Calculating Your Net Multiplier
The Net Multiplier is a powerful key performance indicator that allows you to see how your projects are performing. Once you understand its implications, you're going to be wondering why you haven't been using it for years.
3.0, The Magic Number
When it comes to your Net Multiplier, you shouldmust follow thea rule of thumb - you must bill your employees out at three times what you pay them. You have to bill yourself out at that as well. The target is to be at a 3.0 or greater.
How To Calculate Your Net Multiplier
Take your net revenue and dividedivite it by your direct labor. You can use this calculation on a project-by-project basis. You can also apply it monthly or annually to see how your firm did over a particular period of time.
But if you want to make the most out of this key performance indicator, apply it on a project-by-project basis.
Let's say for example, you do $1,000,000 in Net Revenue and you racked up $300,000 in Direct Labor. When you divide those numbers, you'll end up at a 3.3 Net Multiplier, which is not too bad.
Next, you have to bring in the Overhead Factor.
If you want a more detailed explanation about overhead factor, click on the button below:
HOW TO CALCULATE YOUR OVERHEAD FACTOR
In this example, we'll use 1.65 as the Overhead Factor (an average number for firms across the US). Take the $300,000 of Direct Labor, multiply it by your Overhead Factor, and you'll end up with $795,000 - the cost allocated to a particular project for labor and overhead.
Subtract that amount to your $1,000,000 Net Revenue, and you'll get $205,000 of profit. That's 20.5% in profit, not too shabby!
Why You Need To Get To 3.0 Or Higher
If your Net Multiplier is under 3.0, chances are, you're only breaking even and not earning enough profit per project. If you add the Overhead Factor average of 1.65 every dollar of labor, you will only get a breakevenNet Multiplier of 2.65 - this number barely gives you enough room to get by without any profitsearn.
When you divide your Net Revenue and Direct Labor, you'll get to a 3.0 or higher to make sure you're earning enough profit from every project.
To get a more detailed explanation on how to calculate your Net Multiplier, click on the button below!
Don’t Forget To Compare and Evaluate
Get the Net Multiplier for every project you've got going on and compare them. Do this by different segments - compare project types or client types or funding sources. Use this net multiplier formula and compare across all your tracking segments so you can identify your best projects. This will let you know if you’re losing money, breaking even, or making a profit from your projects.
If you learned something from this post, make sure to share this to your colleagues and associates. We want to help as many people and firms as possible to understand what they need to know to operate their organizations to higher profits and better success.
