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Secrets to Creating a Profit Machine

Aug 1, 2008 12:00 PM, By Herbert M. Cannon, AEC Management Solutions, Inc.

Learn what it takes to produce a 20%+ profit on net revenues

Everyone enters the electrical business for different reasons. Whether they're driven by family tradition, love of the trade, dreams of research and development, or career advancement, you'll be hard pressed to find owners of engineering or contracting firms who are not interested in turning a profit. Everyone wants to make money, but what many owners don't realize is that making a profit for the sake of profit does little to motivate most employees. What does motivate most people? Reinvesting a significant portion of profits in the company is a great start. By sharing the wealth with employees, motivation remains high, and the owner will still enjoy a fair return on his investment.

By reinvesting profits in the company, you can provide the best working environment, equipment, training, compensation, and support for employees. This approach ultimately leads to producing an even better product for clients and generates repeat business. By sharing the profits with employees through incentive compensation, you motivate them to be proactive in solving business problems and producing the profits they deserve for their creative efforts.

When these strategies are implemented properly, they quickly become part of the corporate culture, resulting in a profit machine that provides not only profits, but also satisfied clients, employees, and owners. Most engineering and contracting firms are already doing the work — creating the value that deserves a reward by a 20%+ profit on net revenues. Let's take a look at how you can realize a similar potential.

Understanding the financial fundamentals

Every week, I meet design professionals that somehow managed to stay in business with little or no understanding of what it takes to consistently produce a profit. They believe that working longer hours is the only way to produce a profit and stay in business. Worse yet, many make the excuse that quality design and making a profit are inconsistent goals — a mind-set that is clearly untrue.

Although there are about a dozen key indicators worth tracking, three will give you 80% of the benefit. Every firm, without exception, should be monitoring and acting upon the following indicators on a regular basis: employee utilization rate, net multiplier, and overhead rate. Let's take a look at each more closely.

Employee utilization rate

The employee utilization rate is calculated as follows:

Direct Labor Dollars ÷ Total Labor Dollars = Utilization Percentage

A higher utilization simply means that more labor dollars are being charged to revenue-producing projects. With everything else being equal, this will result in increased revenue with no increase in costs. In other words, every dollar of revenue produced through higher employee utilization goes directly to the bottom line.

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