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Secrets to Creating a Profit Machine

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

If you extrapolate this across the entire company, a 10-person firm would generate an additional $250,200 of profit. A 100-person firm would generate an additional $2,520,000 of profit. How do you increase the net multiplier? While it's clearly easier to do the math than to make it happen, here are few ideas to get you started.

• Stop the unpaid scope creep. This is by far the No. 1 enemy of profit.

• Do fixed fee work within your area of expertise. The opportunities for reuse of prior work is high.

• Increase your hourly rates every year. Don't worry — it's extremely unlikely that you'll lose any business.

• Quote fixed fees for additional services.

• Avoid hourly work to a cap.

• Do not give a fixed scope for an unknown quantity of work.

Overhead rate

The overhead rate is calculated as follows:

Total Overhead Expenses ÷ Direct Labor Dollars = Overhead Rate

The Overhead Rate is expressed as a percentage (150% of direct labor, for example).

As a rule, the lower the overhead rate the better, because it allows you to produce work at a lower cost and, in turn, be more profitable. Unfortunately, too many firms neglect the required investment in technology, supplies, and support staff under the guise of keeping the overhead rate low. At the end of the day, this is a shortsighted view of business operations. A heavy-handed approach to reducing overhead will ultimately lead to a dramatic decrease in productivity (net multiplier) and profits.

The secret of creating a profit machine does not lie in keeping your supply cabinet empty and reducing (or eliminating) employee benefits. Oddly enough, the largest component of overhead is indirect labor. If you increase your utilization rate, you reduce your overhead rate as well.

Everything else being equal, a 70% utilization rate will substantially solve your overhead problem. This is not to say, however, that you should be frivolous with overhead expenditures. Every reasonable effort should be made to keep overhead costs under control. Here are some ideas to get you started:

• Rather than let everyone contract for their own cell phone, negotiate a company-wide cell phone plan.

• Consolidate office supply orders to obtain discounts.

• Make sure you track all of your project printing costs for reimbursement.

• Sublease unneeded office space.

• When work runs out, do not hold on to employees for too long.

Cannon is president of AEC Management Solutions, Inc., Matawan, N.J. He can be reached at hcannon@aecmanagementsolutions.com.

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© 2012 Penton Business Media, Inc.

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