Archives for March 2019

*Published with permission in the September, 2015 Newsletter*

Put on the professional hat

Dear Dave,
My father is one-third owner in our family business. He isn’t involved with the company anymore, but he still insists on taking a salary. I’ve become a little bitter over the situation, and I was wondering if you think there’s a solution or if I should just get over it. -Tracy

Dear Tracy,
As an owner, especially one who is no longer actively involved in the company, he should be getting a distribution of the profits, not a salary. Specifically, he should receive one-third when the profits are distributed.

From what you’ve said, three owners form a board, or counsel, and you three direct the leadership and management of the company. If two of you outvote your dad on issues, he has to live with it because he’s what’s known as a minority owner.

Let me give you a visual. Draw three concentric circles so that they all overlap in the center. Any given two of them overlap on the sides, correct? It should look a bit like the Olympic symbol—a Venn diagram. In each circle write “owner,” “management and leadership” and “family.” This is a standard family-business diagram. Most problems in family businesses come when someone forgets which circle they’re in. You could be a member of the family but not have any ownership or be in leadership. You could be in leadership but not be part of the family or be an owner. You could also be a member of the family and be an owner but not work at the company. That would be your father.

I think you guys have to reset things in your business. It’s time for the working owners to sit down with your father and have an adult conversation about the mistakes that have been made where salaries and profit distributions are concerned. The discussion should be professional and gentle and go something like this: “Dad, we all set this up in the beginning. But we’ve made some mistakes because we shouldn’t be paying a salary to people who don’t work in the business.

“You’ve been repaid for your venture money and, from this point forward, you’ll be getting a distribution of profits instead of a salary. We think this is fair and reasonable. If you don’t agree, then we can discuss buying you out of your third of the company.”

I have two daughters and a son-in-law who work for me at my company. I love them with all my heart, but when we’re inside the building at work, we put on our professional hats and my name is Dave. I’m the boss and the CEO, not “Dad.” They work within their departments and answer to their leaders and to me. Then, when we sit down to dinner or get together for weekends and holidays, we switch gears and put on the family hats. It’s just Dad and the kids.

But you’ve got to have a professional relationship inside the family business. Otherwise, stupid things will happen or you’ll end up wanting to kill each other!
—Dave

Prevent a Partnership

Dear Dave,
I’m thinking about going in with a buddy of mine as partners in a landscaping business. Should I have any concerns about this idea? -Mike

Dear Mike,
I would beg you not to do this. Consider buying it and having your buddy work for you, or let him buy it and you could work for him. Either of you could work for the other for a percentage of the profits without being an owner.

If you can’t tell, I hate partnerships. I know you guys are friends, but anything with two heads is a monster. Something will happen where there will be a disagreement, and you guys will end up being mad at each other. I’ve been doing business counseling and coaching for two decades, and I can tell you that precious few businesses that function as partnerships last 10 years. Law firms and medical practices may be the exception, but they have unique partnership structures.

So many things can go wrong in these situations. All the bad things that happen to your family happen to your business, and all the bad things that happen to your business happen to your family. Stuff you never dreamed about will occur, and then you’re stuck to each other.

The only ship that won’t sail is a partnership. Don’t do it, Mike!
—Dave

There is nothing like an actual service call from the local plumber to open one’s eyes to the frustrations that customers face every day. In my case the tech actually did quality work, but somewhere along the way, management failed to provide adequate training that included a checklist of what to bring to each job.

It was a seemingly simple task. We ordered a new kitchen faucet. The company called on Friday to say the unit had arrived and that we were scheduled as the first call Monday morning. The dispatcher called at 8:15 AM Monday morning to tell us John Doe (not his real name, we need to protect the innocent) was on the way. That was good! John arrived and we spoke long enough to find out that John had been a plumber with this company for over 36 years. Wow, I thought. He must be good with that much experience and to have stayed with the same company that long, right?

Well it turns out John really was “technically” a very good plumber. He had some issues, not of his making, with the faucet that needed to be replaced and he had to customize a couple things to make the new one fit. However, he really did do a great job … technically. Oh by the way, this company is still on time and material so you pay for every minute!

Now you must understand my wife is an outstanding housekeeper. Our home always looks great, but what I am about to share with you would (or should) irritate any homeowner. To keep it simple, let me simply list a few of the irritating things that took place over the course of the entire day. Yes, it took him all day to replace the faucet. But there were issues he had to overcome so it wasn’t all his fault it took that long.

