Hi everybody!
For anyone that attended yesterday’s Practice Management workshop, Evaluating a Firm’s Financial Metrics [Exercise A] , we covered a TON of material in a short amount of time so I wanted to provide a brief overview of the formulas we discussed as well as some links to resources that may be helpful as you study this topic further.
Direct Labor and Expenses are anything that can be traced back to the client. Indirect Labor and Expenses are anything that cannot be directly billed to a client. These distinctions are important to remember as you look at the following formulas.
Utilization Rate = Efficiency. How much of my total work time is spent on direct labor? (Can be calculated for a firm or for individuals).
Utilization Rate = Total Direct Labor / Total Labor
Overhead Rate = Ratio of indirect expenses to direct labor. (Lower number = higher efficiency)
Overhead Rate = Total Indirect Expenses / Total Direct Labor
Break Even Rate = How much do you need to make to offset your expenses? Overhead + Unit cost of 1 for an hour of salary.
Break Even Rate = Overhead Rate + 1
Net Multiplier = Measures the return (revenue) on dollars spent on direct labor.
Net Multiplier = Net Operating Revenue / Total Direct Labor Cost
For additional help with calculations you can check out Chapter 7 of the Architect’s Handbook of Professional Practice (AHPP) as well as the following posts here on the ARE community.
Evaluating a Firm’s Financial Metrics [Exercise A]
Financial Study Material
PCM Practice Exam Question (from Form3)
You can also check out the ARE Live from November 12, 2020 that reviews the calculation exercise again and has some sample questions as well.
Hope this is helpful as you keep studying!
Heidi