Al Levi: Loaves of bread, not slices
Get to know your financials and what the numbers mean.
I’ll admit it. I’m not a giant fan of reading financials and management reporting. I’ll also admit that I feel I can help any business be more successful through proven and repeatable systems, but they’ll still fail if they don’t know the numbers.
That’s why I make sure they’re in good hands when it comes to mastering this particular power. Financial Power is one of the 7 Power Concepts it takes to run any business, and that’s why I write and speak about it all the time.
Yes, I can read a financial statement and I know what the numbers mean. And yet, it still bores me! This is because I read financial reports where obsessive-compulsive owners and/or their accountants get busy generating tons of paper (digitally today) and all of it makes it even more mind-numbing.
The great Frank Blau told me once, “If you can’t run your company with a pad and a pencil, the computer will just obscure the facts.” That doesn’t mean the computer isn’t helpful, because it is. However, sometimes it generates too much of the wrong things.
My good friend and financial expert, Ellen Rohr, handles the financial one-to-one work with my clients. She teaches them a ton, but one thing in particular that I like is she teaches them, “You don’t need to know how many slices of bread there are on the shelf when all you need to know is how many loaves of bread there are.”
When I’m working one-to-one with clients and she’s not involved, I teach my clients the following: Focus on the basics of real-world accounting and know that this is not the same as tax accounting.
Real-world accounting done properly gives owners and managers real numbers designed to run their company in real-time as opposed to the tax accounting that your accountant typically does, designed to help you avoid or at least delay paying taxes — a good thing. But, only real-world accounting will help you run your company with a financial dashboard to know where you are and where you’re headed.
Key Numbers for Service and Repair Companies
Here are the loaves of bread I pay attention to:
Note: The following is only a Rule of Thumb, but it’s based on experience in traveling the country and speaking with other industry leaders.
- Marketing is 4% to 18% of last year’s gross sales. Four percent being conservative and typically a mature company just looking to replace customers lost to moving, quitting and yes, dying. Ten percent is the first mark where a company is marketing aggressively, and know that I’ve worked with plenty of fast growers who spend up to 25%.
- A desired ratio of 2 employees in the field making money for every 1 employee who doesn’t turn a wrench or a screwdriver. 1.5 to 1 is still acceptable. But, when you’re operating at 1 to 1 it’s a red light potential danger sign. Note: The boss/bosses who are on the inside count as those not using the tools and bringing in money.
- A good goal for gross profit should be in a range of 50% to 70%. A good goal for service work is typically 75% gross profit. That’s because there’s usually no bidding involved. Customers just want the work done and the headache gone. A good goal for install work is typically 50%. And that’s because most customers will shop at least two to three contractors for a high-ticket install. The more service work you do, the more it should lean toward 75%, and the more install work you do, the more it tends to lean toward 50%.
- Having a high new profit of say 8% to 20% is only necessary if you need or want to show the banks or are preparing to sell. The focus needs to be on hitting top line gross sales and gross profit targets first and foremost.
Note: Another reason I don’t get overly focused on net profit is I know I can manipulate it anyway I want to by paying the owner and managers more profit sharing and bonuses and loading up on other types of compensation and perks.
- A CSR conversion rate of 75% or higher is the metric of turning legitimate incoming calls into booked calls.
- A service tech conversion rate of 75% or higher (and the higher it is tends to favor whether a minimum service fee is part of it) is likely because customers are more inclined to say yes to avoid this fee and they’re more invested in the outcome.
- In the past, $250,000 per truck per year was a good goal. Now, the goal has been trending toward averaging $300,000 per truck per year. The best shops are averaging $350,000 and up. Anything $250,000 and below is a caution flag.
- I like to see a budget line item for year-round recruiting, hiring and training that is at least 0.5% to 1% of last year’s sales.
- A good material cost for the total sale goal is 10% to 20% for a pure service and repair company.
- For a pure install company, the goal is 25% to 40% material cost for the total sale.
Get focused on these key numbers and engineer a change that will get you focused on making the numbers work for you.