Break even rate architecture

The following is a direct, effective and accurate method for starting the financial management FM planning process for your firm, regardless of the size of your firm. Please keep in mind that this is not a comprehensive FM process, it is merely an easy approach to gaining a better understanding of how to initially plan for profitability. Unless a project awarded to the firm is billed on an hourly basis either open-ended, or with a max. Hourly fee project hours are both chargeable and billable, up to a maximum if one is stipulated.

This total figure should be based on only the total hours of available time each year 40 hours x 52 weeks and should not include any allowance for overtime.

The total available hours are used for Direct Labor project hours and Indirect Labor non-project or overhead hours.

Define the Utilization Rate UR for each staff member, including all principals. Then, multiply the UR by hours to arrive at the total direct project labor hours and its complement for the total indirect hours.

At this point, having a prepared, detailed Annual Budget for the firm would be very helpful and create a more meaningful set of indicators. The ratios between these two figures are two of the most critical of the key financial per performance indicators. Target range for Net Multiplier is 3. See Caveat on P. Care needs to be given to also keep the reverse ratio within its target range to ensure the targeted profit percentage for all project fees is maintained and the balance between the number of staff and the project workload remains balanced.

However, being out of range almost always is an indication that the TDL is too high overspent fees compared to project fee budget. The optimum relationship between the three components that comprise the NOR, would be as follows:. While that may not seem to be realistic, it is possible, especially if you are disciplined enough to accurately manage your time and develop a Project Fee Budget PFB for every projectas an important and integral part of the work to be done in preparing a response to a Request for Proposal RFP.

To demonstrate the differences between these two methods:. Do you have questions? This is a great post! I have one question which is in looking at direct labor would you base that on hours available to work bill or would you back out paid vacationholidays and leave? Hi Christian, I am pleased you found the post on developing a profit plan to be helpful. In response to your question; Direct Labor are those hours that are charged not necessarily billed to an active project.Investors in the stock market obsess over buzzwords like earnings per share and revenue growth.

These financial metrics tell a story about the company. In any event, this applies to all businesses and not just big companies.

Different industries have different sets of metrics that we should pay attention to. We have identified the most important metrics that all architectural and engineering firms should keep track of.

The first step is to keep all financial records organised.

break even rate architecture

Things can get even simpler with the help of enterprise resource planning ERP software. Ask your Accountant or Bookkeeper to calculate these metrics for you so you can keep a track on them.

Here are the relevant financial metrics for architectural and engineering firms:. The overhead rate is the ratio of total indirect expenses to total direct labour.

You can calculate overhead rate as a ratio or as a percentage of total direct labour. For an architectural or engineering firm, indirect expenses are all expenses unrelated to projects. This amount is higher than total direct labour even for the most efficient architectural firm. The trick is to keep the overhead rate in check.

The utilisation rate is the ratio of total direct labour to total labour. You can calculate utilisation rate as a ratio or as a percentage of total labour. For an architectural or engineering firm, direct labour is the labour that a firm spends on billable projects.

The utilisation rate is a measure of how well the firm utilises its labour.

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It is however not a measure of productivity. An efficient firm would use a higher percentage of its labour to generate revenue. For example, a new hire is more ready to work on billable projects after completing advanced Revit training. The net multiplier is the ratio of net revenue to total direct labour. A net multiplier of 3 means the firm is getting three times back in revenue.

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There is a net multiplier that every industry has to hit in order to have a healthy profit. For the architecture and engineering industry, it is 2.

This average increases to 3. Therefore, the break-even rate shows us how much the firm has to gross above its labour cost to break even.

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The break-even rate ties to the overhead rate. The break-even rate must be lower than the net multiplier for the firm to turn a profit.

The backlog is the value of the unbilled portions of existing fee contracts. It is also known as revenue backlog. The backlog of an architectural firm is revenue in the pipeline. You have to continuously update this metric, since new invoices subtract from the backlog and new contracts add to the backlog.

