And, Now the Antidotes
The Antidotes to the Ten Mistakes
Labor and consumable install parts should be 2/3 of the Equipment bid on a sustainable average. That means, on a $100K bid: $60K Equipment + $30K Labor (50% of Equipment) + $10K Parts (16% of Equipment). Labor and Parts bidding are the highest risk in every project and of the course most of time they are under-bid.
Terms are very important to maintaining a healthy Ci company. A 50% deposit and 45% second payment tied to a specific date at the beginning of the project when all is well, helps cash flow. By leaving 5% at the end, you will have less collection issues as well. By using a date not an event, your admin people will be able to request payments without fail. For quick turn projects (inside 3 weeks), consider 80% up front and 20% at final.
Revenue recognition is a huge issue with CI companies: some do cash, some do project completion and many shades in between. There is only one proper way: recognize revenue when goods, labor and parts are delivered to the project. This way you align revenue with costs and can better manage the process.
The common mistake of most companies is that they pay too high of salaries and often capped them for their salespeople. This does not motivate the salesperson and keep him/her selling. Consider a moderate salary $50K and use something like 3% on sales on the 1st million; escalate to 4% on the second and maybe even more on the third. Keep total pay under 7%. It is critical to pay the commissions like clockwork; don’t screw around with your rainmakers. Also, if you can pay them on the initial deposit closer to the closing; it is a better reward-for-effort practice. Keeping commissions paid when the company gets paid keeps the salesperson motivated to collect. Forget about margin calculations in this. This is your policing responsibility and your salespeople should not be independently pricing jobs.
Everyone says Just In Time but few practice it. In a JIT business you should have only enough parts for less than 60 days of usage on trucks, and you would only have “assigned” inventory in the building; likely only a week ahead of delivery. Calculated inventory buys would be only made against future known production on the books. All returns would be processed immediately. These are all good practices; the numbers don’t lie.
The billable hours per tech per week is a main indicator of profitability. Many companies get less than 20 hours billable per tech. Charging for travel time and billing for project time in the office, and adding a parts delivery service can greatly increase this utilization. Solid work plans also improve productivity.
We have no problem with how much owner’s want to pay themselves. The issue is with how they do it. We believe you should treat your salary as what is needed to replace you for what you do in the business. This is the w-2 component. The bonuses/draws should be used to reflect other compensation the owner wants within the operating year. And, of course, distributions to members/partners and dividends to shareholders can be done from the balance sheet and are not in your operating earnings. In this way, you will have a more presentable view to the outside world of your business.
Hiring in CI businesses tends to be reactionary. We think every CI owner should have a 3-year hiring plan; outlining key positions and changes in org structure. Many of us operate with the personalities we have today. The goal should be to get to the best functional organization with the very best people. The right people in the right seats!
If you truly understood the long term business you receive from your best clients, you would know they repeat buy and influence many others to buy from you. Yet, we typically have few programs to keep them informed and excited about our service and the future potential with them. Ask yourself do you offer upgrade programs, service check-ups and other client friendly services. Do you gauge satisfaction?
Most companies take the cash out of the business almost to the detriment of the business. Sometimes this is in an effort to avoid taxes or keep the owner’s lifestyle. Great companies should have one–year of their payroll in retained earnings in cash in the business. If you have 50% to 100% of your annual sales run rate in equity, you have built a very successful company. You will be able to weather almost any storm the marketplace present. Congratulations.
We hope there are a few nuggets of wisdom in this brief list. Let us know if we can help in any way.