Key Performance Indicators
Key Performance Indicators
YOU MUST KNOW
If You Are Running An Appliance Service Business
Most Appliance Service Company owners probably went into business because they were good at repairing appliances, not because they were good at business. Most of the time, and I will venture to say that possibly up to 90% of appliance service owners, had no experience or no idea how to run a successful business prior to going into business for themselves. And they probably thought to themselves & maybe shared with others, “It Can’t Be That Hard”, look at my boss, he’s probably making boat loads of money, and he’s not that smart. Well, think again, it’s not as easy as you think and if you been in business any length of time, you’ve probably found that out.
Let’s take a look at the typical appliance service business owner. He’s working for someone else, he get’s ticked off at his boss and work gets slow and he thinks, I can do this, I’m going to buy a truck or a van & do it for myself. He probably has some contacts from his current job so he starts to build a small network of potential customers and decides to pull the plug and start his own business. He goes and takes out a loan, buys a truck, prints some business cards, gets a license from the city or county and schazaam, he’s in business and as long as he is making more than he was at his previous job & making his truck payment, he thinks he struck it rich.
As long as he works out of his home and can keep his customers happy & get a few more along the way, everything is ok. But as soon as his business begins to build, he needs to hire someone to answer the phone, he needs to start looking at insurance and possibly hiring another technician & buying another truck and so on & so on & so on. Oh, & don’t forget, it may be time to move out of the house because the wife doesn’t want the business in the house any longer and she needs the room you are using for the office for another child and the scenarios can on & on.
Any business, if successful, just isn’t that easy to run. It takes a lot of work and a lot of business knowledge to make any business really successful.
The fact that you probably thought you could make a better living than if you were working for someone else is true, as long as you follow some basic business principles and understand a few Key Performance Indicators in the Appliance Service Business and know what those KPI’s are telling you. Everything was probably ok in the beginning but as the business grew and incurred more overhead, they were in “Over Their” heads.
The Tips listed below will begin to give you some insight as to the “numbers” you need to be looking at in your business..
Small business owners continually face a variety of challenges, tough choices, and financial decisions that can have a significant impact on revenue. The challenges can include additional employees, more inventory, more vehicles and additional or funding to support that growth. Small business owners must be strategic, creative, customer centric, and take a proactive stance toward fiscal planning.
Do you get the picture. There is a lot more to running a business than just working out of a truck.
It’s called “OVERHEAD”. And if you are going to be successful, you have to plan how you are going to pay for that overhead, which brings us to the first KPI you need to understand.
Let’s Begin with Some Financial Numbers (Your P&L)
There are many financial numbers that come into play as you are running your small business but probably none more important than your profit & loss numbers, also known as a P&L statement. In its simplest form this is nothing more than adding up what you made & deducting what you spent and your profit is what is leftover.
Here’s the problem with P&L’s for most businesses, they don’t get them often enough or soon enough to make operational changes that can really make a difference. Many small businesses don’t really know whether they made a profit or not until the end of the year. Yes they know how much money they have in the bank. And if they were lucky enough to pay their bills, they claim, hallelujah, I made money. How sad this is but unfortunately it happens more often than we would like to admit. When they do get their financial statements from the accountant, probably 3-6 months after the year has ended, they go to the bottom line of the P&L statement to see if it is positive or negative. This may sound strange, but believe me, it is very true. Then it will probably be put in a drawer or file cabinet somewhere and not looked at again until he needs to go to the bank for a loan. That is not the way to run a small business. You need to know at least on a monthly basis how you are doing. In addition to knowing your P&L on a monthly basis, you also need to determine some type of budget and cash flow projections. These numbers are important because it will help you understand how much you need to operate you business for a month and then based on the number of jobs or services offered and the amount of time involved, you will be able to determine how much you need to charge on an hourly basis to make a profit. And “PROFIT” is not a dirty word, it is an absolute admirable word. Other numbers are also important in your business such as accounts receivable, accounts payable, inventory and equity (how much money are you keeping in the business) just to name a few. However, if you don’t start with understanding and tracking profit & loss on a monthly basis, then the rest of the numbers will be of no good to you.
#1. What is 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 Key performance Indicator is better known in the industry as “Cost Of Doing Business” or “CODB”. This is typically broken down into an hourly amount or per completed call amount. In other words, how much money do you need to charge a customer just to show up at the door to pay all your bills that you have to pay 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. 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. 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. These items are what is known as indirect cost and if you are going to stay in business, they have to be paid regardless of whether or not you make the first service call. And then on top of that, you want to get paid don’t you, so you have to add on top of that, whatever you decide you are worth and if you need a part, you have to pay for the part. These last 2 items 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 they don’t have to be paid unless you actually do some work. And then on top of all this is a nice little thing called “PROFIT”. And 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 it in your calculations when you are running your numbers.
So how do we go about figuring our cost of doing business.
