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Hey, I’m not in the bakery business or a supermarket owner, so what’s with the loaves of bread and slices reference? Ah, as owners, we are far and away perfectionists, so we like to get it down to every little detail. However, after a while, we can’t see the forest for the trees — oh, sorry, 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-on-one consulting, I would usually discover the only numbers people had available to run their businesses were the financial reports accountants created for tax purposes. These 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). Tax accounting is not very helpful in helping you steer your company where you want it to go. To do it 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. This is 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 about 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 are on the shelf; 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 deconstruct 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 only need to know who took what in what quantity to know what should be happening versus what is actually happening. In other words, given his calls and sales numbers, if a technician is taking or using a certain amount of a certain part, does it make sense?
If so, great; if not, it’s a problem you must address. You’ve either got the best salesperson or an unexpected and unwanted partner.
If you have multiple trades in your company, you must know if the sale is a service or an install. Break it down so you can arrive at a good rule of thumb: typically 10 percent to 25 percent of sales allocated for service work material and 25 percent to 40 percent of sales for install material.
Beware: You may encounter some obstacles if you employ a pushy accountant who isn’t interested in helping with real-world accounting or a bookkeeper who is focused on counting all things rather than reporting the things that count the most and move the needle.
The other problem I see is when an owner is unfamiliar with the financial stuff and wants to be hands-off or leave it to others.
One of my clients had two controllers; both were certified public accountants (CPAs) who competed against each other and made things very difficult. With our work and Ellen’s help, he let them go once he became financially literate and focused on real-world accounting. He finally got a good bookkeeper on board who delivered 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 can track the numbers you need and deliver the information in a clear format as required: daily, weekly, monthly, quarterly and yearly.
Ten Key Numbers
The following are only rules of thumb, but they’re based on my experience traveling the country, speaking with other industry leaders and my work with clients.
1. Marketing is typically 4 percent to 10 percent (or more) of the previous year’s gross sales. However, 4 percent is conservative; typically, a mature company looking to replace customers who get sick, move, quit and more. Companies at the 10 percent or more spot are highly aggressive and looking to continue to grow fast.
You want to run your company on percentages because as you go and grow, the numbers get very scary. If I say, spend 10 percent of sales on advertising and you’re at $1 million, it means you’d be spending $100,000. If next year you’re at $4 million and you only spend $200,000, that’s only 5 percent, meaning you’ve dropped the percentage.
2. Staffing ratio affects the numbers. A desired ratio is two employees in the field making money for every employee on the inside (2 to 1). Yes, 1.5 to 1 is still acceptable. However, a 1-to-1 ratio is a danger sign.
3. Gross profit should be 50 percent to 70 percent. The more service you do, the more it should lean toward 70 percent; the more installations you do, the more it tends to lean toward 50 percent. There are reasons for this.
4. Having a high net profit of 8 percent to 20 percent is only necessary if you need it to show the bank 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!
Another reason I don’t get overly focused on net profit is I know I can “massage” it in any way I want by paying the owner and managers more salary, profit-sharing and bonuses. Plus, I can load up on other types of compensation and perks.
5. A customer service representative conversion rate of 75 percent or higher.
6. A service tech conversion rate of 75 percent or higher.
7. A good goal in the past was to spend $250,000 per truck per year. The goal has been trending toward an average of $300,000 per truck per year. The best shops are averaging $350,000 and up; anything below $250,000 is a caution flag.
8. I prefer to see a budget line item for year-round recruiting, hiring and training that is at least 0.5 percent to 1 percent of last year’s sales.
9. About 10 percent to 20 percent of material cost is to the total sales for a pure service-and-repair company.
10. About 25 percent to 40 percent of material cost is to the total sales for pure new construction and remodeling company.
Get focused on these key percentages and engineer a change that will get you focused on making real-world accounting numbers work for you.