Are you finding it hard to earn a profit? Are your expenses devouring your revenues? Most companies, including professional service firms, like engineering, are always struggling to make a profit. The majority of a professional service company’s expenses are labor related. This is why many companies chose to do one or two things to increase their profits; increase work load, or reduce staff. But there are many other strategies that can have a similar effect.
A typical engineering company usually strives for a profit or 10 to 15% after all expenses including salaries. A very competitive market or a significant drop in the market demand for engineering services can drive these margins even lower.
The current market has driven many companies to lower their fees significantly, but is this really the answer. Ever engineering firm knows that there are certain expenses that they can not escape. Such as staff salaries, business licenses, professional licenses, business insurance, professional insurance, office expenses, and on and on the list goes. With a good handle on the company budget various adjustments can be done to retain a portion of the revenues.
Below is a list of the top 5 key strategies to increase your company’s profits without cutting staff.
Key 1: Increase Service Fees – This may sound a little counter intuitive right now during a recession, but a small increase can have a significant impact on your profits. As an example, your firm has a service which charges $1000 with a profit margin of 10% ($100). If you increase the fee by 5% ($50), your profit would increase by 50% ($150). This small increase in fees will most likely not even be noticeable to your clients, but it can be very noticeable on your company’s Profit and Loss Statement.
Key 2: Workload determines the Company Size – Your engineering business should be sit-up with permanent staff level and independent contractors. The number of independent contractors can vary depending on the workload. Hiring independent contractors or sub-consultants were possible is also known as out-sourcing. The only permanent employees are those that are absolutely necessary. Outsourcing allows the company to restructure to handle a large number of new contracts when the times are good and then reduce the number of contractors when there are fewer contracts during poor economic conditions. An example is to have one or two CAD Designers as permanent employees and then a pool of CAD Operators that are independent contractors.
In recent years the federal government has really cracking down on who is an independent contractor. Independent contractors are in business for themselves and are able to obtain work from numerous sources. Having an independent contractor sit-up an office within your business and only contract with your firm is probably not an independent contractor, and the government will seriously frown on this arrangement. You should discuss any questionable agreement with your tax advisor.
Key 3: Do not Focus on Sectors with Very Small Profit Margins – Although during a tough economy companies may be forced to take on what ever comes along, do not focus your marketing efforts on those sectors that constantly contract with the firm with the cheapest offer. Professional services companies like engineering firms should never compete on price alone. A good engineer can save a developer thousands if not millions of dollars which will usually far exceed the engineer’s fees. Sectors that haggles the service fees are usually not worth the expense. In essence do not buy the job. There are those clients that will expect that since times are rough you should provide even more concessions; free or drastically reduced fees to keep them as a client. It is almost never a good idea buying a project just to have work. Know were your company’s break even point, and what sectors and services make the most profit. Anything less will force your business to possibly close.
Key 4: Contact Existing and Previous Clients for New Contracts – The best source of new work is from existing or previous clients. If you did a good job for them in the past, they will be more than willing to use your services again. Even if they have gone with another engineer, they may want to contract with you again. The new engineer may have not treated them as well. In some cases, clients may have lost your contact information. In this instance they would be glad to hear from you again.
There is nothing better in business than satisfied clients. This is the foremost marketing tool used in the engineering profession. Losing clients to other engineering firms, means an immediate loss in revenues and can only be regained by finding new clients. In order to find new clients you will have to sit aside additional funds to market them, which will further reduce your bottom line. Your existing clients can increase your revenues by either awarding you with new projects or by assisting you in finding new clients.
They may be so satisfied with your performance that they may not have noticed that you need additional work. Your clients know other people in the same industry who maybe also dissatisfied with their professional designers. Your clients will be your best marketer. When their referrals call you they are already sold on your firm’s abilities and services. In some cases your clients may be so large a firm that they require the services of several engineering firms. If they really like your performance, they might just give you a larger share of their available jobs. The best source of new work is always through your existing clients.
Key 5: Deliver on Your Promises – Clients expect that the engineer will provide all of the services as stated in the contract. This is why the proposal is so important. The services to be provided should be as explicit as possible, and every attempt should be made to restate any vague language. Also a section in the proposal should include what is expected of the client. Before signing the Agreement make sure that both you and the client understand what is expected of both parties. If the customer believes you are to provide a service that is not in the contract, may cause serious problems later, and may cause the client to be disgruntled and not willing to do any more work with you. Whether the economy is in good times or tough explicit language in the contract is extremely important.
Most engineers have excellent technical skills, but not necessarily the same level of expertise in management. It is responsibility of the engineer to develop these management skills through continuing education. This training can be obtained through Community Colleges, Universities, Professional Training Programs, Professional Organizations, and online training courses. In most states these continuing education courses qualify for continuing education units (CEU) or Professional Development Hours (PDH).
In Part 2 we will discuss five more strategies that you can implement to increase your revenues and profits. Managers are often called upon to make difficult decisions that may impact the size of the support staff, having a list of other strategies that do not require cutting staff maybe the difference between a good and a bad manager.