• Shoes – Plumbers work in lots of places so their shoes tend to be dirty with caked mud from past jobs and, in our case, the moist grass he walked across to get to the door. John did not have shoe covers nor did he take his dirty boots off prior to entering our home. Over the course of the next several hours John had been in the kitchen, the upstairs and main level bathrooms and downstairs to turn off the hot water. It was no problem tracking where John has been. Like Hansel and Gretel, there were bits of dirt and grass throughout our house where he had walked. My wife wasn’t happy.

• Drop Cloths – John showed up to work in my wife’s spotless kitchen without a drop cloth. My wife ended up providing not one, but five towels for the floor, the sink and under the sink. Granted, they were not new towels, but they still needed to laundered after John soaked some, wiped grease on others and, in general, messed them up. My wife really wasn’t happy!

• Tools – John was having trouble getting the old faucet off. After grunting and groaning a bit he asked me if I had any wrenches. We looked at my tools in the garage, but none would work. John then announced he would have to go back to the shop to get a deep socket wrench. After 36 years of work, I really thought he should have a tool like that on his truck. He didn’t, so he was gone for at least 15 minutes, which we were going to have to pay for. At this point, neither wife nor I were happy campers.

• Handling of Tools – By now John has returned and is back at work. Now I realize John may not have really nice, real tile, floors in his home. However after he “dropped” his tools on the tile, for the third time, I said, “John, could you be a bit more careful placing your tools on the floor. It is very easy to break a tile by dropping tools on it.” He was nice about it and did do a “bit” better from then on.

• Paper Towels – Guess what, while John was working he sometimes had wet hands. Sometimes he had gunk on him and other times he needed to simply wipe some water up. Apparently he did not bring rags or paper towels. However, he was sharp enough to notice there was a roll of paper towels next to the stove. If he used ten sheets during the day he used a half a roll. I might add he did not ask if could use them, he simply helped himself. At this point my wife is getting more upset. Paper towels cost money and she felt like John should have brought his own.

• Dust Pan and Broom – Midway through the process John had metal shavings and other debris collecting under the sink. Did John have a dust pan or broom on his truck? I assume not, as he asked my wife, “Mrs. Grandy, do you have a dust pan and broom I could borrow?” My wife, unhappily, got both for John.

• Cleaning Pad – The old faucet was finally off and it’s time to install the new one on our stainless steel sink. Again John says to my wife, “Do you have a cloth or pad I can clean the sink with before I install the new faucet?” This time my wife cleaned the area so John could do the work.

• Hold Pipe In Place – The faucet must have been twisting a bit. John asked me if I could hold the fixture while he tightened. Again, that is no big deal but what would he have done if I were not sitting in the kitchen watching him?

Now none of the above items were big deals. However, each one continued to say to the customer “I am sloppy; therefore my work is sloppy, too.” The sad part is that every one of the above items could have easily been avoided with a bit of training. The standard from management should say “Before you enter the customer’s home either remove your shoes or place shoe covers over your boots.” Also a standard tool inventory for each truck would have included a deep socket wrench. Clean drop cloths and clean rags should be standard for every call, and each truck should have a dust pan and broom on it. Better yet, really impress the customer and go back to the truck and get a vacuum and vacuum the area. It would have also been good to have some sort of cleaning pad on the truck as well to clean the sink with before installing new faucets or fixtures. Now dropping heavy tools on an expensive tile floor should be common sense…however common sense is nearly impossible to train!

Again, John’s work was outstanding. He was also a very friendly guy. However his sloppiness created a very negative impression with the customer, which in this case was my wife and me.

We have used this company for many years. They have 25 service techs and refuse to go on flat rate pricing. We continue to use them because they do the best work in town, but my wife cringes each time we have to call them because she knows it will take a minimum of an hour to clean up after they are gone.

A little training goes a long way. Take a look at your techs and think about the impression they are making with your customer. Remember, to the customer the tech IS the company.

Your accountant just called. “Bill, you lost $12,000 over the past few months. You better make some changes or else this is going to be a really bad year.” You hang up the phone, feeling really low and a bit upset, thinking ” I’m paying this guy $200/hour to tell me I’m losing money. I already know that. I can look at the checkbook and come to that conclusion for free! My question is: What went wrong and how do I fix it?”

The process of understanding why we lost money should have begun months ago. Step one is to create a month-by-month cash flow budget. That process involves projecting what our sales, cost of goods (labor and material costs) and overhead costs are going to be, on a monthly basis.

