Firewatch March 2022: Director's Forum Maximize Your Labor: Rethinking Your Business Needs
by Jeff Wyatt
Every conversation I have with business leaders inside, and outside, our industry about business challenges ends up on the topic of labor. There is no doubt we have labor issues. 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?
One of the most important things you can do right now is make the most of the labor force you have. Here are the areas we will briefly cover in this article:
Prioritizing your revenue
Evaluating your margin by job
Prioritizing Your Revenue What is the math we should know in business? Revenue minus cost of goods sold (COGS) equals gross margin. Margin minus overhead (the SG&A or selling, general, and administrative expenses) equals net profit. Net profit ultimately should become positive cash flow. So, this all starts with revenue. And the labor you need to deliver your revenue.
Let’s take a close look at what steps you should take to prioritize your revenue. This will determine how much labor you need.
First, you need to consider the level of urgency amongst your customer base for the month. This includes the size, scope, and value to your business of each customer and each job. It is important to separate work accordingly so you are utilizing your labor, first and foremost, where it must be. Second, consider if that work is profitable work. You are in the business to make a profit, aren’t you? Don’t feel like you must service anyone who calls. 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.
There’s a theory that 80 percent of revenue comes from 20 percent of customers. 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. On the other hand, if you focus on the good business, you might not need to hire as much.
Evaluating Your Margin by Job After 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. Some of us in the industry have inspection software that helps us see the margin by job. Others must do this manually. This is important: PLEASE calculate the profit margin even if you have to do it manually. It is not that hard to do. Each day, you should know and understand what each completed job entails. At a minimum, you should know the hours, parts, and travel cost. Come up with a burden rate for your labor so you can include benefits and overhead. With these combined items, look at what you plan to charge the customer and calculate a gross margin. Each person must decide what is acceptable to them, but we can all agree it should be more than zero percent, right?
By doing this exercise, you might identify issues with your workload that need to be addressed. Please consider downloading a “margin vs. mark-up chart” so your team knows how to properly calculate the right margin for your business.
Terminating Customers I often hear people say they don’t service a certain kind of customer for a variety of reasons. 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. Or perhaps they didn’t pay you in a reasonable timeframe. Now think about all your customers today. How many fit that description?
We tend to focus on these questions when we are considering adding these customers. In reality, most of us already have lots of these customers. If you eliminated customers that fit your “do not service” list, consider how many would get terminated today. 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?
Take the time and figure out who you should consider eliminating from your service schedule. Take a look at labor costs being spent on these customers. Consider the hiring front and how many people you’re hiring to service this particular type of customer. All things need to be considered when re-evaluating whether to terminate or keep a customer.
Technician Utilization 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.
Utilization is simply how many hours you paid for the labor you have each day versus how many hours a customer was charged. So, on average, companies utilize 70 percent of the labor they pay for. Do you know your number? Take a week and figure this out. You will either be impressed or shocked by your findings.
Here’s the thing. When you consider how well you schedule this labor, or how well they schedule themselves, and what you do and don’t charge for, you will soon realize what percent of your day is paid by the company versus the payments the serviced company should be paying you but are not. The best rates are over 90 percent.
You will always have some lost time for training, PTO, and various other reasons. But imagine if every day your labor team was servicing customers 7 hours out of every 8-hour business day compared to the 5.5 hours out of an 8-hour business day that is more typical across the industry today. Consider how much labor you would then need (or not need) to hire.
When you look at your business and truly consider these items discussed above, you just might find you do not need as many technicians as you thought. I certainly hope this helps in one way or another. We owe it to ourselves as business owners to make sure we have the right labor for the right business in all the right places.
Jeff Wyatt is region three director and the CEO of CertaSite headquartered in Indianapolis, Indiana.
This article is from the March 2022 issue of NAFED's quarterly magazine Firewatch.