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Ratios - One More Time

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?

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.

Wahby and Associates