When it comes to overhead costs, it’s not enough to know that insurance is estimated to be $14,000 next year. We need to know what month the down payment will fall in and how much our monthly payments will be after that. When it comes to labor projections, we need to estimate which months we expect to be working a lot of overtime, and which months the techs are likely to work less than a 40 hour week. The cost of materials and equipment normally goes up and down with billable hours, so projecting what we will spend each month is relatively simple. Once we project the total annual purchases we can pro-rate those dollars monthly based on our projected billable hours. Bingo, our month-by-month cash flow budget is now complete. We now know what months are projected to be profitable and which ones are projected to lose money. By the way, once we have created our budget, the budget will be our basis for creating profitable hourly rates. That, however, is a different topic that we will have to discuss at a later time.

Back to the call from our accountant. Yes, we lost $12,000 over the past three months. But the question is whether that loss was expected or unexpected. If your company is like most trades companies, there will be some months that lose money while other months will be very profitable. That is the nature of the industry.

So how do we know if losing $12,000 over the past three months is a real problem or not. Perhaps our month-by-month cash flow budget projected a $15,000 loss over those months. If so, we can now relax a bit. Knowing that we lost $3,000 less than what was projected might even cause someone in the office to actually detect a smile on your face since you now know if the rest of the year comes in close to budget that you will actually make $3,000 more profit, for the year, than you projected.

But, let’s look at it from a different angle. Consider if the budget forecasted that the company should have actually made a $5,000 profit over the past three months. That means our real net loss was really $17,000 ($12,000 loss plus the $5,000 in profit we had projected to make.) What happened? Since we now have a budget, and we know what we actually spent, we should be able to pinpoint the problem. Here’s the process:

• Review Sales – Step one is to look at the projected sales for each of the three months. After checking, sales were pretty much what was expected. Conclusion, sales were not a problem.
• Material and Equipment Purchases – After reviewing the budget we find the company spent about $8,000 more than expected on equipment and materials. By digging a bit deeper we find out that our supplier offered a one-time 20% discount on XYZ equipment. Since this is the equipment we normally sell it was a wise investment to “bulk purchase.” Yes, it hurts cash flow right now but it will actually increase our overall profitability by the end of the year. Good move!
• Labor Costs – Upon review, labor costs were pretty much in line as well. Sure, we worked a few more overtime hours than expected but it wasn’t enough to account for the remaining $9,000 loss.
• Overhead Costs – The next step is to review each and every overhead cost in light of budget verses actual dollars spent. After review, most seem to be in line with two major exceptions. First, our workman’s compensation insurance was about $6,000 more than we had projected, which still leaves us looking for the other $3,000. Bingo, gasoline was up a bit over $3,000. Now the question is why? Perhaps we did more work and therefore used more gas. After checking, that was not a problem. Perhaps the cost of gasoline per gallon went up. Nope, the cost per gallon stayed pretty much the same. Lastly, perhaps one or more of the techs was abusing the company credit card. After we checked the records we found the problem. Seems Willy has been buying gas for his friends. Bye Willy!

The owner now knows what happened. Some things, like the gas situation, can be corrected. When it comes to the increased cost of W/C that cost will simply have to be built into a price increase since it will NOT go away.

The objective of creating, and tracking, a budget will tell the owner what’s going on. At that point it’s up the owner to do something about it. Bottom line, you can’t fix a problem unless you know what the source is. Creating a month-by-month cash flow budget, and tracking the monthly costs, will clearly show what is going on. Don’t depend on your CPA or accountant to tell you what’s happening. It’s your responsibility to know what is going on within your business.

*Published with permission from the August, 2015 Grandy and Associates newsletter*

Your raise is effective when you are

Raises are almost as much fun to give as they are to receive. Even after 20-plus years of running my own business, I love how a team member’s face will light up when they hear that they’re appreciated — and that appreciation is being shown through an increase in pay.

At my company, we don’t give out raises based on longevity. Just because you’ve been breathing air in the same building for 365 days doesn’t qualify you as raise-worthy in my book. But if you’ve brought value to the company, if you’ve made us money and shown yourself to be a valuable contributor — one who goes out, kills it and drags it home every day — you bet you’re going to be rewarded.
Your team is filled with players holding varying degrees of tenure, talent and maturity. At some point, each and every one of them is going to have that Jerry Maguire moment where they say, “Show me the money!” Inevitably, some of these team members will deserve for you to be more generous. Others, unfortunately, will have an unrealistic view of what they’ve brought to the table.

