AHPP Chapter 7 - Financial Management Flashcards
What are the two primary financial reports for an architecture firm?
- Profit-Loss Statement
- Balance Sheet
What are the two essential components of a firm’s financial management system?
- Annual Budget
- Profit Plan
What is Accrual-basis accounting?
Counting revenue earned and billed, plus all other direct and indirect expenses incurred.
Used for profit-loss statement and balance sheet development.
What is cash-basis accounting?
Income received, and all salaries and expenses paid.
Most commonly used for filing and paying quarterly and year-end taxes.
What is Net Operating Revenue?
aka. Net Revenue
Fees Billed + Reimbursables - Consultants - Project Expenses
What is Direct Labor?
Same as direct salary. Time charged to projects, invoiced or not.
What is Indirect Labor?
Same as indirect salary. Time charged to non-project-related activities.
Included in the calculation of total indirect expenses.
What are Reimbursable Expenses?
Expenses invoiced to the client in addition to fees.
What are Direct Expenses?
Non-reimbursable project-related expenses.
What are Indirect expenses?
Non-project related operating expenses.
Ex. Administrative labor, PTO, Office lease, marketing
What is an Overhead rate?
The ratio of total indirect expenses to total direct labor.
What is a Break-even rate?
The overhead rate plus the unit cost of 1.00 for an hour of salary.
Ex. Overhead rate of 1.30 + 1.00 = break-even rate of 2.30
What is a Utilization rate?
Direct labor expressed as a percentage of total labor.
What is Hourly Billing Rate?
The dollar amount charged to a client relative to one hour of direct labor.
What is a Net Multiplier?
The ratio of Net Operating Revenue to Total Direct Labor. (The measure of return on every dollar of direct labor)
What is Net Profit?
The $$$ remaining after deducting all direct and indirect labor and indirect expenses, before and distributions are made or tax is paid.
What are Current Earnings?
The net dollar amount after all distributions are made and all applicable taxes have been deducted?
What is the difference between Cash-Basis accounting and Accrual-Basis accounting?
Cash-basis is counting actual income received and money spent that month, regardless of when it was earned… whereas accrual-basis projects how much revenue is earned from the work done that month and labor expenses even though the revenue won’t come in for some time.
What are some financial performance goals?
- Projected net billing and revenue
- Project consultant fees
- Project-related expenses
- Staff size and salary expense
- Overhead expense & Break-even rates
- Net profit
What is “backlog”?
The balance of fees from current projects that have carried over into the coming year.
What is the formula to find an employee’s hourly billing rate?
[Salary x (overhead rate + 1)] / compliment of profit %
What is the formula for Overhead Rate?
Total indirect expenses / Total Direct Labor
What is the formula to find the Net Multiplier?
Net Operating Revenue (how much it costs to run the firm) / Total direct labor (Salary costs)
What is the formula for the Profit-to-earnings ratio?
Net profit (before distributions & tax) / net operating revenue (how much it costs to run the firm)
What is the formula to find the net revenue per employee?
Net operating revenue (annual) / total number of employees
What is the formula to find current Aged Accounts Receivable?
Average annual accounts receivable / (Net operating revenue/ 365 days)
Target is 60-90 days
What is Solvency?
The firm’s ability to pay current debt.
Total current assets / total current liabilities
ex. $521,667 / $218,658 = 2.39 solvency
What are the four sections of a Mattox format Profit-Loss Statement?
Revenue
Direct Labor
Indirect Expenses
Misc. Revenue/Expenses
What are the sections of an Annual Budget?
1) Revenue
2) Fixed Expenses
3) Variable Expenses
4) Misc Revenue/Expenses
What are some examples of Fixed Expenses?
Direct labor Indirect Labor Benefits Office Lease Insurance Auto Expense
What are some examples of Variable Expenses?
Office supplies Software Interest Marketing/PR Shipping Office events/meals
What are the three components of a Profit Plan?
Top Section: Revenue Projection
Middle: Projected P/L Summary
Bottom: Profit Goal
