Archives for June 2019

Proper Labor Pricing is “Still” an Industry Issue

By Tom Grandy

Proper labor pricing, or I should say profitable labor pricing, is still a major issue within the trades industry.  There have been positive changes within the industry over the past 30 or 40 years.  New software has been developed, mobile technology has become common and techs are better trained than ever before.  However, one thing has not changed.  The overall life cycle of the industry has remained basically the same.

Most are aware that over fifty percent of all small businesses fail within the first five years.  Although statistics are not kept specifically for the trades industry, I strongly suspect the failure rate within the trades industry is significantly higher.  Why? Because the process of starting new companies within the industry has not changed within my lifetime. 

We are all aware of the process.  A highly trained and skilled technician is working for someone else.  One day a little light bulb goes off.  “Ghee, they are paying me $XX.XX/hour and the company is charging the customer this large amount of money.  If I went into business for myself, I could charge a lot less and be rich within months”

Thus, the process begins.  The highly trained technician leaves the company on Friday and by Monday a new company is born under the leadership of a highly trained technician that is technically very proficient; while at the same time is woefully lacking in the area of business skills.  The new companies’ hourly rates are easily set after having called every other company in town to find out what they charge.  The wise new owner then sets rates somewhat below everyone else (which tends to ruin the market for all other contractors) with the assumed knowledge that he can charge a lot less and still be rich.  After all, my old company was paying me $24.50/hour while charging the customer $175/hour. There are a lot of profit dollars between $24.50 and $175, or so the thinking goes.

Ironically, things go well the first couple of years since the new company has little overhead compared to everyone else in town.  The startup company grows, the costs of doing business rise however hourly rates tend to change very little, if at all.  Profit seems to be shrinking but no worries, sales are increasing so all will be well.  Five years later the doors close on yet another relatively new company.

It really is a shame because the new owner usually does an outstanding job technically.  However, without the knowledge of how to initially set profitable hourly rates and more importantly, how and when to increase those rates, another business becomes a statistic.

It’s not like training is not available, but far too few companies take advantage of it.  Pride raises its ugly head.  The new owner’s thinking is just like those who have gone before them.  “We will borrow a little more money to help us get over the hump and soon, very soon, everything will be all right.”  Significantly raising the company’s hourly rate is simply not an option because the new owner is totally convinced the customer simply won’t pay that much, or will they?  The reality is as true today as it was 40 years ago.  If the company simply does quality work, do what they said they would do and show up on time, the hourly rate they charge would not even be on the top ten list of concerns for most customers.

I continue to be amazed at the number of trades companies that I have worked with that have hourly rates in excess of $250/hour.  Sure, they are on flat rate pricing so the customer never sees their actual hourly rate but all those companies have two things in common.  First, they continue to have consistent growth, and secondly, they are very profitable. 

Do yourself and the industry a favor.  Set proper hourly rates so your company and indirectly the industry, can all make a reasonable profit.  Don’t be shy.  If you need help, ask for it.  You will be glad you did.

Profit University Audio Series – Selling Your Business

June Profit University Audio Series

This Q and A session with Bill Kinnard, President & CEO of Grandy & Associates, and Gary Van Sistine of Creative Business Services, explores the many aspects you should know when thinking about selling your business. They discuss topics such as timing, pricing, finding the right buyer, preparations for the seller and much more. With the proper planning you can make the transition to retirement a simple and orderly experience.

To access this months program, click HERE.

Listen to a sample of this months’ program! The Profit University Audio Series features a new trade focused audio presentation every month. These programs are designed to provide the trades contractor relevant information that can help their business immediately. Get more information on this program or sign up for a monthly subscription today.

Profit University Audio Series Badge Logo

Gary Van Sistine

Reasons Parents Made Us Pick Up Our Toys

By Tom Grandy

Most reading this article have children.  If so, you know the drill.  At the end of the day we instruct our children to put their toys back on the shelf before going to bed.  There are several reasons for this:

  • Safety of Others – Depending on the age of the child, the parent will come into the child’s dark room one or more times during the night. Tripping on toys can be very dangerous.
  • Preserve the Life of the Toy – Toys on the floor run the risk of being stepped on resulting in damage or even destroying the toy altogether.
  • Know Where It Is – How many times has little Johnny or Susie asked “Mom, I can’t find my toy. Do you know where it is?”
  • Learn Discipline – Habits learned early tend to be remembered.

Guess what?  The above principles also apply to the tool’s technicians use throughout the day.  Putting tools back where they belong saves time and money.  It also reduces loss and/or damage.  Spending time looking for a tool (or repairing/replacing a broken or damaged tool) increases the cost of the job and therefore lowering profits.

It’s a shame we as adults often don’t appreciate the value of what our parents taught us until the “need” arises.  The good news is that we all have the opportunity to change and form new habits.  Putting tools back where they belong helps everyone within the company.

