I'm in business for 3 years now and have had exponential growth. I am trying to get a grip on what revenue I'm doing and what profit that should include.
So I was wondering, what you guys all find to be normal profit margins and how you might plan to put them in place?
My old company worked on a "billable hours" model, where they had a total number of hours for the year for each employee and they wanted you billing a certain percentage of your time to projects that were billable. The problem with this as I saw it was that it lead to a lot of cheating. If you were out of money in the budget so long as the project number was open, but the managers didn't want their projects to look bad, so if they had a dog, they'd shift the time over to a project they actually had money in.
This is very common to what is detailed in Beardslee's book about surveying business.
In purchasing GPS and Robotics & trying to get to the point where our crews are highly trained has resulted in much more waste than is typical in an established firm. So our margins seem to be suffering.
I had an idea to try to build the model backwards, starting with a projection of gross revenue, then build in a profit margin, then try to get my bills and payroll in line with that...simply like a household budget. Is there an industry standard for profit margin? I have built my rates on the 3x cost multiplier most companies use.
I have long ago understood that the service sector (surveying included) cannot have a projected yearly gross income. Why? Because we are not like the manufacturing sector that could project how many cans of sardines they could produce based on their existing canning facilities. For the example of a sardine factory, their existing equipment has a maximum output per 8 hour day if they chose this maximum number. From there, they could then project how many grocery stores their marketing people should have a consignment contract with & how many delivery trucks are needed to supply those stores. Other factors they could make an estimate - manhours, trucks, fuel, etc - to meet the number of sardines that they could produce.
In our work, that is not possible. We can't make topography survey in cans & put them on grocery shelves for people who need a survey of their property to buy. In my case for example, one month would have my emails & phones full of quotation requests with maybe 75% turn into actual income. Next month, the phones would not be ringing or email inquiries would turn into nothing.
For months that are full of work, 30% of those work I would not be able to handle because manpower & equipment would be lacking. My cost of services depends on:
1. Estimated number of days to complete the job
2. Mobilization Cost
3. Salary of all people involved in the project
4. Total (1,2,3) * 2.5 = Project Cost
As to equipment & training costs, I rarely buy new equipment. I am always on the lookout for used equipment from local sellers, fellow surveyors or the internet. I buy equipment that are 2 cycles prior to the latest releases. I found out that you could buy these for less than 1/2 of their original new cost.
When a project comes along that my existing equipment cannot handle then I buy the used equipment that I have seen previously. Most large project can absorb the costs of new "used" equipment with a good 30% profit margin remaining.
Hopefully that remaining 30% net income would be able to pay all expenses for the company during the lean months.
Lugeyser, post: 333166, member: 1249 wrote: My old company worked on a "billable hours" model, where they had a total number of hours for the year for each employee and they wanted you billing a certain percentage of your time to projects that were billable. The problem with this as I saw it was that it lead to a lot of cheating. If you were out of money in the budget so long as the project number was open, but the managers didn't want their projects to look bad, so if they had a dog, they'd shift the time over to a project they actually had money in.
Every company I've worked for tracks costs this way. The accounting packages made for the industry pretty much dictate it. The difference is in how you, as top management, use those numbers. I think it will be more effective to show your people profit/loss numbers by the month/quarter/year instead of focusing on project by project. Once people realize you aren't coming down on them for project overruns, there will be less cause to cheat.
If the project is a government project, you could be committing a felony, I know an engineer who had a very uncomfortable interview with a FBI agent over such an allegation. This not only cheating. It is criminal activity. I would advise caution and discretion in addressing this subject. BTW: I agree that some companies strict adherence to utilization rates and individual project performance can well create this type of environment. A more long term evaluation is better for many reasons.
I took a historical look at costs, hours, and revenue. 7 years worth of historical data. It allowed me to tract linear progression (least squares) of rising costs and project them out. Same with revenue (although that model was all over the place), and hours, which were fairly flat when looking at the lines.
From there, I was able to see total hours vs. total costs. From there, it was simply a matter or determining a break even point at an hourly rate and then the profit margin was exceedingly easy to solve for.
The reason I feel like this is superior to many others is that you not only see hours, but costs, and revenues and can track and project based on linear least squares models that can be developed and edited in excel.
Once you have the base data entered, you can add to it monthly, quarterly, or daily of you choose (although I prefer quarterly as not to eat up too much time). You also begin to develop better feelings (this is the epitome of the Delphi method that another former poster chastised me about ad nasuem) and see when you are historically going to spike or plummet. This then lends itself to purchasing practices and larger retained earnings.
If I want to know something about something, I take history and bring it forward with excel and projections then get MUCH easier. This aids in billing and estimating because you can set it up as detailed or generic as you wish.
To be fair though, my college education is NOT in land surveying. 🙂