As promised at the end of Part 1 of The Right Way to Cut Business Costs, I’m going to share here in Part 2 the rest of the 5 most common areas to look to cut expenses the right way.
The remaining three are:
3) Inventory is in overload and out of control. The vast majority of shops I visit when I first do my 1-to-1 consulting are way overloaded with dead inventory that is costing them money. To me, it costs money because they could be trading this excess inventory off for credits with a supplier or sold off at a discount to generate money. It’s easy to think, “I should have those items on my shelf because if I buy in bulk it’ll be a good deal,” or “I want a lot of it in my warehouse because I don’t want to run out.” It’s all flawed thinking.
The best thing to do is what I call “Exit the Warehouse” business process, and that means finding a great partner with a great vendor or even two great vendors if need be. They can help take control of what you keep in stock, and they can help you arrive at the correct minimums and maximums for each item. It requires restricting access to the warehouse itself to a very limited amount of people, typically the owner and possibly a Warehouse Manager (this is rarely a full-time position as they tend to do other things based on the Org Chart). It also requires that you get your Truck Stocking systematized so what they carry is typically what they’d need for 80% of the work they do at 80% of the jobs they arrive at. Restocking is also part of the “Exit the Warehouse” business process.
4) Unnecessary overtime for Techs whether they’re Service Techs or Installers. You need to be watching overtime daily, weekly, monthly, quarterly, and yearly. Understand that overtime is natural in a contracting business. But it can easily get out of hand if not attended to quickly. How does it happen? If no one is watching billable hour efficiency of the Service Techs, it is problematic. Know that billable hour efficiency is basically… how many hours did your Service Techs bill for vs. how many hours did you pay them. The rule of thumb is you’re shooting for at least 50% billable hour efficiency which would be if you paid them for 8 hours, they brought you 4 billable hours.
What is problematic is an excessive callback ratio, which means the number of callbacks divided by the number of calls run. A good starter rule of thumb is to shoot for 4% or less. This means if they ran 100 service calls, 4 callbacks would occur. You can plan for this in your budgeting.
Dispatchers that don’t watch out for excessive windshield time today (which means not paying attention to drive time and traffic) is something that should be happening less often with a good dispatcher and good dispatching software.
Not creating shifts for Techs such as the 10 to 7 PM shift so they can start later and stay a little later, which fits your customers' schedules better, and you can maximize the revenue on these calls and minimize excessive overtime.
For installers, it starts with who sold the big install job and how well they accounted for projected labor. Also, it’s affected by how well prepared the Installer was before they got to the job so they knew the projected hours bid on the job. This helps them bring the job in with actual labor hours at or even a little less than was projected. Planning and good communication has a big effect on these expenses.
5) Mismanaged marketing expenses. Marketing is key to the continued growth of your company, so to be clear, I’m not advocating no marketing expenses. I’m advocating taking a scalpel vs. a hatchet to better allocate your marketing spending if costs must be contained.
The key is having a Marketing Plan in place that’s in writing. That plan has these key elements:
- Marketing Budget which is based on a percentage of sales. A rule of thumb is 4% of sales is just to maintain your customer base as customers will quit, move, or even die. And at 10% of sales, you’re reaching the beginning of aggressive spending with the desire to grow aggressively.
- Marketing Allocation which is focusing on the 3 key ways to go to market that get the majority of your dollars, time, and energy because they give you the biggest bang for your buck.
- Marketing Calendar which means you’re proactively marketing throughout the year so there is a steady stream of calls.
Again, if you need to cut expenses, you need to choose wisely. It might mean working on more of the lower cost ways to market like referral marketing and acquisition marketing. Acquisition can be as simple and low cost as buying another contractor’s phone number and paying them only when the call is run. And shoe leather, which is knocking on doors, works even today. Or even a well-planned-out laser-focused direct-mail postcard series to a smaller number of people that is mailed frequently rather than a very expensive direct-mail marketing piece only mailed once.
There are a lot of marketing techniques that are no-cost or low-cost. and the excellent books by Jay Conrad Levinson do a great job of sharing tips and techniques on this approach.
No matter what you do or when you do it when it comes to marketing, it’s critical that you measure these 3 things objectively:
- Number of calls per lead source
- Cost per call per lead source
- ROI (return on investment) which is the total sales from lead source divided by the cost of the lead source
Do what’s here in Part 2 and revisit what’s in Part 1, and you will be cutting the right expenses the right way.
(Need guidance on the right places to invest money in your business? Read my blog Stepping Over Dollars to Pick Up Dimes.)