Utilization is simply how many hours you paid for the labor you have each day versus how many hours a customer was charged. I’ve looked at many businesses through the M&A world and found that the average business has a gross utilization of below 70 percent. All things need to be considered when re-evaluating whether to terminate or keep a customer. Consider the hiring front and how many people you’re hiring to service this particular type of customer. Take a look at labor costs being spent on these customers. Take the time and figure out who you should consider eliminating from your service schedule. For those of us in the acquisition world, how many of those customers did we inherit and now must service because we paid for them? If you eliminated customers that fit your “do not service” list, consider how many would get terminated today. In reality, most of us already have lots of these customers. We tend to focus on these questions when we are considering adding these customers. Now think about all your customers today. Or perhaps they didn’t pay you in a reasonable timeframe. Maybe it is because the customer is difficult to service or they demand a low price that makes you wonder why you would do the job in the first place. I often hear people say they don’t service a certain kind of customer for a variety of reasons.
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mark-up chart” so your team knows how to properly calculate the right margin for your business. Please consider downloading a “margin vs. Each person must decide what is acceptable to them, but we can all agree it should be more than zero percent, right?īy doing this exercise, you might identify issues with your workload that need to be addressed. With these combined items, look at what you plan to charge the customer and calculate a gross margin. Come up with a burden rate for your labor so you can include benefits and overhead. At a minimum, you should know the hours, parts, and travel cost. Each day, you should know and understand what each completed job entails. This is important: PLEASE calculate the profit margin even if you have to do it manually.
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Some of us in the industry have inspection software that helps us see the margin by job.
On the other hand, if you focus on the good business, you might not need to hire as much.Īfter being involved in nearly fifty transactions throughout my career where a business is being acquired, I found it surprising how many companies were not making any profit on a service call when real cost was factored in. I see so many companies struggling to hire qualified labor only to see the work itself isn’t qualified by the company as good business. There’s a theory that 80 percent of revenue comes from 20 percent of customers. Third, what is the business aspect of the customers you prioritize? How easy are they to service? How easy or difficult are they for your office staff to manage? And, perhaps most importantly, what is their payment history? By evaluating your customers who are due for service next month, you can determine which customers remain on your schedule and which ones fall under the “to be reviewed” category for subsequent months. You are in the business to make a profit, aren’t you? Don’t feel like you must service anyone who calls. Second, consider if that work is profitable work. It is important to separate work accordingly so you are utilizing your labor, first and foremost, where it must be. This includes the size, scope, and value to your business of each customer and each job. This will determine how much labor you need.įirst, you need to consider the level of urgency amongst your customer base for the month. Let’s take a close look at what steps you should take to prioritize your revenue. And the labor you need to deliver your revenue. Net profit ultimately should become positive cash flow. Margin minus overhead (the SG&A or selling, general, and administrative expenses) equals net profit. What is the math we should know in business? Revenue minus cost of goods sold (COGS) equals gross margin. Here are the areas we will briefly cover in this article: One of the most important things you can do right now is make the most of the labor force you have. But are the labor issues as bad as you think they are? Should we really be hiring as fast and aggressively as we might think? Are we focusing on the work that needs to be done without thinking about the type of work itself? What other things should we be thinking about as they relate to this challenge in our business? And, by the way, are you sacrificing your own profitability blindly by not addressing the math in this equation? Every conversation I have with business leaders inside, and outside, our industry about business challenges ends up on the topic of labor.
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