(DS) Finance Terms - Financial Performance Indicators Flashcards
Utilization Rate
measures the efficiency of labor use
expressed as the ratio of Direct Labor (hours billed to projects) to Total Labor (hours billed to projects + hours not billed to projects)
Direct Labor (hours)/ Total Labor =
Overhead Rate
Measures the cost of operations not directly attributable to a project. Expressed as the ratio Total Indirect Expenses ($ outside of salaries or expenses related to a project) to Direct Labor (employees salaries)
EX. Overhead rate of project 1.3, $1.30 is being spent to “keep doors open” for every $1 spent on salary
typical for indirect expenses tp exceed direct labor cost
Total Indirect Expenses (outside of salary/project expenses)/ Direct Labor (employees salary) = ~ 1.3 - 1.5
Break Even Rate
Measures the total cost of operations for every dollar spent on labor
OVERHEAD RATE + 1 ~ 2.3-2.5
Net Multiplier
revenue generated for every dollar spent on direct labor.
In other words, its the ratio that describes what factor more you are able to bill for your employees time than you pay out in salaries.
Net multiplier must be greater than the break even rate in order to make profit.
NET OPERATING REVENUE ($) /TOTAL DIRECT LABOR COSTS ($)= ~ 3.0
Profit to Earnings Ratio
Measures firms effectiveness in generating a net profit. It’s expressed as the ratio of Net Profit (Net Operating Revenue - Net Expenses) to Net Operating Revenue. Its the answer to a simple question: For every dollar we bring in, how much are we taking home as profit after all of our expenses?
EQ: NET PROFIT / NET OPERATING REVENUE ($) = ~ 0.2 (20%)
Net Revenue per Employee
Measure earnings per employee. How much revenue does each employee bring in the door?
EQ. ANNUAL NET OPERATING REVENUE ($) / TOTAL NUMBER OF EMPLOYEES ($) = ~ 100K
Aged Accounts Receivable
Measures the average time integral in days between the date payment is received. Expressed as the ratio of the average amount a firm is owed in unpaid services (Avg. Annual Accounts Receivable) to the revenue they take in on a daily basis (Net Revenue / 365 days).
EQ: AVG. ANNUAL ACCOUNTS RECEIVABLE ($) / NET OPERATING REVENUE ($) / 365 DAYS = 60-90 DAYS
What are the four balance sheet indicators?
Solvency (current ratio)
Liquidity (quick ratio)
Leverage
Return on Equity
Solvency (current ratio)
Measures a firm’s ability to pay their current debt
Expressed as a ratio of Current Assets and Current liabilities
Liquidity (Quick Ratio)
Measures firms ability to convert assets to cash
Expressed as a ratio of all
AVAILABLE CASH (Cash + Accounts Receivable
+ Revenue earned but not billed) ________________________________________
Current Liabilities
Leverage
Firms ability to manage debt effectively and is expressed as a ratio of total liabilities to total equity
TOTAL LIABILITIES ($) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ < ~35% TOTAL EQUITY ($)
Return on Equity
Measures accumulated amount of money returned on stock holders’s investments, and is expressed as a ratio of total profit to total equity
TOTAL PROFIT (= Net Operating Revenue (NOR) - EXPENSES) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ > ~20% TOTAL EQUITY ( =ASSETS ($) - TOTAL LIABILITIES ($) )
Direct Personal Expense
Cost of paying taxes and benefits on top of an employee salary. Note that when this is used to calculate total Direct Labor costs, the Net Multiplier will be smaller.
SALARY ($) + ADDITIONAL COMPENSATION ($) +TAXES ($)
Direct Labor
Labor associated to production of services and is billed to a project
Use salaries and the target utiliz. rate to project direct labor cost
Indirect Labor
Labor that is not involved in the production of services for a project
Use salaries and the target utilization rate to project indirect labor
