Best Practices
Financial Management: 10 Key Performance Indicators
Contributed by Steve L. Wintner, AIA, Management Consulting Services, The Woodlands, Tex.
The AIA collects and disseminates Best Practices as a service to AIA members without endorsement or recommendation.
Appropriate use of the information provided is the responsibility of the reader.
U N D E R S T AN D I N G T H E N U M B E R S
Understanding these 10 key performance indicators for
professional service firms may help you manage your
firm’s finances.
Utilization rate. The utilization rate is the percentage of
hours spent on billable projects vs. the total number of
hours worked. It is not a measure of productivity. The
goal for the entire staff should be a utilization rate of 60
to 65 percent; for professional technical staff—including
principals—the goal should be 75 to 85 percent.
Overhead rate. The overhead rate is the cost of non-
project expenditures expressed as a percentage of
direct labor cost. It is perhaps the most critical of all
performance factors; if it is unknown or calculated
incorrectly, it is impossible to accurately determine the
firm’s profitability. The lower the overhead rate, the
higher the profit margin. A good target is 150 to 175
percent direct labor cost (1.5–1.75 x direct labor). A
higher overhead rate should be cause for concern.
Break-even rate. For each employee of the firm, the
break-even rate is the actual cost of that person’s
employment. It is equal to the overhead cost plus the
person’s direct labor cost (salary). If a firm has an
overhead rate of 1.5 (150 percent), then the break-even
rate for each employee is 2.5 (salary + 150 percent, or
250 percent). For a firm to be profitable, revenue must
exceed the break-even rate.
Net multiplier. The net multiplier is the actual revenue
generated by the firm, expressed as a percentage (or
multiplier) of actual direct labor cost. If the net multiplier
is greater than the break-even rate (for example, 3.0 vs.
2.5), the firm is profitable; if it is less than the break-
even rate, the firm is losing money.
Aged accounts receivable. The aged accounts
receivable measures your collection rate; it compares
your annual accounts receivable to net operating
revenue and measures the average number of days that
accounts receivable remain outstanding. The fewer the
© 2004 The American Institute of Architects
number of days average accounts receivable remain
outstanding, the better. Firms should strive to collect all
outstanding accounts receivable within 60 days of the
invoice date; more than 90 days should be cause for
concern.
Profit-to-earnings ratio. The profit-to-earnings ratio is
determined by dividing the profit (before partner
distributions and taxes) by the net operating revenue. It
indicates a firm’s effectiveness in completing projects
profitably.
Net revenue per employee. The net revenue per
employee is calculated by dividing the annual net
operating revenue by the number of employees. It is
useful in forecasting a realistic range for future annual
net operating revenue.
Cash flow. Cash flow is a measure of how much money
the firm actually has on hand at any given time to pay all
accounts payable: employee salaries, insurance,
overhead and reimbursable expenses, subconsultants’
fees, and taxes. Though a firm may be profitable on
paper, cash flow can be a serious challenge for
professional service firms, and may adversely affect the
ability of the firm to meet its obligations to employees,
vendors, and consultants in a timely manner.
A monthly cash flow report and 12-month cash flow
projection can help a firm plan ahead to smooth out the
swings in cash flow by accelerating collections,
requesting retainers upon signing contracts and before
starting a project, or carefully planning purchases of
equipment and supplies. A line of credit may also be
helpful (and necessary), but should only be used
sparingly, as the cost of interest to finance operations
may cut deeply into profits. Habitual dependence on a
line of credit may also mask serious financial
management problems and create a false sense of
security and profitability. It is far better to learn to live
within your means.
BP 08.03.01 January 2004
Best Practices Page 2 of 2

Proposals pending. Proposals pending is a factor F O R M O R E I N F O R M AT I O N

made up of two components: prospects, which are
proposals that the firm has a 50 percent or better See also “Financial
chance of winning, and suspects, which are proposals Systems” and “Financial
that the firm has less than a 50 percent chance of Planning,” by Lowell
winning. The figures are expressed in terms of the Getz, CPA, and
anticipated revenue compared to net operating revenue. “Financial Health” and
The total should be 2.5 to 3 times net operating “Acquiring Capital,” by
revenue, with prospects at least equal to net operating Peter Piven, FAIA, The
revenue and suspects 1.5 to 2 times net operating Architect’s Handbook of
revenue. Maintaining these numbers is the responsibility Professional Practice,
of those responsible for marketing. 13th edition, Chapter 8,
pages 183, 194, 203, and
Backlog volume. The backlog volume is the dollar 214, respectively. The
volume of the unbilled value of current contracts, and Handbook can be
includes the remaining sums to be billed on projects ordered from the AIA Bookstore by calling 800-242-3837
underway and the total value of projects not yet started. (option 4) or by sending e-mail to bookstore@aia.org.
Because monthly invoices continually reduce the firm’s
backlog, it is essential to continually replace billable M O R E B E S T P R AC T I C E S
revenue with newly contracted revenue. A desirable
The following AIA Best Practices provide additional
target is a backlog volume equal to the budgeted annual
information related to this topic:
net operating revenue (one full year of revenue) or
greater. 08.04.01 Obtaining Bank Credit

AB O U T O U R C O N T R I B U T O R
Steve L. Wintner, AIA, is the founder and principal of
Management Consulting Services, a Houston-based
firm specializing in professional design firm
management. A licensed architect since 1968, Wintner
has served as vice president and director of operations
for several internationally prominent architecture firms,
managing principal of his own architecture firm, and a
professional consultant.

© 2004 The American Institute of Architects BP 08.03.01 January 2004