Originally published in The Frederick News Post
By Glenn Zior
Most popular answer to the question is “I think so”. But how can you be sure?
Are you in a service business such as :Lawn Maintenance, Maid Service, Pool, Plumber, Electrician, Painter, Home Improvement and many more.
Many businesses rely on their accounting software to determine if they are making money. There is a major flaw with using the Profit and Loss statement to manage your business. Why? It is too late. What do I mean by that? The P&L is generated after the month is over. It can take weeks after the month is closed to get all the expenses entered. Another flaw is infrequent expenses such as vehicle repair or bi-weekly payroll that can have three payrolls in some months. This can show as a loss for the given month even though the company is profitable overall. In addition, if you are losing money and you make an adjustment, it can take months to figure out if it worked.
Would you like to know your profit on a daily basis and How can you do this?
Remember what are you selling as a service company - your time and expertise. Yes, you do sell materials but that is needed to sell your service. You will be marking up the materials to cover your overhead and profit but in most cases the customer could buy the materials themselves. You do not want to determine your profit based on the amount of material you sell. Focusing on the labor is the only consistent way to ensure a profit.
So, how can you do this?
Determine the number of billable hours by employee
Using the number of production employees (i.e. billable employees doing the work, not office or overhead employees) multiplied by the number of billable hours in a week. Any load, unload, gas fill-up etc. time should not be included. For example, an employee arrives at 8AM but doesn’t leave the shop until 8:30, takes a 30 minute lunch and returns at to the shop at 5:30 and clocks out at 6:00. The potential billable hours for that employee is 8.5 hours a day multiplied by 5 days a week which equals 42.5 hours a week.
Calculate the number of billable weeks in a year
If your business is seasonal, you may have a reduced number of billable weeks in a year. For this example, let’s use 40 billable weeks multiplied by three employee’s working 42.5 hours a week. This gives us 5100 hours a year to sell. These hours must cover all expenses and make a profit.
Determine your expenses
Evaluate all the expenses need to run your company. This should not include material costs. This number can be pulled from previous P&Ls. For this example, let’s estimate the expenses at $180,000/year and add a 10% profit. This is a total of $198,000 in expenses.
Calculate your billable rate
Dividing the $198,000 by the 5100 labor hours will give you the billable rate of $38.82. If that billable rate is not achievable in your industry, you will need to make changes most likely by identifying ways to reduce your expenses. In our example, each employee would need to bring in $330 every day to cover the expenses and target 10% profit.
Evaluate job bidding accuracy
When you bid a job, you estimate the number of hours you expect it to take (including travel time) and multiple it by $38.82. You need to track how many hours you bid against the number of actual hours. This can be done on a spreadsheet or by utilizing a readily available software package. By evaluating this on an on-going basis, you can learn and adjust your estimating and efficiency.
Your key in this example to making a profit is that you need to sell 5100 billable hours per year AND the employees must meet the budgeted hours for the job. Rather than a sales board of money, switch to a sales board of hours. You will be able to tell quickly if you are making money and adjust appropriately to guarantee a profit.
By looking at your company in this new way will allow you to measure your company’s profits in a timely manner.
Glenn Zior is a certified SCORE Frederick mentor. He has owned and operated several small businesses including a software company and a lawn care company.