The SMPS DC education committee recently decided to tackle a topic that scares most marketers: finances. Although many marketers/business developers may not be directly involved with firm finances on a daily basis, these figures still hold an important role in our overall job function. So in an effort to educate the membership on this important topic, we called on some local financial experts: Tom Oettinger (CFO, Onyx Group) and Martin Sharpless (Vice President, Skanska).
The overall message from the program was simple: In order for a company to remain profitable and increase the value of their company, they must manage theirtime and productivity. Seems easy, right? Here are a few of the basic definitions the program covered before we really delved into the formulas:
- Revenue: The fee you bill clients for the services you perform.
- Net Profit: The “bottom line,” meaning what is left of the revenue after all of the costs are paid.
- Direct Costs: Consists of direct labor, travel for project-related work, etc.
- Overhead Costs: Consists of non-direct costs that can be attributed to a specific department, rent or employee benefits.
- Overhead Marketing Costs: Marketing labor and expenses.
- G&A Costs: General and administrative labor and costs that cannot be attributed to a specific department, rent or employee benefits.
With a solid understanding of these terms, one could then begin to process the bigger ideas of the program.
This formula is a ratio of a firm’s total direct labor to total labor. It is the single most important component in a company remaining profitable. The industry standard is approximately 60-65%.
Staff Utilization Rate = Total Direct Labor / Total Labor (includes salaries and fringe benefits)
Most of us would agree that the term “overhead” carries a negative connotation in professional services. If something or someone is not billable, it is considered overhead. A firm’s overhead rate can be determined by the formula below. For an AEC firm, an average overhead rate is in the range of 125-175%.
Overhead Rate = Overhead Costs / Total Direct Labor
DIRECT LABOR MULTIPLIER
The Direct Labor Multiplier shows the efficiency of a team, and describes the relationship of employee labor wage and revenue generated by that wage.
Direct Labor Multiplier = (Revenue – All ODC’s + Direct Labor Costs) / Direct Labor Costs
After explaining the meaning and significance of these different ratios, Tom made an important note that they each must maintain a fine balance for a company to remain profitable in the long term.
The program concluded by both Tom and Martin encouraging participants to take this knowledge back to their firms and start asking questions!
- What is your firm’s overhead rate?
- How does that rate tie to your firm’s performance?
- How do your firm’s salaries, overhead rates and billing rates make your firm competitive?
- What key metrics determine your firm’s financial health?
Interested in seeing more from the presentation? You can download the PDF here: