Variable Costs for growing business

A key number is that associated with requirements for health insurance in today's world. Either stay below that number or shoot as high above as possible to spread the additional expenses.

That is definitely a consideration too, HC.

Holy Cow, post: 414379, member: 50 wrote: A key number is that associated with requirements for health insurance in today's world.

I believe you mean "in today's United States." In most parts of the western industrialized world this isn't a problem.

[USER=6521]@Shawn Billings[/USER]

I‰Ûªm a small company and have found that I can make the most profit running 2 crews constantly, and occasionally 3 crews. It allows me to provide 100% of their medical coverage and a hefty bonus at year end for all employees. (You treat your employees well and they perform extraordinarily well)

The whole damn shootin‰Ûª match boils down to how much your overhead is verses how much you are making.

You might want to take a look at this.... It's a generic explanation but applicable to all businesses. 😎

[MEDIA=youtube]M7rA4VfvdAw[/MEDIA]

I've read, and written here before, that a person can effectively supervise about 6-8 people. So, if well run, a company of about that size is is going to be in the sweet spot of maximizing potential efficiency through effective supervision. In surveying that would equate to a 2 crew operation, maybe 3 on some days, with office support.

You get a little bigger and you are either going to have poorly supervised workers or (higher wage) supervisors with too few people working under them for best efficiency. When you get to about 40-60 people you get back into a sweet spot with a big boss supervising 6-8 managers who each in turn have 6-8 people in their departments.

Mark Mayer, post: 414406, member: 424 wrote: a person can effectively supervise about 6-8 people

I've always said this is why phone numbers have 7 digits, that's about all that can be routinely remembered. I'm at 3 full time crews. We can get a lot of work done in a week. Myself and a drafting tech seem to be able to manage them pretty well, although there are plenty of long evenings making sure they all have calc's for the next day.

Shawn Billings, post: 414376, member: 6521 wrote: As I've been thinking about this for a few days, I suppose I've noticed this over the years but didn't know a name for it.

Variable cost of business is the idea that as an organization grows, its cost to do business increases disproportionately to growth. Labor and material costs will increase in proportion, but organizational costs will increase. It could be argued that material costs decrease due to bulk purchases, but warehousing the materials and inventory taxes might negate of the savings.

If I understand the principle as it relates to surveying, a company with three crews will have a higher profit margin than a company with 50 crews. This doesn't mean that the company with 50 crews cannot be profitable, but that the margins will be less. If three crews each provide a 40% profit margin to the owner, then adding a fourth crew may only add a 35% profit margin because of the additional organizational strain required to support the fourth crew. (These percentages are just examples - not intended to be real). By the time you get to the 50th crew, maybe it's only adding 5% profit margin. It's still a profit, but the margins are less. And it's possible that at some point, the management system required to operate 50 crews makes it such that the 50th crew is actually costing money instead of making a profit.

There are advantages to having a larger company, and I don't mean to diminish those, but it's not really accurate to suggest that a larger company has lower overhead than a small company (proportionately).

What is the optimal size surveying company form maximum profit margin? I don't know. I've spoken with owners of companies with two or three crews that say they have to hustle more and at times take jobs they really don't want in order to feed the machine. But just a wild guess, I'd say 3 crews is probably a peak number. There may be several peaks. At what point do you need additional office staff to support the field operation? When do you hire a receptionist? A draftsman? A book-keeper? A researcher? A human resources officer? A safety inspector? etc.

There's truth to that, but I guess the principle I see at work is everything going to larger companies. So the volume makes up for the lower margin in a big way. Mostly, that equation works out in favor of the larger company. If it didn't, there wouldn't be so many successful huge engineering/multi-discipline firms, law firms, farms, and now national survey firms trying to get a hold on market share. And with commodities, all I can say is Walmart. Depends on what you put in the overhead column I guess. In any event, the smaller operations are generally not the ones that can offer consistently lower prices and prosper.

I have heard the owners of small shops complain that they cant compete on price with the big ones, and principals at big companies make the same complaint about the small shops. Both say that the other has an advantage on overhead.

One key consideration from my point of view is stability of work, shops get top heavy when they surge for whatever reason and then let crews and techs off but keep the heads on in the hope that they can expand again.