There are several programs out there that will help you calculate your cost of doing business and I will list some websites to check them out & see if you are interested in any of them.
But for now, I will boil it down here as simple as possible.
Take the number of days available for working (365 less weekends, holidays, sick days, training days, vacation, etc) probably in the range of 220-230 days per year.
Formula = 365 – weekends (unless you regular work Sat/Sun), sick days, holidays, etc)= Available work days. Normally in the 220-230 range
Now multiply the number of available work days by 8 (hrs per day) to determine the number hours available per year.
Take your average technician wage & multiply it by 40 hrs per week times 52 weeks.
Divide the Yearly technician salary by the number of available hours per year. This will give you the average hourly cost to cover vacation days, training days, holidays, sick days, etc.
(365 days/yr – unavailable days) x 8 = Available Hours per year
Average Tech wage per hr x 40 hrs per wk x 52 weeks per year = Average Tech Salary
Hourly Labor Cost = Average Tech Salary / Available Hours per year
Next, take your yearly expenses & divide it by the number of available hours to work per year. This will give you the amount you need to charge per hour to cover your expenses (overhead)
Total overhead expenses (Indirect Cost)/Available Hrs per Year = Hourly Expense Cost
Add that number to the hourly labor charge to determine your breakeven rate.
Hourly Labor Cost + Hourly Expense Cost = Breakeven
GROSS BILLABLE HOURLY RATE WITH PROFIT:
If you don’t plan on making a profit, you shouldn’t be in business, therefore you need to calculate a profit into your hourly cost. If you want 15% net profit, which should be a minimum in my opinion, the divide the hourly break even by .85 (100%-15%). This will give you the hourly rate you need to charge if you were 100% efficient.
Breakeven / (100% – desired profit margin) or (Breakeven / .85) = Gross Hourly Rate yielding 15% net profit
There is no way anyone can be 100% efficient, therefore we need to determine how efficient your company is. To determine this factor, take the total number of completed calls per day and divide that by the total number of tech hours per day (number of techs times 8 hrs/day).
AVERAGE COMPLETED CALL RATE:
If you are doing any warranty work, this is the number you will need to determine if what a manufacturer is willing to pay you will allow you to make a profit. This is determined by taking the gross billable hourly rate divided by the efficiency factor. This is the amount you need to bill per completed call to make whatever percentage profit you entered above. To determine your breakeven per call, then take this number & subtract the percentage profit you calculated above and this will give you your breakeven per completed call. If you want accept a lower percentage profit for warranty work, then simply deduct the appropriate percentage from this number. By doing this, you are not going in blindfolded with any customer or any manufacturer. This is powerful information. Use it to your advantage.
One thing I did not do above was to add in any profits from any parts you sold. If you wanted to do that, this would lower the actual gross hourly billable rate. To do this, you would simply take the total profits from parts per year & divide it by the available hours, just as you did with the expenses.
This would give you an hourly rate of profit for parts & deduct that from the breakeven hourly rate & then recalculate the number with your profit percentage. I don’t recommend doing this but it is your choice. It will reflect a more accurate number but things change during the year & I would prefer to use the profits from parts as a little cushion fund. You be the judge on this.
#2 – Revenues Generated by Technicians
Let’s face. All technicians are not created equal. Income producing employees such as technicians and salesmen need to be tracked so that you know if they are indeed being profitable for you. These numbers are important because it helps you determine on average what revenue you might expect for each job a technician or a salesman completes for you. This will also help in budgeting for future planning. This is calculated by simply taking the total revenue for each income producing employee dividing it by the number of jobs completed or sold. This should also be broken down between parts & labor. This will tell you the average labor revenue and parts revenue for employee. This should also be broken down between warranty & COD calls and if you are running different departments, each department should also be tracked separately. We do heating & air conditioning, restaurant equipment and water heater service as well as appliance service. We break each department down separately as well as parts & labor so we know what each department average is per call. For example: our Restaurant Equipment Service generates the highest per call rate, our heating & air conditioning a close second, while our appliance service generates the lowest per call rate. It’s important to know these numbers not only for future planning & growth so that we know where to most effectively use of marketing dollars. In addition, employees need to tracked and compared against each other as well as against industry averages or standards. You can also use these numbers to improve efficiency & productivity by running contest or bonuses based on certain criteria.
Last but not least, by tracking revenue per tech, you can determine gross margin per call. If you are doing this, it is real easy to tell if a technician is being productive. You should know what your gross margin needs to be & if a tech is falling below that, you need to find out why & either help the tech improve or replace him. You cannot afford to have a tech that is losing you money on each & every call & if you don’t track it, it won’t know it. To calculate a tech’s gross margin, take the labor he was paid for that job, including travel time & divide it by the labor only collected for the job. Take the answer, which will be a decimal (.XX) & subtract it from 1. This will give you the gross margin for that job. If you can’t track gross margin by the job, then take his weekly pay & divide it by his labor only weekly revenues & subtract the answer from one (1) and this will give you an overall weekly gross margin for the technician. Naturally if you are paying on commission, your gross margin should remain constant.
