Total Payroll Multiplier also called “Revenue Factor”

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The Revenue Factor is a labor-related key indicator that is a better indicator of a firm’s efficiency than the net multiplier or utilization rate alone. The Revenue Factor is calculated by dividing net revenue by total labor dollars (includes both direct and indirect labor) or by multiplying the net multiplier by the utilization rate. The result is the same. The profit plan Revenue Factor is used to check the balance between revenue (marketing plan) and labor (personnel plan). In other words, is there enough revenue to support the existing staff?  This table shows the relationship between the two methods of calculation of the Revenue Factor.  There is an inverse relationship between Net Multiplier and Utilization Rate.

Net Multiplier x UtilizationRate:
Net Multiplier 3.00 2.80 3.00 3.14
Utilization Rate 0.65 0.70 0.70 0.70
Revenue Factor 1.95 1.95 2.10 2.20
Net Revenue divided by Total Labor:
Net Revenue 97,500 100,000 110,000
Total Labor 50,000 45,455 50,000
Revenue Factor 1.95 2.20 2.20

Multiplying the firm’s total labor expense by the profit plan revenue factor shows what the net revenue should be:

Total labor (actual) $ 500,000
Revenue factor (profit plan) 2.20
Net revenue (target) 1,100,000
Net revenue (actual) 1,000,000
Net revenue variance – over/(short) $ (100,000)

Dividing net revenue by the revenue factor shows how much total labor (not just direct labor) the firm should have to produce that much net revenue:The above calculation indicates that the marketing plan may need to be evaluated. Are there enough revenue backlogs to support the current staff level or production capacity?

Net revenue (firm-wide) $ 1,000,000
Divided by revenue factor (profit plan) 2.20
Total labor (budget) $ 454,545
Total labor (actual) $ 500,000
Excessive labor $  45,455

The above calculation indicates that the human resources or personnel plan may need to be evaluated. Is there too much ‘capacity’ for available revenue? Or has “work expanded to fill the available time…?” or are there too many non-technical overhead staff FTE’s in proportion to available technical staff FTE’s?

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