Good Afternoon David,
As per our conversation earlier this week, I had a chance to review the financials for this past year and I want to give you a breakdown of our revenue stream. Despite the increased success and additional $80,000 we made on top of our profit goals for the year, I feel it is important to understand exactly where this additional revenue came from in order for us to plan accordingly for next year.
One of the first variances that stands out to me from our original estimates is the 150,000 potential hours of consulting work in the Dallas area. As you know, once we checked with all the local consulting firms, the actual total consulting market in the area came out to be around 112,000 hours; a 25 percent decrease. After comparing our budgeted hours to our actual number of hours it turns out, due to the change in market size, we logged 1,000 fewer hours than we had originally budgeted. Despite the loss in hours, our sales team was able to more than make up for the loss by increasing our market share from 10 percent to 12.5 percent. This is a positive indicator that we should focus on as we move forward into next year; understanding that the market is potentially shrinking and we are increasing our share indicates that we have a strong and growing presence in the Dallas area.
The largest variance, however, was not from the decline in budgeted hours but rather the variance between our actual numbers when compared to our budget for our two services: re-engineering and streamlining production. If you recall, earlier this year we had raised the price for our re-engineering studies by $10, from $60 to $70. Judging by the numbers, this may not have been the most effective strategy as our sales for our re-engineering studies dropped roughly 26 percent from our original budget estimates. That said, we did end up seeing a significant increase, 26 percent, in our streamlining production hours. The positive note here is that the 26 percent increase in streamlining hours far outweighs the 26 percent loss in re-engineering due to the higher contribution margin and thus contributing to the overall increase we saw in profit.
Lastly, I’d like to make a few recommendations that I feel will benefit our group as we move forward into next year. First and foremost, due to the increasing share and high contribution margin from our streamlining production studies, I am recommending that we begin to focus more resources towards that effort. If share continues to climb and our revenue from streamlining production studies continues to outpace re-engineering, it might be worthwhile to consider a dedicated number of sales employees to focus solely on this activity to try and capitalize on our growth in this market.
Next, I’d like for us to revisit our decision on increasing the price for our re-engineering services. While it may not be possible to prove a correlation between the increased price and drop sales at this time, this may very well be the case. I believe we should return the price of the re-engineering service to $60 and see how the market reacts; if we are able to recapture a portion of our lost share for this activity it would increase our overall profit considerably when paired with the growing streamlining activity.
Finally, I believe it would be a wise choice to reconsider our payment plans for our sales employees. As you know, some of the most significant operating expenses come from the fixed salaries that we pay out sales team, my thought is that by converting the fixed salary to a base + commission schedule would help not only reduce our overall fixed costs but also allow for more profit potential for our employees. Through this plan we would create variable costs for each service depending on how well sales performed, allowing us to pay less in months where sales are low and pay more for months where sales are strong. This can also help to strengthen our sales force as underperforming