# 3 – What Does It Really Cost You To Get A New Customer?
It may be nice to have a backlog of work so you don’t have to worry about a lack of work, however, that is not the case for most businesses. In fact, most businesses have to go looking for work, so this is where marketing comes in. Marketing can be very expensive and it is critical to track all of your marketing (advertising) activity and determine what it really cost you to get a customer in the door. In the Air Conditioning Contracting Business it cost an average of $250 to $300 just to get a new customer. This may sound high for an Appliance Service Business but you may be paying that much and not really know it. Here’s the key! Customers are not free, they really do cost you something to get them to call you or get them in the door. Even a warranty customer referred by a manufacturer cost you something. Consider this. You give a manufacturer a discount because they are going to refer customers to you. The discount you give that manufacturer from your COD rate is actually the cost you paid to acquire that customer. In addition, you don’t make any money on the parts, in fact, you have to pay shipping to get the parts to you in most cases. So look at your average revenue for a COD call. Let’s say it’s $150.00 parts & labor. If a manufacturer is paying you $90 flat Rate per completed call, it cost you $60 to acquire that customer. Now you can argue that it really didn’t cost you $60 because you didn’t have to do anything to get that customer, but I will argue that if you had not run that warranty call, you could have run a COD call & made $150 instaed of $90. You be the judge.
So what does it cost me to get a COD customer. If you don’t know, you should. This is very easy to track but few small businesses actually track it. In order to determine what a new customer cost you to acquire, you must do a little tracking of your new customers. You have to know how many new customers you service this year. If you are using some kind of customer software, this should be fairly easy to do. Just find the customers whereby the first service call for them falls within the last year and total them up. You will also have to separate them between warranty & COD customers. Now, add up all the advertising for the last year, then divide the advertising cost by the number of new COD customers and that will tell you how much it cost you on average to acquire those new customers. I would truly encourage you to do this. This Key Performance Indicator could be a real eye opener for you.
I would also encourage you to take the number of warranty calls you do for a manufacturer & take the difference between you average COD call & the manufacturer’s completed call rate they are paying you & multiply those numbers by each other. This is essence is advertising cost to get a warranty customer. I think this will also be an eye opener.
If you wish, you can take it a step further. Take your normal advertising cost and add the difference between COD & warranty pay for all manufacturers to come up with a total advertising cost. Then take all new customers & divide into your advertising cost. This will give you an overall cost to acquire new customers.
In order to make marketing really pay off for you, you need to track all your marketing cost. Again, this is something that must have some type of tracking system in place. To do this effectively, you must have your customer service reps track how the customer got your number. Then on a monthly basis, take the number of calls received from a specific marketing campaign & divide the number of customers calling into the monthly cost of that marketing campaign. This will not be an exact science but it will give you a gauge as to whether or not that particular marketing strategy is paying off.
I know this sounds like a lot of work, but it really isn’t. It’s just the struggle of getting people to do. You as a business owner must make it happen. If you are truly serious about being successful, it’s time for you to be a business owner & not just a technician.
For most small business owners this can be an unexpected surprise. Sure, we know it cost something for someone to answer the phones or take the orders, but quite often, we don’t realize just how much it cost us. For the most part, these types of employees are classified as indirect labor employees meaning they don’t get paid directly from the customer for the work they do. Their wages must be built into the price we charge the customer even though they are not actually doing the work, therefore their cost is hidden or “indirect” relative to your financial statements and is just one of the many cost of doing business. Again this number is included in your calculations for determining what it cost you to do business and how much you need to charge per hour in order to make a profit. The number you want to look at here is the number of indirect employees you need to support the direct labor employees. This varies by industry & the type of work being performed.
# 5 – Customer Numbers/Revenues# 4 – Staffing Numbers
The importance of customer numbers is to be able to predict with some type of accuracy how much revenue each customer represents to you. The easiest way to determine this number is to take your monthly or yearly revenue & divide it by the number of jobs you completed during that time period. This will give you an average of the revenue per customer per job. Naturally this can vary greatly depending on what kind of jobs you are doing so it may make sense to track them by the type of job as well but whatever method you use, just track it. This also helps in predicting future revenue based somewhat predictable jobs.
The Future for Small Businesses
The Small Business Administration has created futuristic opportunities for small business owners. As of the 2011 U.S. budget, there is $994 million for the SBA, a $170 million, or 21 percent, increase over the 2010 enacted level. This is a reflection of the administration’s support of small business for the future.
If you have comments or questions, please go back to my website www.smallbusinessbuilding.com and contact me via the “CONTACT” page and share your ideas and comments for future improvements to this download.
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.