If the backlog continues to build up, the firm would have to add to its operating expenses, such as expanding the workforce. If the backlog falls off, the firm may have to reduce its operating expenses. The aged accounts receivable is the average accounts receivable divided by net operating revenue per day.

Therefore, the unit of this metric is days. First of all, there are several ways to determine average accounts receivable. One way is to add up end-of-month accounts receivable for the past 12 months and divide by The aged accounts receivable is the average number of days that a firm has to wait for payment.Hi Brian, good article, well explained.

I am not sure what t means. Maybe you can use dec as the maturity date of the bond just to show the calculation. BTW: I am buying one of your books, maybe two. I realise now that I should put an example of the cash flows in the text itself, or else have another article with how the cash flows work. I deliberately skipped over one technical issue in the calculation: we need to add a lag for the CPI series, as we do not have a published December CPI. I will roll back to October monthly series.

Since I was at a loss of what to write about, I will discuss this in this weekend's article, should be published tomorrow. Anyway, thanks for reminding me about this topic! Note: Posts may be moderated, and there may be a considerable delay before they appear. Although I welcome people who disagree with me, please be civil. Please note that my spam comment filter appears to dislike long "anonymous" posts.

Note: if you want to post comments from Apple devices iPhone, iPadyou apparently need to turn off "prevent cross-site tracking" in Safari privacy settings. The reason presumably is that another URL handles comments, and so the user session needs to be preserved when redirected to that site. I don't like this, but this is not enough to make me switch my hosting service. Recent Posts Loading Inflation-linked bonds therefore allow you to create retirement cash flows that are indexed to inflation.

Technical note: For TIPS but not all other marketsthere is an added guarantee that you will get your money back if you buy it when first auctioned. The chart above shows the yields of generic year U. Since having your cash flows indexed to inflation is valuable, the quoted yield on TIPS are generally less than on regular "nominal" Treasurys. Most people refer to the yield on TIPS as being the "real yield", although that conflicts with the definition of real yield that is often used in economics which was developed before inflation-linked bonds existed.

Nemo April 17, at AM. Inflation Watcher December 17, at AM.Bond investors routinely have to make judgment calls about expectations on future conditions in the credit markets, including changes in prevailing interest rates and inflation.

Using a break-even calculation can help assist investors to make those judgment calls in a more informed way. In particular, there are two situations that often come up where knowing a break-even interest rate can help you make better decisions.

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Situation 1: Comparing short-maturity bonds with long-maturity bonds One common situation involves deciding the maturity of the bond you want to buy. Typically, bonds that mature further into the future offer higher rates than those that mature sooner. But if you think interest rates will rise, then you might prefer to take a lower rate now in exchange for being able to reinvest at a higher rate sooner in the future.

In this case, the break-even interest rate will tell you how far prevailing rates would need to rise by the time the shorter-term bond matures in order to make up for its smaller interest payments. To calculate the break-even interest rate, you need to know the yields to maturity, and the number of years left before the bonds mature. Take each bond's yield to maturity, add one to the yield, and then use an exponential calculation, raising the sum to the power of the number of years before maturity.

You'll have two results: one for the longer-term bond, and one for the shorter-term bond. Divide the longer-term bond result by the shorter-term bond result, and then do another exponential calculation, raising the number to the power of one divided by the difference in years of the two maturities.

Subtract one from the result, and that gives you the break-even interest rate. An example will make this clearer. The resulting numbers are 1. Divide 1. Subtract one, and the final break-even interest rate is 4.

This means that, in five years, you'd have to be able to buy another five-year bond yielding 4. Situation 2: Inflation-indexed bonds The other typical situation involves comparing a traditional bond with a bond with the same maturity date whose principal value automatically adjusts for inflation. In this case, you're calculating the break-even interest rate of inflation for which buying the inflation-indexed bond will provide a larger return. Here, the calculation is simpler because the maturities are the same.

