Engineers perform technical calculations every day. They are trained in the practical application of geometry, calculus,and differential equations. Yet, when it comes to basic business financials, engineers tend to seize up, shy away, or just pretend that the math of accountants isn’t a critical element of their business and career success. This may have been a tolerable approach when times were good and clients were clamoring for our services, but failing to pay close attention to the underlying financial data nowadays is professional suicide.

So, put away your HP48-GX, break out your kid’s solar-powered 16-botton calculator, and let’s do some math.

Don’t worry – we’re only going to deal with three simple numbers. They are as follows:

Without proper financial planning, many firms make the mistake of letting their profits float. In other words, they get the work, they do the work, and they pray that there is money left over after all of the bills have been paid. Profit becomes the unknown variable. To express this approach mathematically,

Profit = Income – Expenses

Those firms that pride themselves at being a bit more financially astute, actually set profit goals. They subsequently focus on negotiating for fees that are sufficiently high to cover expenses and meet those profit goals. Basically, they add profit to expenses in order to determine what their income must be.

Income = Expenses + Profit

Unfortunately, both approaches are misguided. The problem lies in the assumption that expenses are pretty much fixed and that our fees are not dictated by the market that we serve. A better way to look at it would be

Expenses = Income - Profit

This approach has some interesting ramifications when we recognize that we have far less control over our fees than we would like to admit.  As engineers, we pride ourselves in providing a high level of value to our clients and are, therefore, able to justify maintaining a certain price range for our services. However, like it or not, we’re still participants in a free market system. As demand for our services decreases while, coincidentally, the number of competitors increase (what do you think those engineers that you laid off are doing?), the level of fees that we are able to secure will also go down. Of course, the opposite occurs when demand for our services goes up.

Since profit is essentially fixed based on our financial goals and fees are largely dictated by the market, this last approach tells us that we must focus on controlling expenses. We’re not just talking about laying people off and conserving paper clips (although such measures may be in order). Rather, we must look seriously at the time, effort, and expense associated with the technical part of what we do. Perhaps, there is a more efficient, streamlined method of preparing drainage studies that hasn’t been discovered yet because we’ve been too focused on demanding higher fees and doing what we’ve always done. Innovation and creativity are at the core of effective financial planning.

I was in school when our profession made the painful, awkward transition from manual drafting to CAD. It’s never an easy thing to abandon old ways and embrace such a dramatic change in methodology. But, somewhere along the line, I suspect that someone envisioned a better, more efficient way of generating plans on a computer, rather than on a drafting board. I suspect that someone did the math.