The Revenue Factor may be one of the most important indicators of the firm’s financial performance.
It is a fairly reliable and stable metric, and not easily manipulated.
Not only is it a barometer of how well the firm is deploying its labor, it is also an indication of how well the firm is pricing its services.
The Simple Math
Somewhat similar to the Net Fee Multiplier, our Revenue Factor is easily calculated as follows:
Net Fees / Total Labor costs
Note that here we are using our total labor costs, combining both Direct and Indirect Labor costs.
Another way of getting to our Revenue Factor is to multiply our Utilization Rate by our Net Fee Multiplier.
We can calculate our break-even Revenue Factor by adding 1.00 to our current Overhead Rate (in decimal form), and multiplying by our typical Utilization Rate. This will tell us the minimum return we need on our total labor.
The Big Idea
How well is the firm generating revenue from its total labor investment? The firm’s goal should be to at least double that investment in the production of Net Fees (Net Revenues).
For many firms, this Revenue Factor may fluctuate on either side of 2.0. Higher is better, of course, but this factor tends to be fairly stable for firms whose finances are relatively consistent from month to month.
If a firm’s Revenue Factor calculates at 2.0, this means that for every dollar paid out in total labor cost, the firm is generating $2.00 in Net Fees.
Increase in the Revenue Factor is generally an indication of higher return on the firm’s labor costs, which will usually mean increased profitability.
The Revenue Factor is improved by both utilization rate and the Net Fee Multiplier– in other words, with more efficient use of staff, coupled with higher fees.