how to break through the million dollar level and beyond in 2013

How to Break Through the Million Dollar Level and Beyond in 2013

Daniel S. Gordon, CPA

Let’s Grow Our Business – What Resources are Required?

Let’s Measure:

Overview

Financial Performance Marketing Performance Sales Performance Operational Performance

Questions

To maximize the value of Our Business…. Period !

There is no other reason !!

Let’s Grow Our Business

Why are we in Business?

Create a great Place to Work

Increase Salaries & Benefits

Create Job Security

Do business in a Socially Responsible

Manner

Let’s Grow Our Business

In Maximizing the value of our business we:

This business model is Simple

(Not Easy But Simple)

We are in a Service Business

and Sell our Time.

Let’s Grow Our Business

First lets go over how we run a successful business with a recurring revenue model

Let’s Grow Our Business

This time that we charge for includes:

Identifying a customer needProviding a solutionSetting the Customer up on a

Service Contract Doing the Same thing Over and

over until you have built a route

or several routes.

Time is a Perishable Commodity

Once it is gone, you can’t resell it

If you route your calls effectively you will be able to maximize the amount of time that you can sell.

Let’s Grow Our Business

The Concept of Selling Time:

Are we growing the number of employees?

Are we growing sales?

Are we growing our current income?

Are we increasing the value of our firm?

Let’s Grow Our Business

There are several areas we can grow

Let’s Grow Our Business

Let’s assume we are growing the value of our firm

How do we MEASURE THE VALUE of our firm?

Accounting approach: Assets minus Liabilities

Continue

Let’s Grow Our Business

Liabilities Include: Accounts Payable Credit Lines Loans Payable

Customer Lists (The most valuable asset) Accounts Receivable Trucks and Equipment Furniture and Fixtures Real Estate owned Other Assets

Assets Include :

But Hold On! The Gross Revenue Needs to be Profitable Recurring Work. One Shot Work is helpful in meeting current expenses but adds very little value to the your Firm.

How A Recurring Revenue Business is is Valued

Let’s Grow Our Business

Consider this: The selling price of many service firms can be equaled to about one year’s gross revenue. If you grew your firm’s sales by $250,000 last year you have increased your net worth (or Wealth) by a quarter of a million dollars.

Long Term – Can be compared to machinery in a manufacturing business:

Let’s Grow Our Business

The Customer List (Your most Valued Asset)

Must be “well oiled” by providing great Service

Routes must be tight allowing for the greatest output from this machine

Short Term - Can be compared to a life insurance Salesman setting up a book of renewable policies that generate current income.

Let’s Grow Our Business

You need a Plan…

The plan must focus on growing your customer list as well as selling more to existing customers

This is the Asset that will spit out the profits.

Remember – We are not in a high margin business. Rather it is a moderate margin business where you generate high profits from customers that use your service on a scheduled recurring business

Let’s Grow Our Business

Service Contracts vs. One Time Work

Consider that it costs anywhere from $80.00 to $500.00 to generate a lead from various sources

Which is better a one time at $500.00 or a ongoing service agreement at $75.00 per visit?

Future Customer Acquisition Requirements

Year Revenue # Customers Current New

Customers Cash

  Projection Needed # Customers Required Requirement

Current Yr $500,000 1000 1000 0 $0

1 $600,000 1200 1000 200 $50,000

2 $720,000 1440 1200 240 $60,000

3 $864,000 1728 1440 288 $72,000

4 $1,036,800 2073.6 1728 345.6 $86,400

Let’s Grow Our Business

Target Annual Revenue Per Customer: $500.00 Cost To Acquire 1 New Customer (average): $250.00 Expansion Goals: Double Revenues over 4 Yrs (20% per Yr) Assume 100% retention

Money Requirements

Let’s Grow Our Business

If more People or Equipment is Required For Expansion, How does it get Paid For?

Several Options Exist:Through Daily Operations &

Cash Flow

Through Financing (i.e. Bank, Finance Companies, etc.)

By Giving Up Equity (i.e. Silent Partner, Not so Silent Partner, Joint Venture)

Benchmarking Revenue Per Customer – Most companies look at Revenue for the company or Revenue for the branch and determine profitability from there.

Disadvantages to Looking at your business this way: You can have unprofitable customers You will never understand your profitability as you will always be looking at the

sum of the parts as opposed to the parts themselves

Suggestion: Look at Dollars per hour or dollars per sq ft of coverage per customer Look at Revenue per customer per year

Benchmark that number Try to increase that average each year

By doing this you guarantee profitability as well as maximize the amount each customer is spending with you

Let’s Grow Our Business

How Much Money You Made? How much Fertilization or Lawn

Maintenance you did last Year? What Your Labor Percentage Was? What Your Material Percentage Was? How Much You Spent on Sales & Advertising? What Your Gross & Net Margins Were?

