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If you’ve read my previous posts, you’re getting very familiar with operating profit, net fees, pipelines, and payroll. Now its time to understand your operating expenses or OPEX for short.
OPEX
Think of your operating expenses as investments required to ensure your clients are getting what you promised them. To operate optimally, you and your staff need tools and support systems to make that happen. Your operating expenses provide the funds to do that.
You’ll find your operating expenses on your Profit and Loss statement (P&L). In fact, these expenses will make up most of the lines on your P&L statement. The list is long and can be overwhelming but operating expenses fall into just 4 major categories.
1. Labour related expenses (non payroll) allow your staff to focus on project work knowing their personal and professional interests are taken care of…think:statutory taxes, workers compensation, health insurance, pension contributions, professional licence fees as well as investments in training and professional development, etc.
2. Marketing expenses ensure that the firm stays visible to your target clients…think websites, social media, donations, trade shows, thought leadership development, corporate blog, newsletters, travel, etc.
3. Facility Expenses ensure there’s a place to work, meet and store documents…think office rent, operating and maintenance costs, home office supports, fixtures, furnishings and equipment, subscriptions, etc.
4. Corporate Expenses keep the business and practice running…think insurance, legal, accounting, management consultants, business taxes, etc.
The list is long but at the end of the day, all these operating expenses taken together should comprise about 25% of your net fee.
If you’re spending more than 25% of net fee on operating expenses:
- Your net fees may not be sufficient to support the current level of operating expenses, in which case you either must increase your net fees, accept lower profits, or reduce your expenses.
- Reducing expenses is difficult since most operating expenses are fixed and are not easily changed from year to year.
If you’re spending less than 25% of net fee on operating expenses it may be a sign of a very lean operation but it may also be a warning sign:
- Make sure you have mitigated risk appropriately (general and professional liability insurance)
- Make sure your space is indicative of your brand to visiting clients and staff.
- Make sure you’re investing sufficiently on professional development and training
- Make sure your practice culture is healthy
- Make sure you’re doing sufficient research and development
- Make sure you have the right tools (software, FF&E, printers, etc.)
- Make sure you are maintaining your systems adequately (IT support, etc)
- Make sure you are using expert advisors (bookkeepers, accountants, attorneys, management consultants, etc.)
If you are not investing appropriately in the firm’s future, you need to accept the long-term consequences of underinvestment that may include diminishing profits and practice value.
The lesson here is to keep close tabs on your operating expenses in relation to your net fees.
For more detail on how your operating expenses interact with the other key measures of your practice, check out my book, Scoreboard Your Practice: 7 Numbers to Understand Your Design Firm’s Financials (Available at Amazon).
Be Strong, Rick
