Engineering Business – Office Location Can Keep Your Expenses Low
Have you reviewed the company’s budget recently? Does it need to be reevaluated? Has the staff stayed within the budget or are they over budget? What are you doing to get back in budget? These are all questions that need to be answered regularly to ensure a profit at the end of the day. If you have revenues then you want to keep as much of it as possible.
The purpose of the budget is to control the expenses and to make sure that they do not exceed the revenues. As long as the company has a greater quantity of incoming cash versus outgoing there is positive cash flow. Many of the businesses in the professional service industry that go out of business have a profit on the books, but have a negative cash flow. This is because invoices in account receivables show as earned income, but that does very little good until the payments are received. You need incoming cash to pay the bills and the salaries.
There are several financial strategies that can be implement that will keep your expenses in check. In Part 1, we covered 4 key strategies your engineering company can utilize to trim costs without touching your core business.
Key 1: Recording Your Expenses
Key 2: Using the Internet over the Postal Service
Key 3: Making use of Telecommuting
Key 4: Negotiate better Lease Terms and Rates
In this article we are addressing one more key financial strategy for reducing expenses; the location of the business. The location of the business is important for the flexibility of the business to adjust to the expansion and contraction of the workload. The more flexible the more likely the business can make adjustment depending on the economic conditions.
Key 5: Office Location – Depending on the size of your business certain locations are more suited. Trying to operate a business with gross annual revenue of $300,000 from a 4,000 square foot building may not be appropriate. There are many different locations to operate an engineering business; home-office, virtual office, executive suites, professional office space, or an office building. Each has their advantages and disadvantages.
Home-Office – If you company is very small and you are able to obtain a business license for a home office, it can be a very good way to keep your expenses low. Obviously there are no leasing expenses and the space used is usually tax deductible. Check with your city or government agency to make sure they will allow a business in your home. You will need to obtain a business license in order to render any professional services. In most cases professional services entrepreneurs can obtain a license to operate out of their home, since clients will not be at the office or large delivers of supplies will not be showing-up at the front door every day and disrupting the neighborhood.
But the question always arises when someone should leave the home office and open a business in a commercial building. This really depends on the revenues one is able to generate and whether one has outgrown their available space. The best answer is probably to stay in your home as long as possible to keep the over-head expenses as low as possible. Initially, a professional license alone may be sufficient to grow the client list and establish enough revenue to operate the business. The disadvantage to the home office is that clients when visiting your office will not consider it as a real business, and may question the credibility of the firm.
Virtual Offices – These companies literally lease a space on the wall. The physical presence of the company is actually somewhere else. The basic package is nothing more than an address, a place to hang the business license, and mail service. Usually the business that lease virtual offices also offer additional services to the basic package such as phone service, fax service, community office, community conference rooms, and so on. This type of service is meant to be for a short period of time, but in some cases can be a more permanent situation. Leases are usually month to month. Again, the disadvantage to a virtual office is that clients when visiting your office may not believe that your community office or conference room is a real business, and may question the credibility of the firm.
Executive Suites – A business that leases out individual offices with common uses such as rest rooms, break areas, lounges, conference rooms, spare office, mail service, parking, custodial service, secretarial staff, and phone answering service. In addition, the lease may also include the utility bills and phone book ad service. There are some major advantages to executive suites. First, you have a real commercial address, which adds credibility to the company. Clients can meet you in your office or in a conference room. Most lease agreements are for a fairly short period of time usually one to three months, which has an advantage if the business does not do well and you need to move or terminate the lease. Disadvantage executive suite leases are higher than a traditional office space, usually two to three times per square foot. When it comes time to expand your business to include additional office space for new staff, the executive suite option may not be attractive any longer. Also if you move the business to another executive suite complex or an office space, you may loss your company phone and fax numbers. To overcome this scenario try to find a building that has both executive suites and traditional offices for lease. Then when it comes time to expand you can move the business to a different location in the building and possibly maintain the address, and phone and fax numbers.
Professional Office Space – If your company significantly grows to a size were the executive suite services are no longer economical, then it may be time for leasing a portion or all of an office building. The lease per square foot are usually low, put all of the services the executive suites provides, including the utilities, your company will now have to obtain. The leases for office buildings are also much longer; usually three years or longer. Make sure that the client base is sufficient and the market conditions are right to maintain a lease that long. The disadvantages to a professional office space is that if business drastically slows down, the property managers may not be willing to renegotiate the lease and will hold you responsible for the full term of the lease. To avoid this scenario try to lease the facilities with a clause that will let you sub-lease the property. The ability to lease a portion of your office space if the need arises may save your company.
Professional Office Building – For a large firm can either lease or purchase a professional office building. Owning the building maybe a better option than leasing. During a recession commercial buildings are sometimes priced well below the cost to build a building. Obviously the business is responsible for the mortgage, but the company can lease unused portions of the building to create additional revenues. If the market is performing poorly and the engineering company is unable to attract sufficient amount of new contracts it can lease a greater portion or all of the building. There are disadvantages to owning an office building such as a possible mortgage, property taxes, insurance, but there are plenty of advantages.
It is definitely important were the business is located. Too much unused office space will eat away all of you profits. Too little space will also limit your maximum revenue potential. The key is to be in a situation were you can make adjusted based on your revenue projections. In Part 3, we will cover 5 more key financial strategies to reduce expenses without cutting staff.