At The Click of a Button Can You Tell on a Monthly Basis:

Financial Performance

A well-designed Land Care Profit & Loss Statement includes:

Revenue - Broken up by department with Recurring & Non-Recurring Revenue accurately displayed

Direct Costs - All cost associated with putting a truck on the road & performing service

Gross Margin - Revenue minus Direct Cost

Sales & Marketing

- All cost associated with sales and marketing function

Financial Performance

A well-designed Land Care Profit & Loss Statement includes:

G & A Expenses - The cost associated with running the office. Usually these costs are fixed with regard to transacting business up to a certain level

EBITA - Earnings before Interest taxes & Amortization

IADT - Interest, Amortization, Depreciation & Taxes

Net Income - Net Performance of the Business

Financial Performance

Profit & Loss Ratios & Benchmarks

Gross Margin

Technician Labor cost as a percentage of Revenue

Material Cost as a percentage of Revenue

Selling Cost as a percentage of Revenue

Office Labor as a percentage of Revenue

Other G & A as a percentage of Revenue

Why is it so important to setup a P & L using the

approach described?

Drilling down in Profit & Loss Statement

It allows us to make accurate conclusions about how our management staff is executing our business strategy.

It allows us to isolate revenue types that will add to the value of our business

It allows us to isolate expense types so that we can implement cost controls

Benefits of having profitability information in this format: Allows us to create Management

Bonus & Incentive Structures Allows us to determine which service

is profitable & Why? Allows us to consistently value our

company Allows us to identify specific

improvement needed and measure

Those Improvements that are required

Drilling down in Profit & Loss Statement

Rating our Accounts Receivable

Drilling down into a Balance Sheet

We can age our Accounts Receivable Current 30 days 60 Days Over 90 days

with percentage of Total We can try to improve those percentages

on monthly basis We can see how close we are keeping our

customers within our terms using a ratio called Number of days sales in receivables

Calculation: AR balance/(Average daily Sales)

– Calculation: (AR balance/ ( Average Daily Sales)

MonthAccounts

ReceivableCumulative

SalesCumulative

DaysAR Collection

(In $$) (In $$) (In Days)

Jan 92,978.71 141,979.65 30 20

Feb 99,344.19 229,884.19 60 26

Mar 118,261.00 349,186.84 90 30

Apr 127,553.67 469,772.91 120 33

May 119,382.39 573,908.18 150 31

Jun 110,584.97 681,817.53 180 29

Jul 114,392.45 781,463.98 210 31

Aug 120,091.32 897,158.05 240 32

Sep 134,356.95 1,009,201.90 270 36

Oct 108,142.62 1,125,025.47 300 29

Nov 107,366.28 1,234,987.85 330 29

Dec 116,399.87 1,294,946.77 365 33

Average Collection Period

Drilling down into a Balance Sheet

Marketing Math

Example of a GoalI want to take my Business from $500,000 in

Annual Revenue to $1,000,000 in Annual Revenue over the next 4 Years, increasing my profit margin from 12% to 20% for the same period.

Not an example of a GoalI want to get Bigger.

Marketing Math for the PCO

Define Growth – Set Goals

Product Price Place Promotion

Marketing Math

In defining your overall strategy, the MARKETING MIX concept is extremely useful.

It is broken into four categories known as the Four P’s of Marketing:

Marketing Math for the PCO

PRODUCT

From a marketing prospective our product is our service. We need to define:

The QualityThe FeaturesThe ServicesThe Warranties etc.

From a standpoint of practicality, it makes sense that as we grow our business we need to be uniform in our Service Plans.

As our customer list grows, it will become extremely difficult to manage a business where every customer’s service is different. Thus, in defining our services we should design a core group of services that are standardized.

All of our technicians can be trained to work using standardized methods. In addition our office staff is not faced with differing problems with each customer.

Marketing Math for the PCO

STANDARDIZATION OF SERVICES IS KEY !

Marketing Math for the PCO

PRICE

Pricing is extremely important.You need to price for profit.

Service Area Defined - In designing our business we need to define our service area. Again, if you go outside of your service area, you need to charge a lot more money in order to account for the travel time.

The most profitable land care companies have very well defined service areas. In fact, each office has sub service areas for each route. Sound routing methodology needs to be employed.

At this point we should note that you should have well-defined service areas that you will not breach.

Marketing Math for the PCO

PLACE

This is getting the word out. It’s is not my intention to speak about all of the promotional concepts of marketing a land care company.

However, we should be able to track our advertising in our computer system and generate reports that will tell us which advertising works and which does not. Promoting your company through advertising is the single most

important thing that you can do to build your company. However, too much of the wrong type of advertising can sink

your company quickly. By tracking which advertising is working through your computer system, you can build successful advertising campaigns that deliver RESULTS.

Marketing Math for the PCO

PROMOTION

Sales Performance

Number of leads received Number of leads Closed Number of proposals written Dollars Proposed Dollars Sold Closing Percentages Follow Up actions Including dates Commission’s Earned by Sales Staff Base Pay For Sales People

Sales Performance

What are the important data points :

Sometimes we draw Conclusions based solely on the numbers.

We need to distinguish between creative leads and inbound leads. as the ladder will yield much higher percentages.

