The Importance Of Knowing Your “Cost of Doing Business”
Do you know what it cost you per hour or per completed call to run your Service Business? If you don’t, you better find out in a hurry. This one number is probably the most critical number to know to ensure the success of your business.
In the service industry, it is known as your “Cost Of Doing Business” or “CODB”. This is a dollar value that tells you exactly what you need to charge to cover all your operating but more importantly, what you need to charge to make a profit. This is typically broken down into an hourly dollar amount or per completed call dollar amount. In other words, how much money do you need to charge a customer just to show up at the door so that you will have enough income to pay all your employees, including yourself and all your bills on a monthly basis? And this is before you even make a repair a single product. That’s a scary thought if you think about it. You mean I have to pay for stuff before I make a repair? Yes, you do, and there is a lot involved to make that happen.
Let’s look at it in a little more detail. You have to pay for loans or truck payments, liability insurance, health insurance, telephones, employees in the office, utilities, licenses, vehicle repairs, gas, subscriptions to manufacturers for tech support, tools & equipment, computers, office products & supplies and the list can go on & on. These items are what is known as an “Indirect Cost” and if you are going to stay in business, they have to be paid regardless of whether or not you make any service calls. And then you will want to get paid for the work you are doing to accomplish the repair and if you have to replace any parts, you certainly want to get paid for the parts you install. These last 2 items, labor, and parts are what is known as “Direct Cost”. In other words, these items are a direct result of the work or repair you do for the customer and theoretically, if you don’t have any service calls to run, you will probably send the technician home since you don’t have any work. Then finally, on top of all this is a nice little thing called “PROFIT”. Profit is not a dirty word. It doesn’t even contain four letters! You are in business to make a profit so make sure you include something for profit in all your service billings.
So how do you go about figuring out all these costs so you can determine your cost of doing business and know that you will be profitable at the end of the call? Good question!. We’re going to look at the different elements or components you need to know to determine what you need to charge to be profitable.
There are several software programs out there that will help you calculate your cost of doing business, including the one I have developed, but in order to use those, you need to understand some basic cost principles in running a business.
So let me boil it down here to a few simple categories you need to understand:
NET AVAILABLE WORKING HOURS PER YEAR:
The first thing you need to do is determine the number of hours per year available to you to run service calls. This will be the total number of hours available to work throughout the year and then deduct holidays, vacation days, sick days, training days and hours used for meetings at the office. This will give you the NET AVAILABLE hours per year to run service calls.
EXPENSES (Indirect Cost, Expenses or Overhead ):
The next thing you need to know is what are your expenses or anticipated expenses for the year. These are also known as “Indirect Cost” or Expenses. This is what it cost you to keep the doors open regardless of how many calls you run. These are things like loans or truck payments, liability insurance, health insurance, telephones, employees in the office, utilities, licenses, vehicle repairs, gas, subscriptions to manufacturers for tech support, tools & equipment, computers, office products & supplies, etc. These are typically things that have some type of weekly or monthly payment associated with them. You will take this expense number & divide it by the number of Net Available hours to get a per hour cost to cover expenses.
DIRECT LABOR COST:
“Direct Labor” cost is the labor you pay yourself or your technicians to run service calls and do the work of a technician. Remember, you not only have to pay them for the hours they work running service calls but also you will have to pay them for the vacation days, holidays, sick days, training days and the time they are in meetings. You also need to take into consideration whether or not you, as the owner, will be running service calls. If you are running service calls, the portion of the wages you are paid for running those service calls is included in this Direct Labor Cost calculation and the portion of your wages for spending time in the office and managing the business is included in salaries or officer’s compensation in the Indirect Cost or expenses section.
To get an average hourly cost for direct labor, take the wages of all technicians, add them together & divide that total by the number of technicians to determine the average technician wage. Then multiply that by the total number of available working hours for the year to get a yearly salary. Then divide that salary by the Net Available hours per year to get an adjusted hourly direct labor cost.
