Engineering Business: 5 Keys to Increase Revenue and Profits
Do you find it difficult to make a profit? Are your expenses eating up your income? Most businesses, including professional service firms such as engineering, are always struggling to make a profit. Most of the expenses of a professional services company are related to labor. That’s why many companies chose to do one or two things to increase their profits; increase workload or reduce staff. But there are many other strategies that can have a similar effect.
A typical engineering company typically strives for a 10-15% profit after all expenses, including salaries. A very competitive market or a significant drop in market demand for engineering services can further reduce these margins.
The current market has led many companies to significantly reduce their rates, but this is really the answer. Every engineering company knows that there are certain expenses that they cannot escape. Such as staff salaries, business licenses, professional licenses, business insurance, professional insurance, office expenses, and so on. With good management of the company’s budget, several adjustments can be made to retain a part of the income.
Below is a list of the top 5 key strategies to increase your company’s profits without reducing staff.
Key 1: Increase service fees – This may seem a bit counterintuitive at the moment during a recession, but a small increase can have a significant impact on your earnings. As an example, your company has a service that charges $1,000 with a 10% markup ($100). If you increase the fee by 5% ($50), your profit would increase by 50% ($150). This small increase in fees most likely won’t even be noticeable to your customers, but it can be very noticeable on your company’s profit and loss statement.
Key 2: The workload determines the size of the company – Your engineering company must have permanent staff and independent contractors. The number of independent contractors may vary depending on the workload. Hiring independent contractors or sub-consultants where possible is also known as outsourcing. The only permanent employees are those who are absolutely necessary. Outsourcing allows the company to restructure itself to handle a large number of new contracts when times are good, and then reduce the number of contractors when there are fewer contracts during bad economic conditions. An example is having one or two CAD designers as permanent employees and then a group of CAD operators who are independent contractors.
In recent years, the federal government has really cracked down on who is an independent contractor. Independent contractors are in business for themselves and can obtain work from numerous sources. Having an independent contractor who sets up an office within your company and only contracts with your company is probably not an independent contractor, and the government will seriously frown on this arrangement. You should discuss any questionable deals 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 whatever comes their way, don’t focus your marketing efforts on those industries that consistently hire the company with the cheapest offer. Professional services firms, like engineering firms, should never compete on price alone. A good engineer can save a developer thousands, if not millions, of dollars, which will typically far exceed the engineer’s fee. Sectors that haggle over service fees are generally not worth it. In essence, don’t buy the job. There are those customers who will expect that since times are tough, you need to provide even more concessions; free or drastically reduced rates to keep them as customers. It’s almost never a good idea to buy a project just to get a job. Find out what your company’s break-even point is and which sectors and services generate the most profits. Anything less will possibly force your business out of business.
Key 4: Contact Existing and Previous Clients for New Contracts – The best source of new work is from existing or previous clients. If you’ve done a good job for them in the past, they’ll be more than willing to use your services again. Even if they have gone with another engineer, they may want to rehire you. The new engineer may not have treated them so well. In some cases, customers may have lost their contact information. In this case, they will be delighted to hear from you again.
There is nothing better in business than satisfied customers. This is the main marketing tool used in the engineering profession. Losing clients to other engineering companies means an immediate loss of revenue and can only be recovered by finding new clients. To find new customers, you’ll have to set aside additional funds to market them, further reducing your bottom line. Your existing clients can increase your income by giving you new projects or helping you find new clients.
They may be so pleased with your performance that they haven’t noticed you need additional work. Your clients know other people in the same industry who may also be dissatisfied with their professional designers. Your customers will be your best marketer. When your references call you, they are already convinced of your company’s capabilities and services. In some cases, your clients may be so large that they require the services of multiple engineering firms. If they really like your performance, they may give you a larger share of their available jobs. The best source of new work is always through your existing clients.
Key 5: Keep your promises – Customers expect the engineer to provide all services as stated in the contract. That is why the proposal is so important. The services to be provided should be as explicit as possible, and every effort should be made to reinforce 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 client believes that you are going to provide a service that is not in the contract, it can cause serious problems later on and may make the client unhappy and unwilling to work with you further. Whether the economy is in good times or harsh explicit language in the contract is extremely important.
Most engineers have excellent technical skills, but not necessarily the same level of management experience. It is the engineer’s responsibility to develop these managerial skills through continuing education. This training can be obtained through community colleges, universities, vocational training programs, professional organizations, and online training courses. In most states, these continuing education courses qualify for continuing education units (CEUs) or professional development hours (PDHs).
In Part 2, we’ll discuss five more strategies you can implement to increase your income and profits. Managers often have to make tough decisions that can affect the size of support staff, having a list of other strategies that don’t require cutting staff can be the difference between a good manager and a bad manager.