Profitability in a Psf Essay

1789 WordsJun 5, 20138 Pages
Profitability in a PSF The “economic model” Revenue (expertise and time) – Cost (of running a business) = Margin (profit) Higher relative profitability higher investment in the business > greater ability to attract and retain the best > higher reltive profitability > higher investment in the business … and so on Profitability is measured by PEP Raising prices = Realisation Do more work per person = Utilisation Employ just the right number of fee earners = Leverage Manage expenditure and cost = Margin Get bills in on time = WIP (work in progress) RULES Realisation – the level of fees actually recovered from the client for doing the work Utilisation – the number or percentage of chargeable hours spent on client work in a period of time Leverage – the ratio of fee earners to principals or equity holders who take profit from the firm Expenses – the fixed and variable costs involved in being in business and doing the work Speed – how quickly bills get sent out cash collected and reused by the business If we increase leverage, then, other things being equal, we would improve profitability. However, by increasing leverage we do not necessarily increase the amount of work that is available to do. So in fact the level of utilisation may go down. Also, the rate of fee generation may go down as increasing leverage is achieved by hiring less experienced people who can only charge out lower fees – so the average billing level would decrease. Both these things may negatively effect productivity and therefore profit. Increasing utilisation can have a negative effect on leverage. If every one is working to a high level of utilisation, then the firm doesn’t need so many people. But this lack of leverage also limits further profit growth if there is more work in the market but insufficient people in the firm who can do it. Equally,

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