The number above is based on your technicians being 100% efficient at running service calls. In other words, billing out 100% of their net available hours. There is no way anyone can be 100% efficient, therefore we need to determine how efficient your company is. To determine this factor, try to determine how many wasted minutes or hours per day the techs spend stopping for coffee or drinks, getting gas or going to the supply house. This is also know as non-billable hours. This will be a guess in most cases because it is not tracked by probably 99% of companies out there. So make an educated guess. If it’s 30 minutes, then divide the number of hours, in this case, .5 hours, of non-billable time by the number of hours you work during the day. Use percentages or fraction of hours for anything between whole hours. The calculation looks like this: 1 (for 100%) – (.5 hours of non-billable hours/8 hours available) = 93.75% Efficiency Factor
Again no one is perfect and callbacks are going to happen. And guess what, you don’t get paid for callbacks. So this needs to be taken into consideration when calculating your Cost of Doing Business. Typically it will be in the 3-5% range but if it is higher, make sure you account for it. This will cause your rate to go up so maybe you need to work on what’s causing a high callback percentage and correct it and just use the industry standard of 3-5% for your calculations.
Now that you have determined your per hour rate to cover your expenses and you per hour rate to cover your labor along with the efficiency factor and your callback percentage, you are ready to determine your Break Even Hourly Rate. To get this number, simply add up the expense rate, the labor rate and then multiplied by the efficiency factor rate and the callback percentage rate. The total of all these is what you need to charge per hour to break even. But don’t stop here!
Remember, we don’t want to just break even, we want to make a profit. So we have one more step. We need to add something in for profit. So if you want to make 15% net profit, you need to subtract 15% from 100%, which gives you 85%, and then divide the breakeven number by 85% and this will give you your per hour labor rate you need to charge to cover your cost and net 15% net profit.
AVERAGE COMPLETED CALL RATE:
If you are doing any warranty work, you need to know what your average completed call rate is. Most manufacturers are not going to pay you an hourly rate. They will pay you a single completed rate. So you need to determine what this rate will be. This is calculated by taking the billable hourly rate with a profit above and dividing it by the daily completed call percentage. You Daily Completed Call percentage is determined by tracking the number of calls you run per day against the number of calls you complete in that same day. If on average you run 8 calls and complete 5 of those calls per day, then your Completed Call percentage would be 62.5%. To determine your completed call rate, take your Billable hourly rate above times 1.65% to determine you completed call rate. This is the amount you need to bill per completed call to make whatever percentage profit you entered above. This is powerful information when it comes to negotiating with a manufacturer for a completed call rate. Most service companies don’t know what their completed call rate is so they just accept whatever the manufacturer throws out there. Remember, the manufacturers are wanting to get by as cheap as they can. Don’t let them eat your lunch. They will if you let them. Use this information to your advantage.
One thing I did not mention in any calculations above was parts sales. You should absolutely add profits to your parts. It cost a lot to acquire parts and it shouldn’t be taken lightly. While your parts cost is a part of “Direct Cost”, typically you expense for handling those parts ( ordering them, getting them to the techs or customers, returning warranty parts is covered in expenses. If this is the case then great. You can actually take the profit from parts and use it to reduce your cost of doing business simply by taking the profit from parts and dividing it by the number of net billable hours. This will you reduce your Cost of Doing Business by a few dollars.
However, I do not suggest this. I suggest just leaving the profits from parts out of the CODB calculations and use it to cover unknown expenses because they will come up. The choice is yours. Handle it whichever way suits your business
As mentioned earlier, there are several associations as well as companies that provide templates for you to use. Some are quite simple while others are quite complex. If you would like to check out our Cost Of Doing Business Calculator, just click here.
Knowing Your Cost of Doing Business is critical to the success of your business. If you need more detail on the calculations or you want a template or calculator to do the calculations for you simply by plugging in your numbers, click here and it will give you access to The Appliance Service Secrets Cost of Doing Business Calculator.
Founder, Appliance Service Secrets
Don Harris owned and operated his own appliance services business in Atlanta, Ga for over 45 years. In 2014 he sold his business, Dependable Services, to his son Brannon. Dependable Services currently operates 18 service vehicles and has 38 employees, providing services for heating and air conditioning, residential appliances, restaurant equipment, commercial refrigeration and water heaters to the metro Atlanta area. Don acquired the nickname “DependableDon” because of his reputation of being there when he said he would be there and doing what he said he would do. Don now spends his time coaching and consulting other businesses in the Appliance and HVAC industry.