Home » The Business Side: Why can't I make a profit?
Making a profit in the surveying/engineering business year after year has always been an elusive proposition. And when a surveying/engineering business becomes unprofitable, it’s easy to blame the economy.
I have developed a system where you as owner or manager can check to see if the
employee cost is the proper percentage of total revenue. This system works best
if it is based on the numbers from an entire year, but it could also work on a
monthly basis if the right income numbers are used. You start by separating out
the total raw wages paid in the year without any benefits. You divide this
number by the total cash income of the company for the year. (Notice I use
cash, not accrual. If you can’t collect the money, you have not made a profit.)
This division should result in a percentage that shows what part of your total
income is labor cost. See the sidebar to the right for real-life examples of these calculations.
The only way to skew this percentage is if the owners are paying themselves a
higher-than-normal amount of money. If the owners’ pay is in line with that of
other professionals, the break-even point is about 45 percent. At less than 45
percent, you should be showing some profit for the year. As this percentage
approaches 50 percent, you start to show a loss. At anything lower than 40
percent, you are starting to operate a cash cow. Some cash cow profit-and-loss
statements show a labor-to-income ratio not much over 30 percent. But keep in
mind that cash cows pay very little in benefits and experience
higher-than-normal employee turnover.
This system only works for a professional service company because we buy very
little in the way of raw materials to produce our products. Remember that this
ratio is only the ratio of total wages to total income.
If your company has struggled for years with making money, I want to make the
following suggestion: Pull out the last three or four years of profit-and-loss
statements and review them carefully. You may not have too many employees, but
you may be spending too much in wages to put the project out the door. If you
control total wages paid to less than 40 percent of total cash income, you will
become profitable. Make that your goal.