The Business Side - Managing in hard times.
The reasons for this downturn are too numerous to mention, but the bottom line is that these are normal business cycles we must experience in a free market system. As company owners in these challenging circumstances, we must react appropriately to keep our companies viable.
The Inevitable DownturnIf you stay in this business long enough, you will eventually experience a business downturn. As an owner, you have no way of knowing how long the slowdown will last. How well you handle this situation is directly related to how well you will survive as a business owner. Many of you probably started your surveying firm as a very small business and continued to grow. Making money in a good market was easy because most of the time you had more work than employees. By the time the inevitable downturn came, you may have had three or more survey crews including office staff. A quick downturn in the economy may leave you with more employees than work. There are a number of tricks you can use during this stressful time to keep your head above water and to keep from borrowing money.
Know Your Cost of Doing BusinessYou must be well organized and prepared as an owner to track your company’s health during a downturn. Hopefully, you have developed your company overhead factor. This is the ratio of wages, including social security and benefits, to the total company overhead. (If you need help developing this information, hire an accountant.) You need to know this factor on a yearly and a monthly basis. To aid you in determining your company’s status, you can develop a chart to track your monthly overhead factor and other information. Of the key bits of data included on this chart, the first is the overhead factor, and the second is new work generated during the last month. Other information to be listed on the chart includes the following: total number of employees, total amount of money billed during the month, and cash received. You will use this information to track the health and profitability of your company.
Normally your overhead factor will fluctuate slightly during the course of a year. If you detect a sustained increase over a three-month period, look very carefully at the new work generated. Your cash flow may still be good based on previously completed jobs. This is the time to start doing something about the slowdown--not months down the road when you have run out of work and money. Keeping the company profitable should be your first and only goal.
Track Your FinancesAnother chart you need to develop is one that shows the total income for previous years, the average number of employees for that year, percent of profitability and overhead factor. This information can be best shown on a graph; in order for the graph to be really helpful, it should illustrate 10 years of your company’s history. Since you don’t know when a business slowdown may occur, start to develop this chart today. You can utilize this information in the following manner. When your records show a monthly increase of overhead factor for a three-month period, take the total of new work generated over the three-month period and multiply it by four. Use this amount and compare it to your historic chart to find the last year you had this total income and made a profit. See how many employees you had that year and compare this to your current employment. I think you know what you are looking for with this comparison. If your current employee levels are more than your number from the chart, you have the very hard job of cutting staff.
Make the Hard DecisionsThe sooner you start making the necessary cutbacks to your business, the better chance you have of maintaining your profitability during a recession. Having the facts is one thing, but making the right cutbacks is more difficult. Most companies start by cutting back on office staff who are only part-time and receiving minimum wage. Some owners even cut their own wage by 10 percent. Most of the time this is only a drop in the bucket of the real cuts that need to be made.
Real cuts for most surveying and engineering companies mean cutting field personnel. Nothing is more worthless than a survey crew that does not have enough work to do. Companies hire individuals for a survey crew one at a time; I call this “hiring vertically.” But when it becomes necessary to lay off crewmembers, most companies want to lay off the rodperson from each of the crews and keep all the highly-paid employees; I call this “laying off horizontally.” Although I understand the reasons for wanting to do this, keeping only highly-paid employees during hard times makes it more difficult to make a profit. It is better to lay off from the top down while you still have plenty of work for remaining staff. Borrowing money to make a payroll for a less-than-fully-utilized survey crew is a sure shortcut to the poorhouse.
Flatten the MiddleNext you have to take a good, in-depth look at your office staff. If you are part of a firm that has been around for 25 years or longer, you have most likely developed layers of middle management. You may not have started out with the intention to have this layer, but over the years junior partners get assigned many duties that are not directly charged to clients. Some companies call this the indirect cost of doing business. The tasks performed by these employees are luxuries that you can no longer afford, such as participating in the United Way annual drive, hosting public relations activities, etc. While these are all good and worthwhile causes, they cost money and keep employees from doing billable work.
If these middle-management employees are still important to the future of the company, they need to be reallocated into production roles with plenty of billable time. This may necessitate laying off employees who have taken over the duties of these middle-management employees. More common is asking middle management people to leave the firm instead of reassigning them. This practice is going on all over America, and is called the “flattening of the corporation.” When cutting staff, think about each employee and how he or she will fit into the future of your company. Keep in mind that technology will play a much larger role in the future in most companies and you may not need certain employees. Also remember that laid-off middle-management people may become your new competition.
To evaluate staffing, add up all new work generated each month and multiply that number by 12. This will give you some idea of your next year’s projected growth. Check back to your chart to see if you might still be overstaffed. Your company will survive much better by being understaffed and paying some workers for overtime than by having employees working only 25 hours per week. (Remember, you still need to pay benefits.) It’s actually a great signal to your competitors if some people in your company have to work overtime.
How Long Will the Downturn Last?The bottom line is that business downturns usually last longer than you have money to pay unneeded employees. I expect real estate developers and builders to get started with new projects in the spring of 2008. There may even be a complete return to business as usual by 2009. (Though I doubt it will ever return to the crazy world of flipping property two or three times before the project is built.) Some parts of the country are still doing OK today, and you should consider yourself lucky if you work in one of these areas. In many markets, commercial property is still doing well and as a company owner you may need to look at providing services in other market segments. I can tell you this: If you take no action and drain your resources, this downturn will seem to last forever!
Some information contained in this article comes from the “Surveyors and Engineers Small Business Handbook” by Milton Denny, PLS, 1988.
Editor’s Note: The publication of this article interrupts Milton’s series on “Company planning for the future.” Because of the economic downturn that has affected the country, Milton chose to write this column specifically for business owners who are dealing with the impacts of change in the economy. He will return to his planning series in his February 2008 column.