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Building Wealth in Your PMP Business1

“We Give Pest Management Professionals A Wealth of Business Building Ideas”

Daniel S Gordon, CPA

Building Wealth in Your PMP

Business

Daniel S.Gordon, CPA

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Agenda

How is a PMP Firm Valued

Taking your PMP Firm to the Next Level

Marketing Math for the PMP

Routing the Silent Killer

Pricing for Profit

Putting it all Together

Your Next Step

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How is Pest Management Firm Valued?

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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.

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

How A PMP Firm is Valued

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Take Your PMP Firm to Next Level

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What is the Next Level?

Growth – How Much? Over What Period of Time?

How Much Money Do I need to Achieve this Growth?

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Money Requirements

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)

If more People or Equipment is Required For Expansion,

How does it get Paid For?

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Assume 100% retention

Expansion Goals: Double Revenues over 4 Yrs (20% per Yr)

Cost To Acquire 1 New Customer (average): $250.00

Target Annual Revenue Per Customer: $500.00

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

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One of the most important things that you need to do in business is to decide:

What it is you are going to do? With whom you are going to do it ? How much you are going to charge?

How you will get the word out to potential customers?

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─ Example 1:-

Bird work is very highly specialized area of pest control, that can be extremely profitable. However, if you don’t have the skills to do that type of work, don’t do it.

Since it will probably lead to substandard work, bad feelings with the customer, and take time away from developing the type of service work that you want to develop.

Marketing Math for the PMP A common error among PMPs is trying to be everything to everyone.

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- Example 2:-

Traveling far outside your service area in order to service a client. In our discussion of route management we will illustrate why an account that has high travel time is a loosing proposition. You would need to charge the customer a great deal of money in order to make it profitable.


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.


In defining your Overall Strategy

the Service Contract Concept is

Extremely Useful

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This discussion may sound somewhat theoretical, however from a standpoint of practicality, it makes sense. You see, 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 try to design a core group of services that have consistent service obligations and service warranties.

In this manner 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.


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STANDARDIZATION OF SERVICES IS KEY!!


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New Customer

The New Customer Acquisition is Expensive

The Yellow Pages estimates that Cost per Lead can vary from $80.00 - $500 per Lead


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More Business From Existing Customers

Your Customers Already Know You

The Cost associated with expanding your relationship is significantly less than New Customer Acquisition.


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Routing the Silent Killer

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Increase Sales

Lower Expenses

Effective Routing

HOW TO…

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Profitability

High Revenues Low Revenues

High ExpensesAverage Profitability

Poor Profitability

Low ExpensesExcellent Profitability Average Profitability

Revenue

It is affected by two factors:

Expenses

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Routing will affect both

Revenue and Expenses.

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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

The Single Largest Expense

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

LABOR

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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

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To Increase Profitability We Need to Increase Efficiency

(Fit More Work into Less Time)

This Increases Profitability by Increasing Total Dollars of Profit.

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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

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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


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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.


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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

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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


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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%.

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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:

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Total Technician Hours Spent at All Stops During the Time Period

_________________________________________________

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

Utilization

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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

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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

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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.

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The PMP Pricing Model

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The Pest Management Pricing Model

Money

This is an hourly charge for our service that covers our costs and allows us to make a reasonable profit. How do we know what that hourly rate should be? Accountants calculate this number using a techniquecalled BREAKEVEN ANALYSIS.

It is based on two variables:

Time

The service time that it takes to fulfill the obligation of eliminating the customer’s Pests under the service program. This includes treatment time and call back time

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Break-Even Analysis

Break-Even point =Fixed Costs

Gross Profit per Hour.in units (service hours)

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Definition

Fixed Costs

Any cost that remains constant at any volume of business

(i.e. Rent, Advertising, Utilities, etc.)

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Variable Costs

Costs associated with producing one unit of our service. For our purposes, one unit of a service will be one hour of service. Thus, variable costs are those costs that rise and fall based upon the number of hours that we provide service.

Examples Hourly pay for your employees, Workers Compensation Insurance, Material Costs, etc.

Definition

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Gross Profit

The difference between the price charged per Unit (Hour of Service) and the Variable Costs.

Example

If we bill our service at $100 per hour and a technicians gets $20 per hour and all other variable costs associated with providing that hour of service are $35, our gross profit would be $45. (figured: $100 billed less ($20+$35) variable costs).

