By Ron Coleman
Over the last 40 years, I have reviewed hundreds of financial statements and bookkeeping systems of plumbing and HVAC contractors. For more than 20 years, I prepared annual reports on the financial statements of Heating, Refrigeration, and Air Conditioning Institute of Canada (HRAI) contractors and focused on helping participants focus on their management accounting. I give over 80 per cent of these companies a failing grade for providing information that is useful to management.
The companies either took standard templates from QuickBooks or Sage, or were designed by CPA firms that are primarily focusing on complying with the requirements of the CRA. They were not designed to provide information to management for improving the running of their businesses. Many companies don’t break out labour between direct labour and overhead labour, or if they do, they don’t do it correctly. They put elements of cost into direct cost that should be an overhead and vice versa, and as you will see in my analysis of labour burden, I believe fewer than one per cent of companies use that process.
Without having proper management information systems, you cannot run your business effectively. You need the three Ms: measure, monitor, and manage. Some 80 per cent of companies failed to provide the information for doing that in their financial accounting. I would love to know how many of our readers could provide the information that I have outlined in this article without a major rehash of their records.
Paying employees
There are quick fixes to some of these issues. Some companies pay their technicians only for hours that are billed out; some use flat rate pricing. These are two successful strategies to avoid management having to take responsibility for their bottom line. Both systems are prone to callbacks. Neither directly addresses the issues around productivity.
Here are some questions for you: Do you prepare an annual budget? Do you have a realistic method of establishing your labour charge-out rates? Do you have realistic methods for marking up materials, subs and equipment for sale? How do you determine how much profit you would like to make? Is it based on a reasonable return on investment (ROI)? How often do you compare your actual performance to the budget? If you do construction work, have you ever used the dual overhead recovery process? (Most won’t even know what that means, but it has been in use in the United States since the 1990s.) Do you do monthly work in progress (WIP) reports? Do you have a realistic understanding of the value of your business?
If 10 per cent of our readers could honestly answer yes to all these questions, I would be astounded. This is a good starting point for managing your business more effectively and efficiently.
Take a look at your business
For the sake of this topic, here are a few assumptions: direct labour has an average base rate of $35.00 an hour; labour productivity (hours billed) is 90 per cent of hours paid; materials/subs to labour are 1.45:1.00, meaning for every $1 spent on materials we spend $1 on labour; mark up on materials/subs is 25 per cent of cost; mark up for profit is 11.1 per cent of cost or rather 10 per cent of selling price; mark up for truck charges is 11.1 per cent for profit; and mark up on labour is the rate needed to recover balance of overhead, we have already recovered some overhead on materials/subs.
When looking at your own business, input your own numbers and targets. These figures are for the purpose of this article only. Quoted jobs can be entered by comparing actual hours to quoted hours to determine the productivity rate.
I know that this seems like a lot of work, but remember the three Ms: measure, monitor, and manage. You cannot manage what you don’t measure. This exercise will be a real revelation for you and make you rethink how you manage your day-to-day operations. Every sports team records statistics on its games. That’s how they get better. Shouldn’t you do the same?
You are in business to sell your business for the best price you can get. You do this by maximizing profits and enhancing customer and employee satisfaction. This exercise will take you to the next level.
Send me your results, or your profit and loss statement, and I will review the first ten at no charge.