Before a building is erected, the land upon which it will stand must be properly prepared. The land may have to be cleared. Permits must be filed. Foundations must be properly dug and poured. These prerequisites are needed because without solid foundations, buildings would be in danger of collapse.
This also is true about your business. Your training and expertise are similar to the clearing of the land. Your license to perform your trade exists because you filed for the license and passed the requirements needed to fulfill your application for licensure. But how do you define the foundation of your business?
It’s easy if you think about it. Without technicians who can perform work for consumers and consumers who will pay you for the services you perform, your business is headed for collapse. Therefore, your business foundation consists of good employees and loyal customers.
If you are a one-person operation, you are not only the owner — you also are the technician and administrative staff of your business. You are in total control of the quality you deliver to consumers. When you deliver excellence and value to consumers in exchange for the dollars they pay you for your services, you turn them into loyal clientele who will avail themselves of your services whenever they need or want PHC services performed. That makes for a strong business foundation.
As your business grows beyond your ability as a one-person business, your need for employees arises. To ensure the delivery of the same excellence and value your loyal clientele have come to expect from your business, you must hire employees with integrity, loyalty and an aptitude similar to yours.
This means you must not only sagaciously vet candidates for employment, you must also know how to compensate employees in a manner allowing you to retain them in your employ. Good employees are hard to come by. They are only human, just like you. I’m sure you want to earn the most you can for your expertise and labors. It’s only natural that they do, too.
When figuring how much to compensate employees, you must take into consideration their worth to your business. Put yourself in their position. What compensation would you want if you worked for them and would like to stay in their employ?
Proper compensation consists of salary, performance incentives and benefits such as paid vacation, holidays and personal time; health insurance; retirement funds; pleasant workplace atmosphere; safe and comfortable working conditions; career security; and respect.
Yes, I said respect. Respect is something that must be earned and mutually enjoyed. If you want your employees to respect you, you must respect them. It also is true for your relationship with your clientele. Respect helps to keep your foundation intact.
All those items I have listed as compensation add tangible and intangible expenses to your budget. They must be considered when calculating your true operational costs and developing properly profitable selling prices.
Calculating true operational costs
Businesses can lose money, breakeven or earn a profit above their true operational costs. Losing money and breaking even, however, are not the goals of real business people. I use the phrase “real business people” because there are pretenders in the business arena who haven’t got a clue as to how to run a business properly. They are the ones who breakeven or, worse yet, lose money. And they destroy their chosen field of business for their competitors and the consumers at large.
The only reason for which business exists is to recover costs and earn a profit above those costs. Therefore, it is imperative that you consider all legitimate, proportionate costs and apply a proper profit margin when calculating your selling prices for any task.
The proportionate salary, performance incentives and benefits for technicians make up the direct labor cost of any task. The pleasant workplace atmosphere, safe and comfortable working conditions, career security and respect — as well as a myriad of other true operational expenses such as administrative salaries and related expenses, vehicles and insurances — are overhead costs every PHC business incurs.
The chart in this article shows hourly tech salaries in $5 increments starting at $20 per hour and ending at $60 per hour. I’ve added 25 percent of the hourly rate to cover salary-related expenses such as FICA matching funds, unemployment and disability insurance, health insurance, etc. Then, in $25-per-hour overhead expense increments starting at $75 and ending at $150 per hour, you see the cost of labor and overhead for a qualified service technician and properly equipped service vehicle.
When considering the hourly wage rate you will offer your techs, keep in mind that you should pay your technicians commensurate with their abilities. Also keep in mind that politicians in our great nation are trying to increase minimum wage standards to $15 per hour. It means people who work in fast food restaurants will be getting $15 per hour. If they can, that’s great — more power to them.
However, qualified service technicians have spent more time and money learning and perfecting their expertise than fast food restaurant workers. Therefore, they deserve more.
The information in the chart falls in line with what I believe a qualified tech/properly equipped vehicle costs a PHC service contracting firm if it sells all its tech hours all the time, inclusive of direct labor, salary-related expenses and overhead costs. In the United States, I believe that range to be between $100 and $250 per tech hour, dependent upon the segment of the country and if all available tech hours are sold.
The lower spectrum of costs applies to areas where salaries and operational costs are low. The higher range of costs reflects areas with higher costs of living and business operation. The numbers in between reflect costs in other varied areas.
The point is that the lowest labor/overhead cost is $100 per tech hour. It only goes up from there. The per-hour cost increases if all available tech hours are not sold in a fiscal year. If a contractor only sells 70 percent of available tech hours, the $100 cost becomes $142.86 per tech hour sold. To recover that cost, a contractor would have to charge $142.86 per tech hour for labor and overhead. If the contractor wanted to earn a profit, he would have to charge more than $142.86.
At the higher end of the chart, we see the labor/overhead cost per tech hour to the contractor is $225 if all tech hours are sold in a fiscal year. If the contractor sells 70 percent of available tech time, his cost will rise to $321.43 per tech hour sold.
Do the math, build the foundation
Since your techs and customers make up the foundation of your business, you must be in control of all your numbers for your foundation to maintain its reliability and capability to support your business.
If you don’t charge enough to compensate your techs in a fashion that will keep them from looking for greener pastures at another contractor’s business, you could lose a very important asset of your business.
Without your techs, you cannot serve your clientele. Techs who leave your employ could also take some of your existing customers with them. In which case, you not only weaken your foundation by losing a qualified tech; you further weakened it by losing a valuable client.
The moral of this article is:
• Know how to properly identify and calculate your true cost.
• Choose a profit margin that can give you the opportunity to get you where you want to go.
• Apply that profit margin to your true task cost.
• Develop properly profitable selling prices for your services.
• Deliver excellence and value to your clientele.
• Compensate your employees in a fashion that will allow them to be content in your employment and not tempted to stray.
• Don’t be afraid to place your pricing where it must be to deliver excellence to your clientele while compensating your employees in a wise and thoughtful manner.
It’s not difficult to do. If you need help, give me a call. Doing the right thing will make your business foundation strong. And strong foundations can hold up great buildings. Build your business in a financially prudent manner and enjoy the benefits of a strong foundation.