Control Costs and Run More Efficiently in a Tough Economy

by H. Edmund Bergeron, LLS, PE
 
If you’ve made it this far in the economic meltdown that started in September 2008, you are probably ready for a turnaround. If things continue to get better it will still be a long time before we see rapid or large growth in small surveying or engineering firms. Although recent job reports show solid gains in the job market, many experts say 2012 will be similar to 2011, and predictions are that it will be 2015 or 2016 before we see a significant recovery. With this in mind, all firms still need to control their costs in order to survive.

To control costs we need to look at annual budget projections for income and expenses. Most firms have seen a significant decrease in income since 2008. Some firms may have less than 50% of the income they had in 2007 and have had to reduce staff and expenses accordingly to survive. Our firm reduced staff size from 23 to 15 while seeing income decrease by 20% to 25%.

What are ways to control expenses? I used to say to our business manager, “You’ve got to buy bullets if you want the soldiers to fight the war.” By this I meant that we had to determine what the critical expenses were that we needed to maintain if we were going to continue to provide first-class service to our clients even at a reduced staff level. We couldn’t get rid of the survey truck or not repair our broken equipment. At the same time we had to pay our staff, maintain their benefits, pay our share of the required taxes, and pay rent, insurance, telephone, and other fixed expenses.
 

Project Your Workload

How should we look at income and expenses and make the hard decisions? The first thing we did was look at our workload backlog and try to project how much work we would have in the coming year.  We considered what proposal opportunities for new work look like and what the pundits were projecting.

If most of your business is related to residential development, you should be looking at the projections for new home construction or, locally, the number of building permits issued.
If most of your work is small-community infrastructure (roads, drainage, sewer, water, and small bridges), where do the funds for these projects come from and at what level is future funding for these programs? In some cases entire funding programs have been eliminated, and uncertainty exists regarding their return.

In an effort to control property taxes we know that our local municipalities have eliminated almost all of their capital expenditures while hoping to “band aid” vehicles and equipment until better times. We are all well aware of the deteriorated state of our infrastructure and the fact that deferred maintenance and reduced or eliminated funding only prolongs the situation. Can your firm survive until funding returns? 
 

Examine Expenses

A firm’s biggest variable expense is staff. It can be half or more of your overall expenses for a year. The obvious way to reduce this expense is to eliminate staff. Does this make sense? Who are the people you need, and what are the talents you need to do the work that remains? A very rough rule of thumb is that each technical person should be responsible to produce $100,000 to $130,000 of income. In other words, if your workload projection is for $1,000,000 to $1,300,000 you’ll need about 10 technical staff to do the work. You’ll also need at least one administrative staff person to support the technicians.

It also is important that you keep staff busy—with billable work. Non-billable time creates a double hit not only by not providing income but by adding to overall expenses. As hard as it may seem, if there is no work, even temporarily, you should consider furloughing staff who aren’t producing income.

Pay close attention to overall firm utilization or percent billable time. All staff will have some non-billable time for attending meetings, non-billable marketing, or equipment maintenance. This has a direct impact on the bottom line so control non-billable time closely.

In an ideal world you have budgeted non-billable time as part of your overhead. We keep careful track of two key ratios, utilization (percent billable time), and overall multiplier, which is total income (minus pass-throughs like consultants and other direct project-related expenses) divided by direct billable labor cost. Our goal is an overall multiplier of 3.2. This includes 20% profit.

Fixed expenses make up that part of your overhead expense that is reoccurring no matter what your workload is. They include rent, telephone, supplies, equipment payments, general and liability insurance, heat, and electricity. Certainly there are others, and they make up the other half or more of your overall budget.

It is very difficult to change fixed expenses no matter what your income is. It may be possible to renegotiate your rent, find lower-cost insurance, or refinance equipment loans to lower monthly payments, but these changes require time and effort and don’t have the impact that reducing variable salaries has on your income statement.

Sunk costs or expenses are a type of variable expense that can’t be recovered and often is not planned. An example is a necessary repair to vehicles or equipment. If your survey truck loses its transmission, you have to pay the expense (unplanned) to repair it to have a viable vehicle. This cost can’t be recovered and adds to general, fixed, overhead expense.
 

Budget for Profit

Obviously, when income equals expense you are at a break-even budget, precarious at best. You should always budget a reasonable profit. Often it isn’t realized but provides income flexibility to cover unexpected costs. We’ve budgeted for 20% profit but lately have considered ourselves lucky to make 5%.

Profit that is realized should not be entirely removed at year-end. In our firm we keep one-third of our profit for operations and split the remainder with the firm owners and staff. We use our 401(k) program as a way to share profits and minimize taxes.
Other than the sunk costs mentioned earlier, what are some other unexpected costs? If you do a lot of lump-sum or fixed-fee work, any salary or other expense over the budget is an unplanned expense. In this difficult economy, marketing or proposal-preparation cost also may be greater than planned, thus decreasing planned profit.

This article is not intended to be a primer in financial analysis or accounting but only a review of the basics of financial management. Hopefully, it helps your understanding of how to project your income and control your expenses. Careful control of both is necessary along with diversification, increased marketing, improved productivity, and efficiency in order to survive in this difficult economy.

Ed Bergeron, LLS, PE, has been the president of H.E. Bergeron Engineers, located in North Conway, New Hampshire, for 36 years. He has a BS in civil engineering and an MBA. He is the author of A Pocket Guide to Business for Engineers and Surveyors, published by Wiley.
 

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