Definition

Gross Profit

Gross Profit

% o

f G

ross

Rev

enu

e

Gross Revenue Cost of Goods Gross Profit

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What Is My Breakeven Point?

=Fixed Costs

Gross Profit per hour. Breakeven Point in Units (Service Hours)

Break-Even Analysis

Fixed Cost

Gro

ss P

rofit

/Hr

Fixed Cost Gross Profit/Hr

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If rent, utilities and all other fixed costs are $10,000 and we use our $45.00 gross profit per hr example than our breakeven point is 222.2 hours of service at a $100 per hour selling price.

After 222.2 hours of service we will start making a profit of $45 per hour. You see the gross profit contributes to paying the fixed costs. Once the fixed costs are paid, the gross profit contributes to bottom line profit. This is the reason some accountants call gross profit the contribution margin.

Example

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$10,000 Fixed Costs$45.00 Per Hr Variable Costs

222.22 Hrs to Break Even=

Gro

ss

Ma

rgin

Break-Even Point

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However, at various sales levels certain fixed costs rise (i.e. after a certain sales level, a new piece of equipment might have to be added, thus the cost of using that piece of equipment must be added to fixed costs).

Therefore, figuring your breakeven point can sometimes be confusing.

Is it Really That Simple?

YES!!!!

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Our Gross Margins ShrinksThereby Increasing our Breakeven Point

What Happens if We Lower Our Price?

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Lets Calculate Our Variable Costs:

Pricing – A Real Live Example

Break Even Point (Service Hrs) = Fixed Cost Divided by Gross Profit Per hour

1st Lets Calculate Technician Salary:

Salary Cost Technician $12.00Per Hr X 2080 Hrs Per Yr = $(a) 24,960.00 Plus: Normal OT Technician $12.00Per Hour X 1.5 X (Ave # of OT Hrs Per Week 7 Hrs) = OT Dollars Per Year $(b) 6552.00

Equals: Total Wages Paid Per Year for this Technician $ (c) 31,512.00

Continued…

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FICA (c) Above $31,512.00 X .0765 (FICA Amount) $ (d) 2,411.00

SUTA (c) Above$ 31,512.00 X $.03 (Your SUTA Rate) $ (e) 945.36

FUTA $7,700 X .008 (Base Amount) $ (f) 62.00

Workers Comp (c) above X Your WC Rate per Technician Class per 100 of payroll (5.5%) $ (g) 1,733.16

Family Medical Benefits (That you provide) $ (h) 4,800.00

Other Benefits (401K, etc) $ (i) 500.00

Equals:Total Salary Cost of One Tech for one Yr.( (c)+(d)+(e)+(f)+(g)+(h)+(i) above) $ 41,963.52

Add Payroll Costs:Continued…

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Lets Calculate Our Technician (Direct Labor) Costs:

Annual Cost Of One Truck:Your Vehicle Lease Expense or Truck Payment perMonth X 12 Months - $ 475 X 12 Months $ 5,700.00Your Monthly Fuel Cost Per Truck X 12 Months $ 3,600.00Your Monthly Repair Expense X 12 Months $ 1,800.00Your Monthly Truck Insurance Costs X 12 Months $ 1,800.00Your Annual Cost of Truck Registration Fees $ 150.00Your Cost of Other Misc. Vehicle Expenses perMonth X 12 Months $ 1,000.00Annual Cost of Materials (Average used by one truck $ 6,000.00Annual Cost of Uniforms Worn by one Technician $ 300.00

Total Annual Cost To Put a Truck on the Road(Add all the above) $ 20,350.00

NOW:

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SO: Our Annual Variable Cost to Put a Truck on the Road Equals:Total Salary Cost of One Tech for one Yr.(From the prior Page) $

41,963.52

Plus:Total Annual Cost To Put a Truck on the Road(From all the above) $

20,350.00

Equals:Annual Variable Cost to Put a Truck on the road $

62,313.52

At this point we need to estimate our Annual Productive Hours. This is probably the most important aspect of running a PMP business. Maximizing this number will determine how successful or unsuccessful you are in this business. What will determine how successful you are in this regard comes down to one word:

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RoutingYou must minimize drive time and keep your technicians on the job not on the road or in the office.