Sales Performance

Number of leads Received/Closed

Sales Performance

Batting Average =# Leads Closed

# Leads Received

Pitch Efficiency =# Proposals written

# Leads given

Sales Performance

Sales Dollars Efficiency =# of Dollars Sold

# of Dollars Proposed

Using the proposal Dates and follow-up dates we can age our proposals, last contact dates and make estimates of likeliness of Closure. What we obviously find is the older the proposal the less likely we Close it.

What happens if we introduce telemarketing?

Sales Performance

Sales Compensation as a percentage of Sales

Base salary + Commissions Total Sales

=

Sales Performance

Operational Performance

Increase Sales

Lower Expenses

Effective Routing

HOW TO…

Operational Performance

Profitability

 High Revenues Low Revenues

High ExpensesAverage Profitability

Poor Profitability

Low ExpensesExcellent Profitability Average Profitability

Revenue

It is affected by two factors:

Expenses

Operational Performance

Routing will affect both

Revenue and Expenses.

Operational Performance

Technicians are paid an hourly rate.

Technicians are compensated as a percentage of their route

The Single Largest Expense for a Pest Control Company is

Land care companies for the most part compensate their technicians one of two ways or a combination of both:

LABOR

Operational Performance

Technicians are paid an hourly rate.

This rate climbs by 50% (overtime) after the technician works 40 hours in any given week. and or;

As a percentage of the dollar value of the jobs that they complete

Technicians are compensated as a percentage of their route

Operational Performance

To Increase Profitability We Need to Increase Efficiency

(Fit More Work into Less Time)

This Increases Profitability by Increasing Total Dollars of Profit.

Operational Performance

Let’s say we have a technician that earns $15.00 per hour.

Further, let’s say that he can complete one job in an hour that produces $50.00.

In this case our labor percentage is 30% (15/50 = .3).

This means for every $100.00 of revenue we have a profit of $70.00 (ignoring all other costs)

Using Our Technician Who is Paid Hourly

Example 1

Operational Performance

Let’s say we have a technician that earns $15.00 per hour.

Further, let’s say that he can complete two jobs in an hour that produces $50.00 each or $100 total.

In this case our labor percentage is 15% (15/100 = .15).

Example 2

Using Our Technician Who is Paid Hourly

Operational Performance

This means for every $100.00 of revenue we have a profit of $85.00 (ignoring all other costs).

By fitting more work into one hour we have been able to increase our profit by $50.00 per hour.

Here we have increased our revenue in dollars and decreased our labor expense as a percentage of revenue.

Using Our Technician Who is Paid Hourly

Operational Performance

Let’s say we have a technician that earns 25% of dollars produced. Further, let’s say that he can complete one job in an hour that produces $50.00.

In this case our profit is $37.50($50.00 – (25% x $50.00) =$37.50) (ignoring all other costs).

Using Our Technician Who is Paid A Percentage Of His Route

Example 1

Operational Performance

Let’s say we have a technician that earns 25% of dollars produced.

Further, let’s say that he can complete two jobs in an hour that produces $50.00.

In this case our profit is $75.00

(($50.00x2) – (25% x $100.00)) =$25.00) (ignoring all other costs).

Example 2

Using Our Technician Who is Paid A Percentage Of His Route

Operational Performance

Using Our Technician Who is Paid A Percentage Of His Route

By fitting more work into one hour we have been able to increase our profit by $37.50 per hour from $37.50 to $75.00 dollars.

In this case we increased the revenue by $50.00 per hour while holding our labor expense constant as a percentage of revenue at 25%.

Operational Performance

Utilization

One of the most important benchmarks in judging how efficient your routing is called Utilization. Utilization is a calculation that CPA firms and law firms use to see how productive their accountants and lawyers are at billing their time.

However this calculation fits our industry perfectly. Quite simply, utilization is the following fraction:

Operational Performance

Total Technician Hours Spent at All Stops During the Time Period

_________________________________________________

Total Technician Hours Clocked in (Paid Hours) During the Time Period

Utilization

Operational Performance

Let’s say that your technician spent 30 hours at various jobs doing actual work for a one week period.

Let’s also assume that according to his time card he was punched in and paid for 50 hours. His utilization would be 60% (30hrs worked / 50 Hours Clocked in).

This means that he was producing revenue 60% of the time he was clocked in.

Example

Utilization

Operational Performance

Let’s say your average dollar per hour on your accounts for the day is $75.00. With a 60% utilization you’re actually taking in $45.00 per hour. If your technician clocks in 8 hours for the day, he will produce $360.00 for the day ($75.00 x 60% x 8hrs). If his utilization is 75% he will bring in $450 ($75.00 x 75% x 8hrs). If he is 40% utilized he will bring in $240 ($75 x 40% x 8hrs). These numbers are using the same $75.00 per hour but varying the utilization percentage.

Example Continued…….

Utilization

Operational Performance

This point illustrates the fact that there are two ways of increasing daily revenue:

Utilization

Raising your prices (dollars per hour). This is not always feasible.

Increasing your utilization by making your routing more efficient.

Operational Performance

Questions?