I almost never cut a team member’s pay due to poor performance. People are more than simple numbers on a weekly report, and as a leader you have an obligation to provide your team with everything they need to succeed. Sometimes, if a team member is underperforming, additional training or education is needed. Other times, a person may have personal issues outside work that require a little understanding, counseling and grace.

For players who are consistent contributors year-in and year-out, raises should be given happily and with a praise sandwich. Praise the person and their actions and talents, give the raise and praise the person some more. This is a time for celebration, because it’s a true win-win scenario. The company wins because it has a truly valued and productive team member, and the player wins because they know they’re valued and respected.

And that extra money in their pocket every payday doesn’t hurt, either!

In previous blog posts, we introduced the new in-house parts and warranty program. We talked about how things fail based on a normal curve and showed how the warranty dollars would be offered to the customer by incorporating the cost into the initial purchase of the equipment (part 1). We then talked about how to handle the money and the necessary paper trail (part 2).

This is the final article in the series, and we’ll talk about creating a Premium Maintenance Agreement.

Setting up a Maintenance Agreement Department
When the company has enough maintenance agreement work to keep the equivalent of one tech busy full time, then it’s time to create a totally separate department for maintenance agreements. If a tech spends one hour of wrench time at the customer’s home, twice a year, that will total two billable hours. The average service tech bills out approximately 1,000 hours a year. That means the company will need 400 to 500 agreements in place to create a totally separate department.

Advantages of Having a Separate Maintenance Agreement Department
When it comes to spreading overhead costs, most fixed overhead can be spread across other departments besides maintenance. The end result is predictable. The generated hourly rate for the maintenance department will be low (little overhead assigned) and, therefore, the cost of the maintenance agreement can be held down. Obviously, if the company shifts fixed overhead to other departments, the cost of operating those departments will go up as will the necessary hourly rate to make a profit. The hope is that the company has more flexibility in pricing within those departments than it does in the maintenance department.

Diagnostic Fees
When it comes to setting proper hourly rates for residential service work, there are two ways the company can handle the diagnostic fee.

• Include the diagnostic fee in the pricing calculation. If the diagnostic fee is included, it tends to lower the required hourly rate.
• Exclude the diagnostic fee in the pricing calculation. If the diagnostic fee is excluded, it tends to increase the service hourly rate; however, that means 100% of the diagnostic fee collected is pure net profit.

Note the difference. As an example, the Sample Company from our Labor Pricing software shows the hourly rate with the diagnostic fee included is $115.52. When the income from the $85,000 of diagnostic fee is NOT included in the calculation, the rate jumps to $151.01. That’s roughly a difference of $35.00 per hour. That is not a big deal if you are on flat rate. It is a big deal if you are on time and material.

Advantages of Excluding the Diagnostic Fee
There are significant advantages to excluding the diagnostic fee when calculating your hourly rate for service.

• Waiving the fee. When the fee is NOT included as part of your service rate, you then have the ability to waive the fee at any point in time, for whatever reason. Why? The dollars are NOT included in your pricing. It doesn’t cost you anything.

• Maintenance agreements have an additional “plus.” Since the company now has the ability to waive the diagnostic fee, without hurting the bottom-line profit, another benefit of being an annual maintenance agreement customer is that you can waive all, or are least 50%, of the normal diagnostic fee.

Maintenance Agreement Sales Will Increase
The new maintenance agreement customer now gets annual or semi-annual maintenance of the equipment, a 10-15% discount off of any additional repairs made during the year, priority service, AND they save the diagnostic fee. That adds up to real savings.

Now Add Full Coverage for All Repairs to the Maintenance Agreement
When coverage for ALL repairs (labor and parts) are part of the annual maintenance agreement, the program has SUPER value to the consumer.
The annual agreement now has 100% coverage for any breakdown once the agreement is in place.

Pricing
The math for including full coverage is simple. Since we know the retail price is $550 for 10 years, the “annual” cost is $55. Simply add $55 to whatever your standard annual maintenance agreement is. If your current price is $140, the new full-coverage price would be $195 ($140 + $55).

Monthly Credit Card Charges
If you charge your customer’s credit card each month, that means you would only need to increase their monthly charge by $4.58/month. That will NOT be a stumbling block to selling the agreement.