Let’s do the Productive Hour Calculation:Total Workable Hours per Yr = ( 40 StraightTime Hrs per week + 7 Total OT Hrs perWeek X 52 Weeks) 2,444 HrsLess:Annual Vacation hours per Tech (80 Hrs)Annual Holiday Hrs per Tech (80 Hrs)Annual Sick Time Hrs Per Tech (32 Hrs)Equals:Total Available Hours to Work Per Year 2,252 HrsMultiplied by: Utilization (ratio #of hours on the Job/Total # of Hours Available to Work) 60.00%(This number is usually about 60% for a well run company) Equals: Total Available Hrs that are Chargeable per Yr 1,351 Hrs

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Now the Exciting Part!!

What is Our Variable Cost per Hour?

Variable Cost per Hour Calculation:

Total Annual Cost To Put a Truck on the Road (From Prior Calculation) $ 62,313.52 Divided By: Total Hrs Available Total Available Hrs that are chargeable per Yr (From Prior Calculation) 1,351 Hrs Equals:

Variable Cost per Hour $ 46.12

Total Variable Cost:

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Remember that we need this calculation in order to calculate break even. Let’s take a look at the list of possible fixed costs.

Particulars Amount

Advertising $5,000.00Office Wages $6,000.00Office Wages – Payroll Taxes $3,654.00Office Wages – Benefits $4,800.00Office Rent $2,000.00Office Vehicle Expense $7,200.00Computer Costs $4,500.00Office Supplies $480.00Office Equipment Lease Exp $1,800.00Telephone $9,600.00Printing $3,600.00Office Maintenance $1,800.00Postage $2,400.00Accounting Fees $6,000.00Dues & Subscriptions $2,000.00Travel & Entertainment $3,600.00Utilities $2,400.00Misc. Office Expense $6,000.00

Total Fixed Expenses $217,634.00

Fixed Cost

Now: Its time to figure out our Fixed Costs.

Annual Fixed Costs.

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Let’s figure out how many Hours it takes to break even. In this exercise we need to assume various selling prices per hour.

From that we subtract our variable cost per hour to get our gross profit per hour. Once we know our gross profit per hour, we can calculate our breakeven point in number of service hours.

After we hit breakeven we start making profit in an amount equal to Gross Profit per hour multiplied by the number of hours that we sell over breakeven!!!

Break Even:

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Scenario 1 Scenario 2 Scenario 3 Scenario 4 Selling Price Per Hour $50.00 $60.00 $75.00 $95.00 Less: Variable Costs Per Hour $46.12 $46.12 $46.12 $46.12 Equals: Gross Profit Per Hour $ 3.88 $13.88 $28.88 $48.88 Annual Fixed Costs $217,634 $217,634 $217,634 $217,634 Divided By: Gross Profit Per Hour- Above $3.88 $13.88 $28.88 $48.88 Equals: Breakeven In Hours 56,091 Hrs 15,680 Hrs 7,536 Hrs 4,452 Hrs Net Profit per Hour after Breakeven

$3.88 $13.88 $28.88 $48.88

Break Even:

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[Never Be a Low Baller – Beat the competition with Quality Service!!]

Draw Your Own Conclusions about the pricing.

Let me leave you with this thought using the numbers in the assumptions.

At $50.00 per Hour - You would need well over 20 Trucks to breakeven

At $95.00 per hour – You would need 2 Trucks to breakeven

Use your own Numbers but;

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Owner

Increase the Value of your Firm

Employees – Create Opportunities for: Better Pay Better Benefits A Better Retirement A Great Place to Work

Putting it all together

Building Wealth (Increasing the Value of your Firm)

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Create a Plan for Growth Determine how you will fund the Growth Create Standardized Services Maximize Route Efficiency Price your Services for Profit Live the Dream

Putting it all together

How to Build Wealth in the PMP Industry

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Daniel S Gordon, CPAYour Next Step

PestPac & QuickBooks Consulting, Integration & Reporting Monthly Conference Call to Help Improve Your Results Year End Financial Reporting Year End Tax Services

Services Provided

If your CPA doesn’t know Your Industry, You Don’t Need Him!

Contact Info: Email: [email protected] Phone 973-300-0288

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Your Next Step

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