How to cut overhead
Who’s paying you for your unproductive time? Ask yourself these questions:
- How do you make money when you have no calls to run today?
- How do you make money when you have technicians who are not producing the same amount of billable time?
- How do you make money when you’ve lost a technician to your competitor and you can’t run all the calls now that you are short a tech?
- How do you make money in this business when your techs call in sick when you need them the most?
- How do you make money when your technician’s truck breaks down, and now he can’t run calls?
This is a short list, and I’m sure you all have more you can add. So, what’s the answer? It’s simple, really.
Before I spill the beans, I want to run you through the basics of coming up with the correct selling price. This won’t be a “market up vs. margin” conversion; I think I beat that dead horse a couple of articles ago.
The first thing you need to know is what your overhead is costing you per year. Here’s a sample overhead list to get you started:
- Owner salary (yes, the owner takes a salary if they are working in the business);
- Overhead payroll (call center, dispatcher, bookkeeping, management, etc.);
- Vehicle expense and depreciation (if you aren’t leasing);
- Building rent;
- Bad debt;
- Credit card fees;
- Customer chisel fund (contact me if you know about that line item); and
- Etc. (all amounting to $1,500,000 in overhead).
Next, let’s calculate cost of your productive time. Let’s say you are paying your techs $35 per hour, and burden is costing you $6 per hour, making wage with burden (taxes, medical, workers’ comp, company pension plan/401(k) matching) $41 per hour. Multiply this by 40 hours per week and you have $1,640, fully burdened.
Your direct labor cost per year is $85,280, which is $1,640 multiplied by 52 weeks (paid vacation of two weeks included). Multiply this by the six technicians, and your total direct labor cost per year is $511,680 (assuming no overtime).
Take your overhead of $1,500,000 and your direct labor cost of $511,680, and your total cost (without materials) is $2,011,680.
Now, divide this total by the productive hours you have available at 40 hours per week per person — don’t forget you gave them two weeks paid vacation — leaving you with only 12,000 hours of billable time per year, which is 2,000 hours per technician multiplied by six technicians.
Take your $2,011,680 and divide that by your 12,000 hours, and you have your breakeven of $167.64 per hour. If you think this is reality, I need to you check your idea of reality.
This scenario does not figure into the equation those questions I laid out in the beginning of the column. Each technician starts out with 2,080 hours per year. The company generously allows for 80 hours paid vacation, bringing the total amount of production to 2,000 hours.
Now let’s figure in the unproductive time that every company faces. Assuming you aren’t perfect — if you are perfect, then move on to another column titled, “For Holier Than Thou” contractors.
Not providing enough calls to run causes your technician to work less than eight hours per day. Having underperforming technicians who bill less than the high- or average-performing technicians causes you to bill less than expected. A technician leaves your company and it takes you four weeks to find someone who can fog a mirror, and you hire them. Then another technician leaves you, because they were recruited by the first tech who left you.
You are now out four more weeks, or more. Plus, you have a new guy that started four weeks ago and he’s not what you thought he was, and you are looking to replace him. Just to dogpile on this situation, you had a tech go on workers’ comp light duty, and two of your six trucks are in the shop getting repaired while yet another is getting body work done for having a side swiped into a mailbox. If this sounds too close to home, I get it — I lived through this, as well.
The key to surviving this scenario is to know it’s possible. Figure how much time during a year an average technician will be productive. I’m going to ask you to take a giant leap of faith with me right now. I have the stats to back this up. Don’t be surprised if your productive time is less than 50%; in most cases, it’s closer to 40%.
So, let’s look at what our selling price would be with a 50% efficiency. We said we were going to sell 12,000 hours; however, knowing we recover the cost for those hours we don’t sell at 100% efficiency, this leaves us with only 6,000 hours to sell. That math looks like this: Total Cost = $2,011,680 / 6,000 hours sold = $335.28. We now need $335.28 per hour sold just to cover our cost. But WAIT!
Where is our profit? The $335.28 only covers our cost. Take that in for a moment.
If you’ve read my previous article, “Know your numbers,” you know the math already. So, let’s take a look at what our selling price would be when we generate a 25% net profit. The $335.28 represents our breakeven, now you divide that number by 75%.
25% Profit + 75% Cost = 100% Selling Price
Your selling price needs to be $447.04 per hour sold.
After you come to grips with what your true production equals, then and only then, can you come up with your correct selling price. It doesn’t stop there. You need to measure your productive hours sold daily, weekly, monthly, quarterly, annually, forever. What gets measured gets managed. Don’t lose sight of your true efficiency.