If you currently run an oilfield service company you have undoubtedly asked yourself the question, “How are we going to scale back on the business to get through this recent downturn?” The answer to this question is ultimately “it depends” due to the size of your company, its market share position, how frugal you currently run your business etc. but holding all things constant here are 3 high level strategies.
3 High Level Simple Strategies to Keep Your Business in Line:
1. Cut your Capital Asset Additions to Zero.
Unless you have some sort of new expansion area (whereby your revenue expectations are undoubted or you have been given a firm commitment by one of your large capitalization E&P customers) you should cut your capital asset additions to zero and then only spend what is absolutely necessary for the maintenance of your current suite of assets.
2. Implement a Salary Expense Reduction Strategy
Next to capital assets, salaries and the benefits associated with those salaries (RRSP plans, benefits, long term disability, etc.) are the biggest expense of your business. If you have not done so already you should be cutting all marginal employees (low production individuals), implementing a hiring freeze and / or implementing a straight across the board 10% to 20% reduction in salaries. Having seen a few downturns most companies who keep salaries expense at 5% to 7% of revenue typically come out the other side of the downturn in tact. For example, let’s say over the next year you are budgeting to generate $8,000,000 of revenue. In keeping your salaries and benefits costs at 5% to 7% of your revenue, this would mean you spend no more than $400,000 to $560,000 over the next year to cover all salaries and benefits of the business.
3. Keep your Selling, General, and Administrative (SG&A) costs (not including Salaries) at 2% to 3% of revenue or less on a rolling 12 month basis.
SG&A costs are all of your non-direct job related costs and include things such as rent for facilities (office and shop), costs for meals and entertainment, costs of advertising and promotion, phone expense and travel expenses (just to name a few, but the key is these are any costs your business incurs not related directly to the jobs your business does for its customers). For example, let’s say over the next year you are budgeting to generate $8,000,000 of revenue. In keeping your SG&A costs at 2% to 3% of your revenue, this would mean you spend no more than $140,000 to $240,000 over the next year to cover all non-direct job related costs of the business. As an oilfield service company, try not to overthink where you are going to cut as the most likely area is to reduce spending on rent for your facilities (which may or may not be possible as you may be locked in) and emphasizing an overall frugalness in regards to expense expenditures in the business.
Article by Chad Robinson.
You can read more about Chad Robinson here.