Whenever you look at firms that aren’t profitable, they inevitably have one, some, or all of the following problems:
- The owners aren’t involved enough with the business.
- The owners take out too much money.
- The firm doesn’t spend enough money on marketing.
- The firm does not have good accounting information.
We see these same themes repeatedly.
Notice that I did not say, “The economy is weak” or “The market got bad.” Those are always cop-outs when the real problem is one or more of the above issues. Let’s take a look at these one at a time.
- The owners aren’t involved enough with the business. I’m talking here about the firm owners who are either so wrapped up in projects they “don’t have time” to run their firms, or, the owners who are so burned out they have abdicated their roles as firm leaders and managers and left the job up to someone else who may not be equipped to succeed. Either of these situations is correctable IF the owner(s) care enough about their business to get back into it.
- The owners take out too much money. Gosh, we see this a LOT in A/E firms. The owners simply decide they each need to make more than $400K a year in a firm that should be paying them $180K a year. Then, lo and behold, the firm isn’t profitable. Completely correctable situation and one (of many) reasons we don’t trust any income statement we see here from a privately-held company without diving into the details of it. There is wide variance here. And whether the money is taken out as excess salaries, excess bonuses, or excess distributions – while it may affect the income statement – doesn’t ultimately matter. Too much is flowing out.
- The firm doesn’t spend enough money on marketing. Such a common problem. Whenever you first start talking about marketing in these companies the first question that comes up is, “How much do other firms spend on marketing?” This is the WRONG question! Who cares? They may be smaller, older, or have different target clients. Not to mention the fact that most companies in this business are 15- to 20-person outfits. Half are smaller than that! So why compare yourself to them. Plus, you have a problem. Your firm isn’t profitable. Top-line revenue growth is probably the antidote to that. Spend more on marketing. And don’t kid yourself that “word-of-mouth” is the best marketing. You won’t ever get word-of-mouth unless you actually work with clients.
- The firm does not have good accounting information. I’m not just talking about an “accurate” P&L statement. There is so much more to accounting than that. Accurate and timely project reports are crucial. Understanding where all your overhead dollars are going is essential. Having good cash flow forecasting is required. I could go on and on but can assure you that we see accounting as a problem in nearly every lack of profitability scenario we encounter in an AEC firm.
This is by no means an exhaustive list, but if you aren’t as profitable as you think you should be, these are the first four places I would look to diagnose the problem. Because the fact is, this industry has never done better. With average profitability of firms in the range of nearly 14 percent and return on equity of almost 50 percent, there’s no reason you shouldn’t be doing well.
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.
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