Once the profit plan goal is established, progress toward that goal is measured and evaluated. The controller begins the income statement analysis after the bookkeeping for the period is completed. Actual values are compared to planned values. Variances are identified and analyzed. Evaluation of the variances between the profit plan and actual operations is the key to financial control. The results of analysis are interpreted so that informed decisions can be made on what actions may need to be taken to reach the profit plan goal. Decisions made to correct unfavorable variances from the profit plan help keep progress toward the financial plan goals on target.
The managing principal of a design firm is often an architect or engineer who is a non-financial manager not trained in accounting. This managing principal is responsible for making decisions that determine the firm's financial success. This firm manager should have a basic understanding of key indicators of financial performance and how they relate to the profit plan goal.
It is the controller’s responsibility to communicate the analysis of profit plan progress to the non-financial manager in a meaningful way so that appropriate decisions can be made to keep the firm on target with the profit plan goals.
Where are financial controls in a professional service firm? The business of a professional service firm is the provision of an hour of labor. The profit plan key indicators provide the bench-marks to measure and control the key indicators for actual operations. Labor constitutes 75+% of most professional services firm's expense and is the most readily adjustable item of expense. In a professional service firm, time is money. The unit of service is the direct labor hour. Labor-related ratios and multipliers are the key indicators of financial performance. Labor-related ratios and multipliers are the focus of financial control. Available direct labor hours determine the capacity of a professional service firm to generate revenue.
How are financial controls used to manage? A professional service firm must have a balance between the available labor force and the revenue required to make the desired profit. The strategic profit plan provides the balance between the marketing plan revenue and the personnel plan labor by calculating the revenue required to make the desired profit. The monthly revenue objective must be compared to the actual revenue backlog projected over the current profit plan year. If the projected revenue backlog is not enough to support the target utilization rate for the existing labor force, then labor may need to be reduced to keep the profit plan on target. The alternative is to increase revenue by adding new projects to the revenue backlog.
"To make a profit, there must be a balance between available revenue and available staff that produces the revenue."
"Labor-related ratios and multipliers are the key indicators of financial
performance. "
The profit plan key indicators provide the bench-marks used to measure and control the key indicators for actual operations. The labor-related key indicators of financial performance include:
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Utilization rate (Direct labor / Total labor) based on hours or dollars
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Net multiplier (Net revenue / Direct labor)
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Revenue factor (Net revenue / Total labor) or (Utilization rate x Net multiplier)
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Overhead rate (Indirect expense / Direct labor)
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Operating profit multiplier (Operating profit / Direct labor)
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Break-even multiplier (Direct labor and Overhead / Direct Labor)
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Net revenue and Operating Profit per full-time-equivalent (FTE)