Take the yield to maturity for each bond, and add one to it. Then divide the traditional bond's number by the inflation-indexed bond's number, and subtract one from the result. The final answer is the break-even inflation rate. Knowing the break-even interest rate is important in comparing bonds. With it, you can make your own predictions about what the future will bring, and then make a decision accordingly.

break even rate architecture

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors.Refinancing your mortgage can be appealing, especially when you can secure a lower rate. You have the potential to lower your monthly payments, pay off your mortgage sooner, and maybe even cash out some of the equity in your home. But closing costs and fees can quickly eat into any savings you might hope to get, leaving you right where you started—or worse.

There are some situations when refinancing your home loan definitely makes sense. A bit of math can help you identify those opportunities. One tool to help evaluate refinancing is a break-even point. To calculate a break-even point, divide your monthly savings into the costs required to refinance. For refinancing to make sense, your break-even point needs to be relatively soon. A shorter period enables you to reap the benefits for more years before you sell or refinance again.

This calculation is especially useful if you plan on moving, because you already have an idea of when you might sell your home.

Breakeven Point (BEP)

Keep in mind that costs and fees may vary somewhat from lender to lender and even from loan to loan, so take that into account when doing your calculations. One of the times it may make sense to get into a different mortgage is to switch between an adjustable-rate mortgage ARM and a fixed-rate one.

ARMs can eventually end up with higher interest rates than fixed-rate mortgages, even if an ARM starts out lower. Those low rates can lead to borrowers getting caught by surprise later when their monthly payments go up along with their rates. Refinancing an ARM to a fixed-rate or year mortgage can eliminate uncertainty surrounding variable rates.

How to Perform Break-Even Analysis

On the other hand, when mortgage rates are plummeting and you expect that to continue, it might make sense to switch from a fixed-rate mortgage with a high interest rate to an ARM that takes advantage of lower rates. A refinance of this sort is best suited to homeowners who can absorb higher monthly payments if rates bounce back up again. If you go with an ARM, be sure you can afford higher payments, just in case.

Refinancing may allow you to pay off your home sooner, shaving years of payments off your loan. You can also take advantage of lower overall interest costs of a shorter-term loan.

A mortgage spread over 30 years will cost more in interest than one spread over 15 years.

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Plus, shorter-term loans tend to have lower rates than long-term loans. Mortgage rates fluctuate constantly. The rate you get depends on numerous factors, including your credit score, economic policy, and the property you own. A better rate is always nice, but make sure you come out ahead after paying closing costs. A few ways to do that include:.

break even rate architecture

In some cases, it's not a good idea to refinance. For example, sometimes your total interest costs will increase—even if your monthly payment decreases. An amortization table can help illustrate how this happens.

break even rate architecture

Each time you make a monthly payment, part of your payment goes toward the principal you borrowed, and part of it is your interest cost. In the early years of your loan, most of each payment goes toward interest, barely making a dent in the principal. If you keep your old loan, more and more of each payment goes toward reducing the loan balance over time. But if you scrap your old loan for a new one, you go back to the beginning of the amortization process, and back to those early payments that are mostly interest costs.

Look at the big picture before you refinance. You may pay a few hundred dollars less each month if you refinance, but it can cost you tens of thousands of dollars more in interest over your lifetime.

Federal Trade Commission. Freddie Mac. Consumer Financial Protection Bureau.Steve shares seven key financial performance indicators that we should all be following. Do you have questions? The material for preparing an annual budget, an annual profit plan, developing project fee budgets, and calculating billing rates—is the stuff of financial planning. Each is a type of forecast that serves as a benchmark for financial management.

Accurate project fee budgets and profitable billing rates are your tools for achieving those goals. Their greatest value, though, is in showing trends as they develop over time. All indicators will vary with normal business cycles—which you will come to recognize—but a consistently downward or upward trend over several reporting periods without a clear reason for such a trend could be an early warning sign of an erosion of your financial plan for the year.

