Eight essential business vital signs you must monitor
Time is fleeting. Once an hour is gone, it is gone forever. This is especially true in the contracting business where you sell hours of service. But, the cost to you, the contractor, for each hour will linger over your head until it’s paid. If you don’t bring in that cost at the time the hour is expended, your subsequent hourly costs will rise whether you admit it or not.
In the contracting business, hourly expenses are not constant, but rather in a state of flux. Monitoring your business vital signs is essential to your business health.
# 1: Know the true operational costs you will incur. That’s the only way you can know whether your proposed selling price is at, above, or below the cost you incur to produce the service you provide to consumers. In order to calculate your hourly technician cost, you must first identify all your legitimate tangible and intangible business expenses.
# 2: Know the amount of hours you have to sell. There are 2,080 hours per tech in a business year (40 hours a week x 52 weeks) for which you pay. But, you don’t have 2,080 hours to sell. If you offer two weeks for vacation/personal days and six holidays per year, the number of potentially revenue producing hours decreases to 1,952.
But, it doesn’t end there. You also must consider daily non-revenue producing hours for tasks such as checking and restocking vehicles as well as tech’s share of administrative paperwork. At an hour a day, and taking into consideration holidays and vacation/personal days, you must deduct another 244 annual hours. This brings your potential revenue producing hours down to 1,708 per tech. Since, you don’t have a crystal ball and cannot predict when consumers will need your services, logic suggests you use this true constant adjusted to your vacation/personal/holiday schedules.
# 3: Monitor the cost to you to produce an hour of service. Divide your projected total annual operational costs by the constant number of hours (method described in #2) you have sell. Keep in mind, costs should be apportioned to number of techs. If you have two techs your number of hours would be 3,416, and so on.
You may be thinking no one sells 1,708 hours per tech every year. You would be absolutely correct. During normal economic times you will probably sell no more than 70 percent of your available time. You will sell less in recessional times and more in boom times.
Hourly operational costs based on selling all your available hours will therefore increase since no one sells all their available hours all the time. But, by using your maximum available revenue producing hours to arrive at your cost, you will have your true minimal cost to produce an hour of service.
# 4: Know the amount of hours you will probably sell. This will help you with vital sign #5.
# 5: Choose the profit margin that will get you where you want to go. It is critical to your success potential. If you only sell 70 percent of your available time, you would need a 30 percent profit margin to recover the cost you incur (based on selling all your available time) for your hour of service. In this instance, it would be wise to use a profit margin higher than 30 percent.
# 6: Know which pricing method is best. You only have two choices - time and material pricing or contract pricing. Time and material pricing is problematic. Neither you nor your client knows the selling price of a task until it’s completed. After you have incurred the cost of providing the service, the consumer may balk at the price causing you and your client grief. While the client has had the job done, you may not earn a profit or recover your full cost. That can present an argumentative situation
Contract pricing is a much better choice. It describes the task and gives the customer the price, and you the opportunity to secure payment, before starting the work.
Both methods require you to know your true operational cost and apply a proper profit margin. However, with T & M pricing your rates are kept artificially low (possibly below your true cost) to compete with ignorant contractors who don’t properly monitor their business vital signs. Contract pricing allows you to calculate your selling prices based on your average task costs and earn the reward you deserve for the excellence you deliver.
# 7: Monitor your average time spent traveling to each client. Your trip to Mrs. Smith’s home may be 5 minutes one day and 55 minutes the next time she needs your service because your previous call to another customer was further away. If this is the trend in your business, your average travel time would be 30 minutes.
# 8: Monitor the labor, overhead and material costs you incur for each task to arrive at the average cost of individual tasks.
Let’s look at the importance of monitoring business vital signs for an everyday plumbing task. I’ve chosen the replacement of a 17 gauge chrome plated tubular P trap as an example.
Taking into consideration introduction and initial discussion with client; taking a look at the circumstances; explaining what’s needed to client; quoting a price; writing up a contract/invoice; getting client’s written authorization; getting paid; setting up the work area; gathering tools and material; replacing the trap; cleaning up the area; putting tools back on truck; and thanking the client for their patronage takes between 50 and 70 minutes.
The average time without travel would therefore be one hour. In the example, we’ll use 30 minutes for the average travel time.
The labor/overhead cost range (that’s the cost to you the contractor) for one service tech/truck in the U.S. is between $100 and $250, based on selling all available regular business hour time whether you believe it or not.
The trap and additional material such as slip nuts, washers, solder, acetylene, flux etc., as a single purchase (not multiple or case lot), costs you $40 to $50. We’ll use the lower $40 cost in the example.
Figure 1 shows the average minimal cost to the contractor (in red with yellow background) to provide the service. It also indicates selling prices using a 30, 40 and 50 percent profit margin when 100 percent of available tech time is sold all the time. Figure 2 shows the minimal cost to contractor (in red with yellow background) when only 70 percent of available tech time is sold.
The differences in cost prove the reason it is imperative to constantly monitor your business’ vital signs. For my assistance checking your business’ vital signs or for any contracting business matter, I’m as close as the phone. Just pick it up and dial.
Richard P. DiToma is a contracting business consultant and active PHC contractor with over 41 years of experience in the PHC industry. To receive more info about his contracting business coaching, consultations, business books, seminars with solutions, customized price guides, business forms, etc., contact Richard by phone at 845/639-5050, email firstname.lastname@example.org.