not clear on. Could
you go through this for me?
MB MN
Dear MB
Net Service Revenue is Gross Fees less (or net of) any sub consultants
or any other direct expenses incurred on projects. The Breakeven Multiplier
is Indirect Expenses (before any discretionary expenses such as bonuses
or profit sharing contributions) divided by Direct Labor. The Effective
Multiplier is Net Service Revenue divided by Direct Labor. The margin
by which the Effective Multiplier is greater than the Breakeven Multiplier
is a measure of the firm’s profitability on its Direct Labor: the
greater the margin, the higher the profit.
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