Financial Management Flashcards
Accrual-basis accounting
Revenue earned and billed from fees and expenses, including outside project consultant fees and expenses, plus all other direct and indirect expenses incurred. This means revenue is based only on invoiced fee and expense amounts sent and/or received. Most firms use this modified accrual-basis for their profit-loss statement and balance sheet development
Cash-basis accounting
Income received and all salaries and expenses paid (a checkbook approach). This is the basis most commonly used for filing and paying quarterly and year-end taxes
Net operating revenue
aka “net revenue”): Represents the net dollars remaining after deducting the invoiced consultant’s fees and expenses, and all reimbursable and non-reimbursable project-related expenses
Direct labor
Same as direct salary. Represents time charged to projects, whether invoiced or not (by everyone, including principals).
Indirect labor
Same as indirect salary. Time charged to non-project-related activities (by everyone, including principals). Note: Indirect labor is included in the calculation of total indirect expenses
Reimbursable expenses
Project-related expenses that are invoiced to the client in addition to fees. These would also include a markup percentage on those expenses. The markup dollars are a form of revenue and are included in net operating revenue
Direct expense
Project-related expenses for a firm and its outside consultants that are not reimbursable, plus project-related expenses included in all lump sum fee contracts
Indirect expense
General and administrative non- project-related operating expenses (total indirect expenses includes indirect labor).
Overhead rate
The ratio of total indirect expenses to total direct labor
Break-even rate
The overhead rate plus the unit cost of 1.00 for an hour of salary (example: overhead rate of 1.30 + 1.00 = break-even rate of 2.30). This means for every $1.00 of salary the firm must recapture $2.30 just to break even
Utilization rate
Direct labor expressed as a percentage of total labor. (For individual rates, use hours; for a firm rate, use dollars
Hourly billing rate
The dollar amount charged to a client relative to one hour of direct labor
Net multiplier
The net multiplier is the ratio of net operating revenue (NOR) to total direct labor. The measure of return on every dollar of direct labor
Net profit
The dollars remaining after deducting all direct and indirect labor and indirect expenses, before any distributions are made or tax is paid
Current earnings
The net dollar amount after all distributions are made and all applicable taxes have been deducted
Utilization rate
Measures the overall efficiency and effec- tive use of labor, not a measure of productivity. This also is not a measure of the number of hours billed, only hours charged to projects.
Formula: direct labor hours ÷ total labor hours × 100 (as a %) Example: 32 hours ÷ 40 hours = 80%
Target: Entire firm: 60–65%
Professional-technical staff, including principals: 75–85%
Overhead rate
Measures the cost of operations not directly attributed to projects.
Formula: total indirect expenses ÷ total direct labor (in $$$)
Example: $308,241 ÷ $200,914 = 1.53 (for an hourly salary of $10/hr., the overhead cost would be 1.53 × $10 = $15.30)
Target: 1.30 to 1.50 of total direct labor
Break-even rate
Measures the total cost of operations for every dollar spent on direct labor.
Formula: overhead rate + 1.00 (represents the unit of cost for an hour of salary)
Example: 1.53 + 1.00 = 2.53 (for an hourly salary of $10, the break-even cost would be 2.53 × $10 = $25.30) Target: 2.30 to 2.50 of total direct labor
Net multiplier
Measures the revenue generated for every dollar spent on direct labor. This indicator must be greater than break-even rate for a net profit to be realized.
Formula: net operating revenue ÷ total direct labor (in $$$)
Example: $622,207 ÷ 200,914 = 3.1
Target: Greater than break-even rate (industr y benchmark: 3.0+)
Profit-to-earnings ratio
Measures the firm’s effectiveness in generating a net profit (as a %).
Formula: net profit (before distributions and tax) ÷ net operating revenue
Example: $108,817 ÷ $622,207 = 17.49%
Target: Equal to or greater than the anticipated net profit in the annual profit plan (20% or greater
Net revenue per employee
Measures the revenue earnings for each employee. Based on targeted net profit, this indicator contributes to the establishing of the net operating revenue in the coming year’s annual budget.
Formula: annual net operating revenue ÷ total number of employees
Example: $622,207 ÷ 6 employees = $103,701 per employee
Target: In excess of $100,000.00 per employee
Aged accounts receivable
Measures the average time interval in days between the date of outstanding invoices and the date payment is received.
Formula: average annual accounts receivable ÷ (net oper- ating revenue ÷ 365 days) = calendar days before pay- ment is received
Example: $245,090 ÷ ($622,207 ÷ 365 = 1,705) = 144 calendar days
Target: 60–90 calendar days (Anything over 90 days means the firm is ”lending” money to client at zero cost.
Solvency
Measures a firm’s ability to pay current debt. This is also known as the “current ratio.”
Formula: total current assets ÷ total current liabilities Example: $521,667 ÷ $218,658 = 2.39
Target ratio: Min. 1.5 to 1.0
Liquidity
Measures a firm’s ability to convert assets to cash. This is also known as the “quick ratio.”
Formula: (cash + accounts receivable + revenue earned, not billed [“work in progress”]) ÷ total current liabilities Example: $518,194 ÷ $218,658 = 2.37
Target ratio: Min. 1.0 to 1.0
Leverage
Measures a firm’s ability to manage debt effec- tively. This is also known as “debt–to-equity” (as a %).
Formula: total liabilities ÷ total equity × 100 (as a %) Example: $280,738 ÷ $949,451 = 29.57%
Target: Less than 35%
Return on equity
Measures the accumulated amount of money returned on a stockholder’s investment for their risk and efforts.
Formula: (total net operating revenue − total expenses) ÷ total equity × 100 (as a %)
Example: ($622,207 − $509,156) ÷ $949,451 × 100 = 11.9%
Target: Equal to or greater than the anticipated net profit in the annual profit plan (20% or greater)
Balance Sheet
Significant line items: Current Assets Current Liabilities Long-term liabilities Equity
Includes the following four indicators to calculate from each month’s financial report: Solvency Liquidity Leverage Return on equity
Profit-Loss Statement
Significant line items: Net operating revenue Total direct labor (% of NOR) Total expenses Net profit (before distributions and tax - "the bottom line")
Includes the following seven indicators to calculate from each month’s financial report Utilization rate Overhead rate Break-even rate Net multiplier Profit-to-earnings ratio Net revenue per employee Aged accounts receivable