Utilization Rate and Expense Ratio

THE IMPACT OF TIME UTILIZATION RATE AND EXPENSE RATIO ON PROFITABILITY IN THE CONSULTING BUSINESS 

Consulting firm profitability may be stated as Profitability = where, for a specified time period (Norris 1987)  

The preceding terms will be defined further including why they are critical to the profitability of a consulting firm and who in the organization has primary control over U and R. Common sense tells us that raising U and decreasing R should increase profitability. 

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The Impact of Time Utilization Rate and Expense Ratio on Profitability in the Consulting Business 315... 

What are the personal, project, and organizational management implications of the impact of time utilization rate and expense ratio on profit Top managers will watch R, the expense ratio, very closely. They control most of it—refer again to its components. They should be very aware that a one percentage point increase in R will cause a roughly four percent drop in profit. 

The income statement was created on a spreadsheet to facilitate running many scenarios. Careful review of the Table 10.8 scenario illustrates the application of various topics covered in this chapter, including raw labor rate utilization rate overhead as a sum of non-billable direct labor cost and non-billable, non-salary costs expense ratio overhead ratio and charge-out rates. The calculated values of parameters such as utilization rate (U), expense ratio (R), overhead ratio (O), and multiplier (M), when compared to values common in the consulting industry, provide a check on the reasonableness of any scenario. Unreasonable values of parameters would be cause for exploring additional scenarios until a workable income statement can be developed. 

As a further introduction to the importance of the time utilization rate and the expense ratio, consider Table 10.7, which is a year-to-date income statement for a hypothetical consulting firm. 

Figure 10.1 Overhead ratio can be reduced, and therefore profit increased, by increasing the utilization rate and decreasing the expense ratio. (Source Adapted with permission of ASCE from Norris 1987)...

In summary, consulting firms must be profitable. The income statement shows profit and factors leading to it. Overhead goes to bottom line where it impacts profit. The absolute value of overhead is determined by the overhead ratio, which is a function of the utilization rate and the expense ratio. A one percent increase in U or a one percent decrease in R, will typically cause a several-fold percent increase in profit with profit being more sensitive to U than R. 

Consider an example in which an increase in utilization rate results in a decrease in the multiplier. For the base line situation, assume the income statement presented in Table 10.7. Assume further that the hypothetical firm is able to increase its utilization rate from 0.60 to 0.61, a 1.7 percent increase. Based on the Figure 10.1 relationship showing the overhead ratio as a function of expense ratio and utilization rate, the stated increase in U would reduce the overhead ratio by about 2.8 percent or the overhead by 16,800—from 600,000 to 583,200. If pre-tax profit is held at 190,000, the firm can reduce annual total revenues and, therefore, net revenues by 16,800 to 1,783,200 and 1,183,200 respectively. Therefore, the revised multiplier is equal to 1,183,200 divided by 400,000 = 2.96, which is a 1.33 percent decrease from the base line value of 3.00. In summary, a 1.7 percent increase in time utilization rate for the situation used in the example yields a 1.3 percent decrease in the multiplier with no reduction in pre-tax profit. 

The support has an internal pore structure (i.e., pore volume and pore size distribution) that facilitates transport of reactants (products) into (out of) the particle. Low pore volume and small pores limit the accessibility of the internal surface because of increased diffusion resistance. Diffusion of products outward also is decreased, and this may cause product degradation or catalyst fouling within the catalyst particle. As discussed in Sec. 7, the effectiveness factor Tj is the ratio of the actual reaction rate to the rate in the absence of any diffusion limitations. When the rate of reaction greatly exceeds the rate of diffusion, the effectiveness factor is low and the internal volume of the catalyst pellet is not utilized for catalysis. In such cases, expensive catalytic metals are best placed as a shell around the pellet. The rate of diffusion may be increased by optimizing the pore structure to provide larger pores (or macropores) that transport the reactants (products) into (out of) the pellet and smaller pores (micropores) that provide the internal surface area needed for effective catalyst dispersion. Micropores typically have volume-averaged diameters of 50 to... 

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