I've seen companies where 6 crews was the magic number. There profit margin was higher than when they had 3, plenty of people to move around ability to take on more work and faster turnaround times when needed and the ability to take on larger projects, but when they went from 6 - 12 crews their profit margins went down, headaches went up and it was more difficult to manage
One thing about the companies with 50 crews is they typically take on large projects where they bill for almost everything, the crew, the tech, the other tech, the senior tech, the PM the Sr. PM and even the paper that goes through printer. Which when you think about it they have to cover all the management salaries that aren't billable plus their debt service for keeping operating cash and equipment pumped into the company

I am taking some online FEMA Incident Command System courses, discussed in there is the idea of span of control.

Span of control
To limit the number of responsibilities and resources being managed by any individual, the ICS requires that any single person's span of control should be between three and seven individuals, with five being ideal. In other words, one manager should have no more than seven people working under them at any given time. If more than seven resources are being managed by an individual, then they are being overloaded and the command structure needs to be expanded by delegating responsibilities (e.g. by defining new sections, divisions, or task forces). If fewer than three, then the position's authority can probably be absorbed by the next highest rung in the chain of command.

This seems pretty applicable to span of control of a single PLS too.

SHG

You can have a profit with 50 crews if work is continuous. Reason why you say 3 crews have larger profit is because work is in excess of manpower.
All your crews have work to do. And every work they do as your example says, returns a 40% profit.
For 50 crews if you as owner can find continuous work for them you would make a profit of say 10% each but 10% x 50 crews outweighs 40% profits from 3 crews.
The magic bullet is in finding work to keep every crew occupied.
I have found out that as you need to keep all those crews working, you will eventually lower your project quotes just to win the contract. This in turn lowers your profit.
Vicious business cycle in any other field too.

Very good point [USER=10211]@FrancisH[/USER]. Many surveyors and other business owners tend keep lowering their prices to keep their people busy. Hard not to do some times. I always thought 2-3 crews paid really well with a 4 day work week twice a month would be the perfect fit. Not sure that I would ever make myself adjust though. I still get up at 4am, even on the days I don't need to and leave the office close to 6. Always can find something to do or tinker with

Shawn,

When I started with my current firm, I had 5 crews, with 15 field personnel, and 1 full time office guy. That was too much. We have thinned out the department due to those projects that the extra crews were hired for were finished up, and I am down to the best 8 field guys.

The firm I am with has been in business about 23 years, and in my conversations with the owners, they say about 3 crews is the most profitable. I am the survey manager, and will be signing paperwork this week to become a partner, so I will have more info to study and analyze to develop strategies to make things more profitable and efficient.

Our firm has 15 employees at the present time, and we offer both engineering and surveying services. Our main focus is transportation work, airport work, municipal work, and support for A/E firms. We are a DBE, and that helps tremendously. The trick is to keep debt as low as possible, keep overhead low, and take care of the employees. We offer health, dental, and a simple IRA type retirement plan, and above average bonuses. I am very blessed to have been chosen to succeed the partner that retired.

Jimmy

Shawn Billings, post: 414376, member: 6521 wrote: As I've been thinking about this for a few days, I suppose I've noticed this over the years but didn't know a name for it.

Variable cost of business is the idea that as an organization grows, its cost to do business increases disproportionately to growth. Labor and material costs will increase in proportion, but organizational costs will increase. It could be argued that material costs decrease due to bulk purchases, but warehousing the materials and inventory taxes might negate of the savings.

If I understand the principle as it relates to surveying, a company with three crews will have a higher profit margin than a company with 50 crews. This doesn't mean that the company with 50 crews cannot be profitable, but that the margins will be less. If three crews each provide a 40% profit margin to the owner, then adding a fourth crew may only add a 35% profit margin because of the additional organizational strain required to support the fourth crew. (These percentages are just examples - not intended to be real). By the time you get to the 50th crew, maybe it's only adding 5% profit margin. It's still a profit, but the margins are less. And it's possible that at some point, the management system required to operate 50 crews makes it such that the 50th crew is actually costing money instead of making a profit.

There are advantages to having a larger company, and I don't mean to diminish those, but it's not really accurate to suggest that a larger company has lower overhead than a small company (proportionately).

What is the optimal size surveying company form maximum profit margin? I don't know. I've spoken with owners of companies with two or three crews that say they have to hustle more and at times take jobs they really don't want in order to feed the machine. But just a wild guess, I'd say 3 crews is probably a peak number. There may be several peaks. At what point do you need additional office staff to support the field operation? When do you hire a receptionist? A draftsman? A book-keeper? A researcher? A human resources officer? A safety inspector? etc.