Firm principals who are good financial managers monitor such trends, determine why they are occurring, and respond to them before they develop into a serious problem. It is not a measure of billable time versus nonbillable time because not all time charged to projects is billable. Nor is it a measure of productivity, which is notoriously difficult to measure in professional service industries, including professional design firms.

Your overhead rate is simply the ratio of your total indirect expenses to your total direct labor cost. You need to know your overhead rate in order to establish appropriate, profitable billing rates and fees for your services. If you have an overhead rate of 1. Simply stated, the break-even rate is your cost of doing business for every dollar of salary you pay your employees.

If your overhead rate is 1. The net multiplier is the ratio of net operating revenue NOR to total direct labor. If you think of direct labor as an investment, the net multiplier is a measure of your return on that investment. It tells you how many dollars of revenue you are generating for every dollar you spend on direct labor. You can compare the net multiplier to your break-even rate to determine if you are generating a profit.

Though the net multiplier is of the same order of magnitude as your break-even rate, it should not be used for setting billing rates. Your overhead rate, break-even rate, and billing rates are all determined from what you know about the actual cost of doing business and what you need to earn in revenue to generate a profit.

The net multiplier measures actual performance: how much money you are actually earning for every dollar you spend on direct labor. It measures results, not costs. If your overhead rate and target profit margin are within typical industry ranges, and your staff is effective and efficient, your direct labor will be about one-third of NOR, and the net multiplier will be in the 2.

Using the formula above, you then calculate your aged accounts receivable, which is the average number of days that it takes for you to receive payment from the invoice date. Profit is what remains after all expenses, including salaries, have been accounted for, and before nonsalary distributions are made to shareholders and employees and income taxes for the firm are paid.

The higher the number, the more profitable the firm is. There is no target range for this indicator; the higher the number, the better. Checking it semiannually is usually sufficient. This is the most critical indicator; if unknown or calculated incorrectly, profitability cannot be measured. When developing project fee budgets, calculate this indicator for every team member.

Add desired profit to determine billing rates.In other words, the break-even sales are the dollar amount of revenue that precisely covers the fixed expenses and the variable expenses of a business. The formula for break-even sales can be derived by dividing the fixed costs of a company by its contribution margin percentage.

Mathematically, it is represented as. The contribution margin percentage can be computed by dividing the difference between the sales and the variable costs by the sales and expressed in terms of percentage.

Mathematically it is represented as. Let us take the example of a company that is engaged in the business of lather shoe manufacturing. Let us take the example of another company ASD Ltd. Calculate the break-even sales of ASD Ltd. Source Link: Wallmart.

Inc Balance Sheet. Step 1: Firstly, determine the variable costs of production of the subject company. Typically, variable costs include those types of costs that directly vary with the change production level or sales volume. Examples of variable costs are the cost of raw material, fuel expense, direct labor cost, etc.

Step 2: Next, determine the fixed costs of production, which include those type of costs which are periodic in nature and as such do not change with the change in the level of production.

Examples of fixed costs are management salaries, depreciation expense, interest expense, taxes, rental expense, etc. Step 3: Next, determine the total sales of the company during a specific period of time, half-yearly or annually, etc. Step 4: Next, calculate the contribution margin percentage by dividing the difference between the sales step 3 and the variable costs step 1 by the sales.

It is expressed in terms of percentage. Step 5: Finally, the formula for break-even sales can be derived by dividing the fixed costs step 2 of a company by the contribution margin percentage step 4 as shown below. It is very important to understand the concept of break-even sales because it is predominantly used to ascertain the minimum sales required in order to achieve at least no profit no loss situation.

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It is usually used before the start of a new business or a new product line, so as to chalk out a clear plan and identify the key risks involved in achieving the desired profitability. This is a guide to Break-Even Sales Formula.

Here we discuss how to calculate Break-Even Sales along with practical examples.

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