New Premium Maintenance Agreement Customers must have new Equipment
Simply allowing all customers to take advantage of the program can sink the ship. If you were a customer, with an old system that had not been properly maintained, would you sign up? You bet you would! The new maintenance program is strictly for customers who have installed new equipment. Note, you can now offer the full 10-year parts and warranty as either part of the purchase price or through the new maintenance agreement program. The choice is yours.

Cost of Premium Maintenance Agreements
You will remember the cost of a 10-year agreement was set at $550, which is equal to $55/year added to the maintenance agreement. Based on our last discussion you may want to increase the added cost by more than $55/year for older equipment.

Paper Trail
The first step is to create a “PMA Current Liabilities” account which will necessitate a totally separate checking or saving account be set up to hold the money.

Unlike the account set up for to hold the new equipment funds, the “PMA Current Liabilities” account will hold all funds for all years. You will not need to create an additional account each year like you will for the newly installed equipment.

Again, when PMA money is received (either monthly or all at once) the warranty portion of the money received will need to be placed into the PMA Current Liabilities account. When repairs are made, like on new equipment, the customer will be provided an invoice showing the cost of the repairs with a “No Charge – Covered by Warranty” written on the invoice. The company will want to keep a copy for year-end money transfers.

End of Year Transfer
At the end of the year the company will need to move 50% of whatever is in the PMA Current Liabilities account into income. If the money transferred is greater than your actual cost during the year, you made money. If the amount transferred to income is more than the actual repairs, the program lost money…for that year. Keep in mind the repair money has profit built into it through your hourly rate and the agreement has a gross profit built in as well. The only way the program will not make money is if repairs on new equipment do not follow the standard deviation curve.

Example
Let’s assume the company has sold 200 extra value agreements. The extra value portion of the of the agreement was $55, so $11,000 needs to be transferred into the liability account during the year ($55 x 200 = $11,000). At the end of the year half of the money in the account needs to transfer as income to the company with the remaining 50% staying in the account, untaxed.

Keep in mind the $55 figure and the 50% transfer figures are suggested figures. You may choose to change one, or both, of the figures. The actual numbers chosen are not nearly as important as the fact that you have logic backing up the numbers you use.

What to Do at the End of Year Two
You will remember we needed to create a different liability account each year for the new equipment sales. However, when it comes to the PMA program, all the money, each year, will be transferred to the one PMA account.

Our Example
By the end of year two, the company has renewed 85% of the year-one customers, plus 250 additional PMAs were sold, plus half the money from year one is still in the account. The bottom line is that there is now $28,600 dollars in the PMA liability account. Half that money, or whatever percentage you are using, will then need to be transferred into the checkbook as income leaving the remaining $14,600 in the account, untaxed.

Uncle Sam’s Perspective
Remember Uncle Sam in more interested in the fact that you have a logical plan to hold and transfer funds then he is in how you do it. Therefore give YOUR program some serious thought and pick numbers that you can back up with logic. Once the plan is created, stick to it. Be sure you document both the plan and the fact that you carried out the plan. If you do Uncle Sam will be happy…and so will you!

As was mentioned in the original article, be sure to touch base with your CPA before starting the program as state laws for remaining funds for warranty are often different.

How would you like to create a customer cheerleader in one minute? You can. We’ll share with you some thoughts from Steve Toburen, one of the best customer service trainers in the country. Below you will find seven (7) things your techs can do on every service call to help create customer cheerleads.

1) Ring the bell once. Listen closely. If you can hear the doorbell OUTSIDE your client can usually hear it INSIDE! So don’t irritate the customer by ringing the bell again causing them to desperately run for the front door!

2) Step back three feet. Don’t crowd the door

3) Your helper should be visible. If there is a helper on the job be sure he, or she, is visible and normally you want that person one step down.

4) Look your customer in the eye and SMILE!

5) Introduce yourself. “Hello, Mrs. _______ . I’m (your full name) with (company name). Hand the customer your personal company business card. This is (helper’s full name) and he (or she) will be helping me today.”

6) Helper says, “Hi, Mrs. _________.”

7) Hand the customer a FREE gift. Give them something. Perhaps it’s a calendar, refrigerator magnet, chip clip with your companies name on it or whatever makes sense to you.

There you have it, seven quick and simple ways to create a customer cheerleader in less than a minute!
Want another idea? Print these seven simple reminders and laminate them. Then place the tips on the dashboard of the technicians’ vehicles. We all need reminders.