I have to disagree with much of what you've said. Firstly, variable costs are just that, cost that vary. Fixed costs are costs that do not. To associate those costs properly means that some items are "overhead" costs. One can argue that salaries are variable if they are paid at an hourly rate or fixed if paid evenly. Fixed costs are typically represented by mortgages, notes, salary, et cetera. All other cost are variable like employee salary, lights, laths et cetera. Past that, placing some variable costs in a projected budget for overhead, like laths flagging, et cetera is much easier to track due to the fact that no one wants to keep up with $0.50 purchases of bolts. Just put those items into overhead.

Forecasting, via regression or moving averages is a great tool for "fixing" variable costs but it takes a lot of historical data.

Also, all profits are not linear. They are in fact, parabolic. One must calculate the point of diminishing returns. Once this is done, based on the costs alone, then you can see where the number of crews begins to make less money. I have noted from our model that when we have two crews, profit is up, three is way up, but four is less. Even though the total profit is higher with 4 than 3, the point of diminishing returns has been reached and will not again reach the same margins until 6 crews. Ish.

The answer to the last question requires that one totally ignores opportunity costs, which is one of the worst things you could do. Your time, whether it be at work or with your family, is worth something and my free time is worth, to me, more than my corporate time. Those costs are intrinsic but can be estimated by looking at how much time it would take to do an assistants job and training them to do that job. As a solo operator, your profit is easy to calculate. Revenue - costs = profit. Sometimes that's a negative number. Once you add employees, you begin to add and commingle extrinsic and intrinsic costs.

If you truly want a better understanding of this, take, as a night class, Cost Accounting. I absolutely hated it. I mean I really hated it. But I got a LOT of mileage out of it. It will teach you how to associate and apply costs properly and show you where hidden costs lie and how to account for them. There are no "T" accounts to deal with nor tax questions, but it's a good class for everyone who runs a business. Quite possibly the BEST class for all business owners who are surveyors to have to take.

My house is very small by most standards because there is only one room designated as a bedroom and their is only one bathroom. Converting my office into another bedroom would be simple, but bathroom time would start to become critical. Adding anything more in the way of bedroom space would require an addition to the house and, most likely, include a second bathroom. If putting on an addition, I might as well add four bedrooms and two more bathrooms. Then when conditions change and I only need the original single bedroom, I can continue to pay property taxes on the vast increase in assessed value.

I think we agreed more than you realized, [USER=29]@Kris Morgan[/USER] but I appreciate your comments. I know your educational background in business, so I was hoping you'd chime in.

I touched on the concept of diminishing returns when I mentioned profit margins from adding multiple crews. There is a peak, and I also suggested that there might even be more than one peak. You mention 3 crews being a peak, then another peak at 6. I don't doubt you on that, although I have no personal experience with it.

[USER=10211]@FrancisH[/USER] you mention that 50 crews can each be 40% profitable, but to your own admission, this is in a perfect world where there is plenty of work to do for all 50 crews. You also mention finding the work to keep them busy. Would that effort of finding the work not bring additional overhead in the form of marketing? Would that additional overhead not negatively affect profit margins?

I'm pretty sure that being solo is not the most profitable model, although it's worked pretty well for me so far. "Pretty well" is good enough for me because of the enjoyment I get from the perks of being solo. I suppose this would fit under those opportunity costs that Kris mentions. It's worth more to me to have the freedom of being solo than having three crews, at least for today. That may change at some point though.

Jimmy Cleveland, post: 415263, member: 91 wrote: ....I had 5 crews, with 15 field personnel, and 1 full time office guy...

That 1 office guy must have been busier than a 1 armed paper hanger.

A lot of this is going to depend on how you organize the responsibilities, the involved individuals capabilities, and on what kind of work you are doing.

FrancisH, post: 415250, member: 10211 wrote: You can have a profit with 50 crews

In my world that would be impossible. The support staff, overhead, and headaches would not only substantially diminish profits, but also would contribute to an early stress related death.

Effective management isn't simply a function of raw numbers of people. I have overseen a dozen crews that would read the board and work order, pull the file and return everything ready to produce a product. I've also run two crews that would sit around for an hour waiting for me to pull the file. Big difference.
These days us 2 old guys will punch out three days work in one with very few words. We bring on an intern in the summer and borrow from other offices on the rare occasion we can't keep up. Our multiplier and profit is the highest I've ever achieved and the stress level is the lowest.
Yes there are some basic truths to the standard business models. It doesn't take a lot of looking around to see that Surveying is in new territory...