Hey, I’m not in the bakery business or a supermarket owner, so what’s with the loaves of bread and slices reference?
Ah… we, as owners, are far and away perfectionists so we like to get it down to every little detail, but after a while we can’t see the forest for the trees… oh sorry… there’s another analogy.
The point is… when it comes to running your contracting business, you need to know the numbers you need to know if you want to be successful. The question is, what numbers do you really need to know?
When I used to do one-to-one consulting, usually I would discover the only numbers that people had available to run their business were the financial reports accountants created for tax purposes, which were all about what happened last month, quarter, or year.
Let’s face it, those reports are boring. That’s because tax accounting is designed to help you avoid or at least delay paying taxes (a good thing). The problem is tax accounting is not very helpful when it comes to helping you steer your company where you want it to go. To do that effectively, you need real-world accounting. The great Ellen Rohr, a great friend-co-consultant-franchise partner, explained the difference between tax accounting and real-world accounting to me years ago. A super valuable thing to know!
When done properly, real world accounting provides you and your managers with certain numbers you can use to run your company in real time. It involves setting up a financial dashboard with the information you need to know where you are and where you’re headed.
Ellen, who used to help my clients with the financial end of things, always said, “You don’t need to know how many slices of bread there are on the shelf when all you need to know is how many loaves of bread there are.”
Think: boxes of screws (loaves), not the number of individual screws (slices).
The biggest problem is the temptation to drill down too much or try to maintain “real time” inventory down to the last screw. Some people go crazy and start deconstructing the slices into their original ingredients (flour, salt, yeast).
In this case, the devil is in the details. For starters, you shouldn’t be in the warehouse business. You just need to know who took what in what quantity so you know what should be happening vs what is really happening. In other words, if a Tech is taking or using a certain amount of a certain part, does that make sense given his calls and sales numbers? If so, great, if not, it’s a problem you’ll need to address. You’ve either got the best salesperson—or an unexpected and unwanted partner.
If you do multiple trades, you need to know basically… is the sale a service or an install? Break it down so you can arrive at a good rule of thumb, which typically is 10-25% of sales being for material for service work and 25-40% of sales being for material for install.
Beware: You may run into some obstacles if you have a pushy accountant who isn’t interested in helping with real world accounting or a bookkeeper who is focused on counting all the things rather than focusing on reporting on the things that count the most and move the needle.
The other problem I see is when an owner is not familiar with the financial stuff and wants to be hands off or just leave it to others.
I had one client who had two controllers who were both CPAs and they ended up competing with one another and made things very difficult. With our work and Ellen’s help, he ended up letting them go once he became financially literate and focused on real-world accounting. He was finally able to get a good bookkeeper on board who would deliver the critical numbers he needed to see in the time he needed to see them. Ultimately, his company grew and he earned the right to add more depth to his financial team.
Most companies do not need a high-level CPA in this role, just someone who gets the assignment who can track the numbers you need and deliver the information in a clear format as required: daily, weekly, monthly, quarterly and yearly.
Key Numbers for Service & Repair Companies
Note: The following is only a Rule of Thumb, but it’s based on experience in traveling the
country and speaking with other industry leaders and with my work with clients.
- Marketing is typically 4% to 10% (or more) of last year’s gross sales. 4% being conservative and typically a mature company just looking to replace customers who get sick, move, quit and more. And 10% (or more) is for a company that is highly aggressive and looking to continue to grow and/or grow fast. (Note: You want to run your company on percentages because as you go and grow the numbers get very scary. If I say spend 10% of sales on advertising and you’re at $1 million that means you’d be spending $100,000, and next year you are at $4 million and you only spend $200,000, that’s only 5%, meaning you’ve dropped the percentage.)
- Staffing Ratio affects the numbers. A desired ratio of 2 employees in the field making money for every 1 employee on the inside or 2:1. Yes, 1.5 to 1 is still acceptable. But typically a 1 to 1 ratio is a danger sign.
- Gross profit should be 50 to 70%. The more service you do the more it should lean more toward 70%, and the more install you do the more it tends to lean toward 50%, and there are reasons for this.
- Having a high net profit of say 8% to 20% is only necessary if you need it to show the banks regular reporting or you’re preparing to sell. The focus needs to be on hitting top line gross sales and gross profit targets first and foremost. Not one or the other… both! (Note: Another reason I don’t get overly focused on net profit is I know I can “massage it” anyway I want by paying the owner and managers more salary, profit sharing, and bonuses to name a few ways. Plus, I can load up on other types of compensation and perks.)
- A CSR conversion rate of 75% or higher.
- A Service Tech conversion rate of 75% or higher.
- $250,000 per truck per year was a good goal in the past. The goal has been trending toward averaging $300,000 per truck per year. The best shops are averaging $350,000 and up. Anything below $250,000 is a caution flag.
- I like to see a budget line item for year-round recruiting, hiring, and training that is at least 0.5% to 1% of last year’s sales
- 10% to 20% material cost is to the total sales for a purer service and repair company.
- 25% to 40% material cost is to the total sales for purer new construction and remodel company.
Get focused on these key percentages and engineer a change that will get you focused on making the real-world accounting numbers work for you.