The Overhead Factor is a critical business number you need to know.
Why?
To ensure profitability. Put succinctly: No Profit, No Company.
Computing your overhead factor can be a challenge for many managers and staff. Here is a straightforward method using financial information from your accounting system and a single report from BillQuick. With this information you can determine whether you charge enough for staff and management time to be profitable.
Note: You can also use the Overhead Factor when setting bill rates.
#1: Calculate the Overhead Factor
From your accounting software, run the Profit and Loss Statement. The numbers you need are:
- Total expenses for a period of time (e.g. annual, quarterly)
- Total payroll for the same period of time
Now, compute: Overhead Factor = Total Expenses / Total Payroll
Let’s assume Total Expenses = $1,000,000 and Total Payroll = $400,000, Overhead Factor is calculated as:
= $1,000,000 / $400,000 = 2.5
Now, let’s use this Overhead Factor.
#2: Salary Ceiling for Profitability
In BillQuick, run the Staff Billing report from the Reports, Analysis menu. Note the Hourly Rate realized for the employees. The rate is computed by dividing the total time billed for the employee (Amount Billed) by Total Hours (Billable and Non-Billable).
Now, compute: Salary Ceiling for an employee = Hourly Realization Rate / Overhead Factor
Let’s assume Janice has an Hourly Rate of $77.63. Her Salary Ceiling is calculated as:
= $77.63 / 2.5 = $31.05
Thus, you cannot pay Janice more than $31.05 per hour for her efforts to be profitable to the company. If Janice wants a raise, then her Bill Rate and/or percentage of Billable Hours need to increase.
#3: Calculating New Bill Rates
Another use of the Overhead Factor relates to #2 above. When determining new bill rates for staff and management, the Overhead Factor is the minimum multiplier required to remain profitable. In other words, for each $1 raise in an employees’ pay rate, their bill rate must be increased by $2.50.
Thus, if you given Janice a $5 per hour raise, her realized hourly rate must increase to $90.13.
