A systematic approach to financial matters will allow you to cut your expenses and consequently increase your profits. Much of cutting expenses comes from having a system: a system to collect money to keep track of costs, etc. In fact, most of the time a business with excessive overhead costs will also have a casual system for keeping track of costs and revenues. We will look at several systems that can reduce your costs.

Last month in the first of this three-part series, I identified three principle ways to accomplish the job: raise prices; cut overhead expenses; and generate more business. Although combining all three of these profit boosters will produce even more dramatic increases in your profits, it’s important not to lose your focus and concentrate on changing only a few things in your business at one time. This month, I will focus on the second method, which is to cut overhead expenses.

Step 1 — Identify And Log Expenses

Whether you are still using the old time and materials method of pricing or have updated your business to flat rate, many costs still don’t show up on the customer’s invoice. Since they aren’t listed on the invoice, however, some businesses overlook some of them. For example, how much do you allocate from each job for truck maintenance and overhauls? It’s also unlikely that any funds have been set aside for those expenses when they suddenly surface.

Other examples include updating training for technician and buying new tools. (Does your business hand them out like paper towels?) A less obvious one, but still a real cost, is the cost of breaking in someone new. That’s part of the cost of losing a good technician — one who had an excellent reputation. Nevertheless, the customer doesn’t recognize that’s part of your overhead — not to mention the cost of jobs that have to be redone or other callbacks from less skilled people.

All these costs represent real dollars that are spent, but where do they show up on your accounting records? Some owners look mostly at labor and materials costs and lump everything else into general overhead or administration expenses. There’s a problem with that.

What Gets Measured? If you are not measuring some common category of expenses, you can’t control it. You don’t know what the amount spent is, let alone have the ability to reduce it. Let me show you what I mean. Let’s say some of your trucks are going through brakes after just a few thousand miles and others are lasting a year. Do you just average them all out and bundle the cost in maintenance expenses? If you could identify problems where some drivers are particularly rough on your trucks, you could let the drivers know there is a problem. Train them if necessary. Then set a standard for performance that lets you control your maintenance costs.

Maio drivers are responsible for their trucks, including washing them and bringing them into the shop for timely preventative maintenance. Any driver waiting until brakes have worn through the metal parts or running an engine without adequate water or oil is held responsible. Preventing unnecessary major expenses is always cheaper than running the trucks into the ground.

I know some business owners who think they are making a fair profit. But because their record-keeping data and accounting procedures are so general, not reflecting their actual expenses, they are both unable to make changes and get a surprise at tax time when they discover that their overhead is much higher (and their profit less) than they thought.

Consequently, the first step to reducing overhead is to work with your accountant to set up a system to measure and log all your expenses. You can’t reduce those expenses that you can’t see or measure.

In an effort to try to cover some of the invisible costs, like unforeseen truck expenses, technician training and education and those disappearing tools, Maio allocates a set charge from each invoice to cover those costs. We take a couple of dollars from each job and apply it to an account for each technician for new tools. This practice not only accounts for such expenses, it helps control them, too.

Tool Account: Here’s how it works. Technicians have a balance in their tool accounts. They can use this money to get new tools issued to them. They can get as many new tools as they want, so long as money is available in their tool account. No money — no tools. That way, they know that they have to take care of the tools they have until they have sufficient funds set aside in their tool account to get new tools.

The money doesn’t come out of their pay, like at some companies. Nor do they get to keep the money and close out the balance if they leave the company; it’s the company’s money. We use the same approach for training technicians with an education account. We even have a truck expense account.

Step 2 — Control Expenses

As you can see from the simple examples above, controlling expenses is easier if you first have the ability to measure them. Even better, there are more ways to reduce your costs (increasing margins) that are the result of controlling expenses. Simple procedures will accomplish the job for you. For instance, Maio technicians use an automated system where they are given replacement parts to restock their truck. Only parts that appear on an invoice from jobs (plus an occasional part from a supply house) can be distributed to replace inventory used from the truck. Technicians are not permitted to roam at will through the warehouse. A warehouse manager is there to hand out whatever is needed. With this system, no parts “walk” out of the warehouse. Inventory control is very good and costs are down. The possibility that a technician will be “moonlighting” is also reduced. Incentives: While I won’t go through the complete system now, our incentive pay plan provides technicians with financial incentives for doing additional (needed) work in the customer’s home. Instead of receiving hourly pay, they receive a commission, much like a salesperson. It’s a more efficient system for the business because you are never paying a technician for standing around. All their pay comes from work they do that generates invoices for the business. Plus, the technicians get a chance to earn more pay. In fact, most Maio technicians receive paychecks well above their counterparts at other companies.

House Brands: As material costs escalate and more home warehouses offer parts and name brands that used to be only available to the trade, it is tougher and tougher to compete. Sometimes we pay more for one item at a supply house than a consumer can purchase that same name brand item at a home warehouse. How much more can we cut costs? And how can we compete?

One way we found was to offer a different — and better — product, which also isn’t available at retail home centers. We have a manufacturer put our house brand on the labels of the water heaters they sell us, and we offer a 10-year guarantee — double the usual time. Since customers want service and quality parts, we offer the best. They also happen to cost us less and eliminate comparison-shopping.

Step 3 — Motivate And Monitor

There’s one more stage to our cost reduction program: get what you pay for by monitoring performance and motivating people to perform at their maximum level.

If all your technicians make the same pay and some are excellent and some are mediocre, at best, you present a counter productive message to your employees. That message is that there is no incentive to excel, just don’t goof off too much so you get in trouble and get fired.

You can use a simple system, but you need some system to show those who work harder and do excellent work that they are rewarded — something more than an annual raise. At the same time, you need to let your people know their performance counts. If they consistently do sloppy work and hastily complete jobs, they need to know that they will be held responsible for the quality of work they do. It’s only fair that you get what you pay for — and that technicians get paid for what they do well.

Performance Appraisal: A simple performance appraisal system will save you money by identifying those technicians whom you want to stay with your company and those whom you cannot afford to keep. Jobs that require repeat trips to the customer’s home cost you money and customer goodwill.

Requiring technicians to leave a satisfaction survey postcard with the customer, then having someone else call customers to be certain they received it, gives any company some feedback about what their customers think about the service and repair work. Since the technicians know the customers will be contacted, they usually don’t forget to leave the cards.

Motivation Pays: The other half of the system is to encourage technicians to do their best all the time. We have meetings every week and recognize those who excelled. The low-cost rewards we give (free lunch, etc.), don’t mean as much as the praise they receive in front of their peers. We also include motivational sayings in pay envelopes and post motivational messages, encouraging top performance, in conspicuous places throughout the company.

A good manager is able to motivate his team members to do their best and make them feel good about it. That same manager will also cut his costs by doing it.

Dollars that you save by following a system that helps monitor and control costs go right into your pocket. You would have to generate another thousand dollars in business for your company, for example, to be able to keep a few hundred. But saving a few hundred here or there has the same net benefit to you of increasing your business by thousands of dollars. Which is easier?

Next month, in the final part of this three-part series, we will explore ways to build profits by generating more business.