In this issue ....
Between the two of us, we have gleaned 24 years of observing Ci companies and studying their performance and metrics. The traditional Ci business has spawned perhaps three dozen $10M+ revenue companies. As a reference, the recent CE PRO 100 called out only 10 residential traditionalists with $10M+ revenue.
Arguably that is 10 in a space of over 4,000 identifiable CI residential companies.
Why is it that this mark is so hard to hit? And, what is in store for companies breaching the $10M revenue mark?
Consistently doing $10M in revenue requires a steady flow of medium to large projects. Seven of the ten average $40K to $60K per project, while 3 live on $90K to approaching 200K average projects. Strong trade partner relationships define most of these companies and provide an evergreen spring of project business.
But what about profitability at the top echelon of CI companies? If 10% net operating profit is the gold standard, how many exceed it? We believe less than 5 touch that level consistently.
In fact, being bigger seems to present challenges for conquering efficiencies. Most companies we have reviewed seem to charge plenty for their services, the complication comes in the productivity of their billable employees. Most do not exceed $10K in Labor Revenue per billable tech a month and many do not achieve 50% labor margin. Of the two, getting a strong labor margin is the most important metric.
While overall Revenue per Employee is over the $200K benchmark and at $300K for a few, our experience indicates most of the revenue does not fall to the bottom line. So, if RPE doesn’t tie to profit, is there a meaningful measure that does? We think the answer could be to measure the gross profit generated for each hour of tech payroll. (This is not the same as Gross Profit per Billable Hour, which is easily distorted by billing differences between companies.) Our quest is to find how much gross profit goes out on the backs of our installers.
Our data suggests that if one hour of tech time generates over $125 of total gross profit (see calculation below), you are doing a pretty good job of leveraging your billable resources. $150 of GP per hour of tech time puts you in the “excellent” category.
The metric includes all paid hours: cost = direct + overtime + subcontractors. GP = GP from all materials + labor revenues (at 100% GP, as labor costs are in the denominator of the equation)…
Labor Revenues + Materials GP
Total Labor costs
As our earlier writings have suggested there are many factors that go into getting great labor margin and productivity. We hope this simple measure uncovers a new challenge for each of you as you grow past significant milestones in the business. Our conclusion: Bigger businesses can & should generate profits as successfully as smaller companies. If they don’t, why bother?bother with all the extra effort?