What happens to your income when revenues go down?
Does your income go down? Substantially?
So you’re humming along doing $100,000 per month in revenues. You’re meeting payroll for your team, paying your marketing-related expenses, and covering your miscellaneous costs like rent, IT, equipment, and other expenses. Thankfully, you’re taking home a good income from the business.
Suddenly, things change. Maybe the economy goes south (again), maybe you do something with your marketing that doesn’t quite work, or maybe you hit a season that is generally slow for family law.
Let's say revenues go from $100,000 to $75,000 per month for two months in a row. That’s not an extraordinary change.
Do you continue to draw your income? Or do you go on a cash diet and start living off savings? Or do you patch it together with a credit line or retained earnings?
Wouldn’t it be nice if you didn’t have to worry about these fluctuations in revenue?
Wouldn’t it be nice if you had some flexibility in your expenses?
Quick story: More than 5 years ago, I joined a group of folks running companies called Vistage. It’s a mastermind-type group of CEOs who meet once per month. They’ve got 10,000 plus members and have been around for a long time.
As I got to know the other 15 CEOs in my group, and more importantly, as they got to know my business, they figured out that the fluctuating revenues were a big problem for us. The fluctuations are exacerbated by the fixed-fee nature of our billing model. We can’t easily spread the work out like those employing an hourly billing model. Lots of new clients means a good month. Cut that number by a handful, and a good month turns bad.
They pushed me to figure out ways to get more variability in our expense structure.
They wanted me to find a way for expenses to go up when revenues went up and, more importantly, for expenses to go down when revenues went down.
During the meetings where we discussed expenses, I often felt ganged up on 14 to 1.
I explained our long-term obligations and commitments with leases, marketing contracts, etc. “We can’t make everything variable,” I whined.
I explained that our lawyers couldn’t cope with variability and needed a firm salary. They didn’t like the lack of predictability of a commission-based system. Uncertainty makes lawyers crazier, I explained.
Month after month, the other CEOs beat me up.
I got bloodied and bruised.
Now, looking back on it all, I’m glad they came after me and pushed. I’m glad they didn’t accept my lame excuses for being locked into fixed costs.
I’m glad they made me change our systems.
Now when revenues vary, our expenses vary. Nearly all of our expenses are now variable. It wasn’t easy, but we’ve done it.
The biggest expense for us, and for you, is payroll. We’ve moved nearly everyone except a few administrative types to a variable compensation plan. Everyone earns more when they accomplish more (and less when they accomplish less). It wasn’t easy to get to this point: it took years of baby steps, but it happened. Getting flexibility on payroll made a huge difference since it represents about half of our expenses.
Once we built variability into our payroll, we moved on to other expenses. Now we’ve achieved variability on our marketing expenses. We have no contracts related to marketing. We can start or stop our marketing on a moment's notice with no penalty. It’s quick and easy.
Our various other expenses (rent, equipment leases, etc.) have been more challenging but not insurmountable.
We’ve (as I’ve explained here) shifted away from having offices to having only conference rooms, and our workforce is distributed. We now have conference rooms in three cities for meetings, mediations, etc. and no offices for our staff (except for two administrative people who handle mail). We are leasing those on very short terms, and the expense is dramatically less than it was when we provided space for everyone. Between the space reductions and the short-term leases, we’ve achieved a much higher degree of variability than I ever expected.
We’re still committed to a few very small leases. For instance, we’ve got a lease for a postage meter and copier in our administrative office. We don’t, however, have fixed costs for servers and data management. We’ve moved to the cloud and away from long-term server leases and maintenance agreements. The same is true of our phone system. We’re now paying month to month, per user, for use of our phones, IT data, and support infrastructure. Nearly everything else we’re doing can be increased or decreased on a monthly basis, and we don’t have a contractual obligation.
Our move to variable expense has required a careful examination of every expense we incur. In some cases, we’ve had to shift our thinking. In some cases, we’ve had to shift vendors to achieve the goal of variability.
It’s working. Revenues up, expenses up. Revenues down, expenses down. Profit varies slightly, but it doesn’t move wildly in the way it did when all expenses were fixed. Variability is good. It requires diligence and some time, but it is a journey worth taking.