Debt Steals Your Profit and Increases Your Taxes

By Tom Grandy

A few months ago you had your annual meeting with your CPA and he/she told you the same thing they tell you year after year. “John, you had a great year.  Your net profit was $88,000 last year which you will pay taxes on.”  Wow, that made you feel really good until you looked in your checkbook.  The checkbook didn’t have anywhere near that amount of money in it.  So where is it?

Debt, in the form of loan payments is the silent killer, kind of like carbon monoxide.  You feel good while it’s sucking the life out of you.  Every loan payment is made up of two parts.  The first is principle.  That is the portion of the loan payment that actually applies towards paying for the vehicle or piece of equipment you purchased. The other part of the loan payment is interest.  This is the amount of money it is costing you to borrow the money from the bank or lending institution.

“Ok, I get that but how does that hurt my profitability and taxes?”  The problem is that principle and interest are handled DIFFERENTLY from an accounting/IRS standpoint.  The interest portion of the loan payment is treated as an expense in terms of your P/L statement.  The principle portion of the loan goes off to never-never land.  Sure, it’s in your assets and liabilities but it does not show up in your P/L Statement and THAT is what your profitability is based on for tax purposes.

Let’s walk through an example.  Our sample company grossed a $1,000,000 in sales.  At the end of the year the net profit shown on the P/L statement was $73,500.  This same company has the following loan payments:

Principle           Interest            Total Loan Payment

Vehicle Loan #1               $ 567               $ 123                      $ 690

Vehicle Loan #2                  463                   99                          562

Vehicle Loan #3                  614                  137                         751

Equipment Loan                  512                  107                         619

The total interest for the year is $5,592 ($466/month X 12 months = $5,592).  Interest is treated as an expense by Uncle Sam and shows up that way on your P/L statement.  The total principle paid was $25,872 ($2,156/month X 12 months = $25,872) but it does NOT show up in your P/L statement.  That’s right.  You wrote the check and the money came out of your checkbook but you are not allowed to count the principle as an expense.  Only the $5,592 interest showed up in your P/L Statement.  Ouch!

Real Profit

Now, back to our CPA’s annual review.  Based on Uncle Sam’s rules the company made a $73,500 net profit.  However, from a cash flow standpoint (real dollars in and real dollars out) the company made a $47,628 net profit ($73,500 – $25,872 = $47,628).  This dollar figure should be somewhat closer to what you really had in the company checkbook.

Taxed on Money You Don’t Really Have

The above helps explain the difference in the profit that your CPA and/or Uncle Sam say you have, verses what’s really in your checkbook.  However, it’s telling you something else as well.  It’s telling you you’re actually paying taxes on money that is not in your checkbook.  Double ouch!  “But Tom, that is not fair.”  I agree 100% but guess what, life is not fair.

What we discussed above was loans.  However, general debt repayment is even worse.  By general debt, I am talking about paying back money on a line of credit or a personal loan from you, a friend or investor.  General debt also includes paying back money you owe the supplier, or paying off a line of credit and/or credit card debt.  These types of “loans” are pretty much all principle. That means any money flowing out to pay for these things is pretty much completely ignored in terms of being able to count it as an expense.

The Solution

The solution is really pretty simple.  Stay out of debt!  In order to do that the company needs to properly price their products and services.  That covers two areas:

  • Equipment Replacement vs. Depreciation – Depreciation is an accounting term that allows the company to write off a portion of the original purchase price, normally over a five-year period. But even that is looking at original costs, not future replacement costs.  Equipment replacement cost deals with what it is “going” to cost you to replace it years in the future.  For example, let’s assume an existing truck will last the company three more years and will cost a net $30,000 after trading in the old vehicle.  You then take the needed $30,000 and divide it by the three years you have left before replacement.  That means the company will need to set aside $10,000 per year over each of the next three years in order to have the money to replace the current vehicle with cash.

That sounds like a great idea, but as usual there is a catch.  The Equipment Replacement dollars you put back is an expense to you (from a cash flow perspective) but to Uncle Sam it’s profit and he will tax it!

  • Earn A Reasonable Profit – Be sure to price your products and services at a proper net profit from a cash flow perspective. A well-run company should generate roughly a 12% net profit or more.  The net profit generated covers company growth.  It will fund increased inventory and your growing accounts receivable while at the same time providing cash to purchase new equipment and vehicles.  Generating a significant net profit will help keep the company out of debt.

Now you know where the profit dollars your accountant said you had, went.  You also know how to stay out of debt.  Remember, there is a huge difference in knowing what to do and doing it. The choice is yours.

If you want to know what you should be charging per hour and take into account your equipment replacement costs, then our June monthly special is right up your ally. The June special is the Labor Pricing for a Profit Software and you can get your copy for 25% off the normal price. By building your financial model forma cash flow perspective, you will know exactly what you need to charge to cover all of your real costs from a cash flow perspective plus generate the profit you are looking for. Get your copy now here.

Free Resource

Knowing how to keep your business profitable is more important than ever.

Download our FREE e-book today and learn how you can keep your business running well for years to come, even when other businesses fail.