Financial stuff

Question 1

Utilization Rate

Answer 1

= Total direct hours / total hours
= direct salary expense / total salary

Tells you the percent of time an employee spends on project-related work

Target = anything over 65%

Question 2

Net Multiplier

Answer 2

= net operating revenue / total direct labor dollars

Can be re-written as:
= break even rate / inverse of target profit %

Tells you the revenue generated for each dollar spent on direct labor. Similar to overheard and break even rates, but with profit in the mix.

Target = over 3.0

Question 3

Direct Labor

Answer 3

Wages or salaries billable to a specific project and client

Also shown as TIME (hours) billed to project work

Question 4

Net operating revenue

Answer 4

= gross revenue - consultant fees - project related expenses

Dollar amount to operate your business

Question 5

Direct salary expense

Answer 5

Direct salaries (amount paid for direct labor)

Excludes fringe benefits

Question 6

Overhead Rate

Answer 6

= total indirect expenses / total direct labor dollars

Measures the cost of operations not directly billable to a project

Target = 1.3 to 1.5

Question 7

Net service revenue

Answer 7

Operating revenue for one specific project

Question 8

Gross revenue

Answer 8

Fees billed + reimbursable expenses billed

Question 9

Current Ratio

Answer 9

= total assets / total liabilities

Measure of the firm’s ability to meet its current obligations

Target = 1.0 to 1.5

Question 10

Liquidity

Answer 10

Quick ratio = (cash + short term investments + accounts receivable) / total current liabilities

Liquidity measures a firm’s ability to pay obligations that are expected to become due within the next year or operating cycle

Target: 1.0

Question 11

Quick Ratio

Answer 11

= (Cash + Accounts Receivable + revenue billed not earned) / total current liabilities

Measures short-term liquidity

Question 12

Net fee

Answer 12

= fees billed - outside consultants

See P/L statement
Revenue Projection based on this

Question 13

Solvency

Answer 13

= total assets / total liability
Aka : current ratio

Measures a firm’s ability to pay current debt

Target: 1.0 to 1.5

Question 14

Leverage

Answer 14

= total liabilities / total equity x 100

(Expressed as a percent)

Measures a firm’s ability to manage debt effectively
Aka: trading on the equity of the firm

Target : less than 35%

Question 15

Return on Equity

Answer 15

= net income / average stockholder’s equity x 100

Measures the accumulated amount of money returned on a stockholder’s investment for their risks and efforts. A widely used profitability ratio.

Target: equal to or greater than the anticipated net profit

Question 16

Accrual basis accounting

Answer 16

Snapshot of accounting status when expenses/costs and good/service provided/received. So it’s a longer term view that includes accounts receivable and payable.

Question 17

Cash basis accounting

Answer 17

Based on that moment. When cash either comes in or goes out. Does not consider accounts payable or receivable, only income received or expenses paid (checkbook approach)

Question 18

Indirect Labor

Answer 18

Wages or salaries NOT billable to a specific project and client

Also shown as TIME (hours) for non-project related work

Question 19

Reimbursable Expenses

Answer 19

Project-related expenses that are invoices to the client, in addition to fees. These include a markup percentage, which is a form of revenue and included in NOR.

Question 20

Direct Expenses

Answer 20

= direct labor + non-reimbursable expenses

Project-related expenses for a firm and it’s outside consultants that are not reimbursable, plus project-related expenses included in all lump-sum fee contracts.

Question 21

Indirect Expenses

Answer 21

= indirect labor + indirect expenses

General and administrative (G & A) non-project-related operating expenses. Total indirect expenses includes indirect labor.

Question 22

Break-Even Rate

Answer 22

= Overhead Rate + 1

Measures cost of operations for each dollar spent on direct labor

Target : 2.3 to 2.5

Question 23

Aged Accounts Receivable

Answer 23

= Average annual accounts receivable / (NOR / 365 days)

Tells you the average number of days it takes to receive payment from invoice date. Used to gauge financial health of your clients.

Target : 45-60 days

Question 24

Average Annual Accounts Receivable

Answer 24

Dollar value of accounts receivable at the end of each of the past 12 months divided by 12

Question 25

Net profit

Answer 25

= gross revenue - total expenses

Before distributions (profit sharing) or taxes are paid

Aka: Net Income

Question 26

Profit-to-Earnings Ratio

Answer 26

= net profit / net operating revenue (%)

Measures a firm’s effectiveness at generating profit / completing projects profitably. Measures how much profit is generated by each dollar of operating revenue.

Target : greater than or equal to anticipated profit in the annual profit plan OR 20% or more

Question 27

Net Revenue Per Employee

Answer 27

= annual net operating revenue / number of employees

Measures roughly how much money each employee generates for the firm. Used to compare to past years and other firms.

Typ. target : over $100,000 per employee

Question 28

Accounts Receivable

Answer 28

= total unpaid amount for delivered services - any amounts paid by clients

Refers to the money due to the firm for its services but not yet paid by clients

Question 29

Backlog

Answer 29

Current list of projects that will carry over to the following year, as well as the dollar value of anticipated revenues from projects contracted but as yet unearned

Does not guarantee future profits

Question 30

Revenue Factor

Answer 30

= Net Multiplier x Utilization Rate
OR
= NOR / Total Labor Dollars

Used to check the balance between revenue and labor. Best gauge of profitability in A/E industry.

Aka: yield on total payroll

Target : 2.0

Question 31

Return on Overhead

Answer 31

= net profit / indirect expenses

Measures firm sales and profit goals relative to overhead investments (like using overhead to pay for staff going to conferences, etc)

Target : 15-20%

Question 32

Current Earnings

Answer 32

= Net Profit (or Loss)

• total distributions
• taxes

Question 33

Current Assets

Answer 33

= cash + short term investments + receivables + prepaid expenses

Cash and other resources reasonably expected to be realized within one year

Question 34

Current Liabilities

Answer 34

= Accounts Payable + short term loans + income taxes payable + accrued salaries and wages + unearned revenue + current portion of long-term debt

Reasonably expected to be paid within one year

Question 35

Long-term liabilities

Answer 35

= notes payable + deferred income tax + other long-term debt

Expect to be paid after one year