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How Much Debt is Too Much Debt?

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By Tom Grandy, Founder

There are few commercials on the radio that irritate me more than this one: “Don’t let your credit card company fool you into thinking you owe the full amount of your credit card debt.”  Dah, of course you owe it.  You consciously made a decision to purchase something (knowing what it cost) and by using your credit card you made an agreement to pay for the item.  It’s called personal debt and yes, you need to pay it back.  That is what integrity is all about.

I understand our whole economy is built on debt but guess what, one day it will catch up to us and it will not be a pretty picture.  Many of you remember 2008 and 2009 when the stock market fell and the economy went way south.  I can remember being totally shocked to hear how many of the Fortune 500 companies were in panic mode.  It wasn’t because of the potential lost sales.  They were panicked because of their “unexpected inability to borrow money” to meet payroll.  Billion-dollar companies dependent on “borrowing money” to make payroll.  Wow, that was an eye opener.

Debt has serious consequences for individuals, small businesses and corporations.  Outside of the obvious additional overhead costs to the company, debt creates a false sense of profitability.  Any and all principle repayment on debt reduces “cash flow” profitability dollar for dollar.  The irony is that is DOES NOT affect the normal P/L statement from an accounting standpoint.  Let me explain.

If the company has a $500 loan payment of which $100 is interest and $400 is principle guess what shows up in the P/L statement?  Right, only the $100 in interest shows up as an expense.  However, from a cash flow perspective (dollars in and dollars out) the company wrote a check each month for the full $500.  Where did the other $400 go?  Well, pretty much off to never-never land.  Sure, assets and liabilities are affected but not the P/L statement.

Think about it this way.  The company produced $1,000,000 in gross sales.  They have multiple loan payments plus money going out to pay off their line of credit, which is quite possibly maxed out.  The principle portion of the loans and line of credit repayment total $35,000 a year.  The company’s P/L statement shows a net profit of $63,000 for the year.  Now 6.3% net profit isn’t great but for many companies there would be a great deal of rejoicing with a $63,000 profit after all expenses, and salaries, had been paid.  However, there is NOT $63,000 in the checkbook!   Why not?  Because the principle portion of the loans and the line of credit repayment sucked out $35,000 of what the CPA and Uncle Sam called profit.  Worst yet, the company now needs to pay taxes on the “accounting” $63,000 when in reality they only made a cash flow profit of $28,000.  Sound crazy?  It’s not.  I have worked with companies that found their ENTIRE net profit was eaten up by the principle portion of their debt repayment. 

How much debt is too much debt?  The answer is quite simply, how much REAL profit do you want your company to make?  If you want to keep what you earned…eliminate debt!

Now, the reality is that most reading this article have at least some debt.  My suggestion is quite simple.  Be sure you include the full amount of the loan payment (or what you want to pay off of your line of credit) as an overhead cost just like rent and utilities.  That means listing the entire loan payment, principle and interest, as a cash flow expense.  Once you know your true overhead you will be able to set proper hourly rates to cover those costs while generating the profit you desire.  The good news of including the full amount of the loan payment in your overhead is this: once the debt is paid off, the entire loan payment, principle and interest, goes straight to the bottom line as profit.  Each time a debt is paid off profitability increases without having to raise your hourly rate. 

Debt may not be a four-letter word you think about a lot but it’s just as destructive.  Count the cost before you borrow those additional funds, no matter what the purpose.  Remember, there will be another 2008–2009 in the future.  The less debt you have, the better the possibility of staying in business when (not if) the next recession comes.

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  • Lesson 1 – Foundations of the Financial Review (30 minutes)
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  • Lesson 3 – The Balance Sheet (30 minutes)
  • Lesson 4 – Payables & Receivables (15 minutes)
  • Lesson 5 – Hill & Valley, Debt Reduction, & Profit Sharing (25 min)
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Techs Are Competitive By Nature

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by Tom Grandy, Founder

Have you ever watched little boys play baseball, basketball or football?  If so, you noticed one thing every time.  They are competitive by nature.  For the most part, they were not told to play hard or give their team their best.  It’s nature, they are competitive by nature.

Guess what?  When little boys grow up nothing changes, they are STILL competitive by nature.  They want to win and they want to do better than the other guys on their team, and for sure the guys on the other team.  That same competitiveness carries over into the workplace.  Service techs are competitive by nature.

Now, being competitive implies there is a goal to reach.  When participating in school sports the goal was easy to define.  The goal was to win the game and/or the championship.  The goal was in plain sight.  However, when it comes to the workplace the goal can sometimes be less clear. 

Without a clear goal in sight, what is the incentive to do your best?  Sure, we should all do our best at whatever we do, but let’s face it.  If there isn’t a specific goal to work towards, few of us excel every day.  However, if a specific goal is set and performance is measured against that goal, what happens to productivity?  It increases.  If there is a reward involved when it comes to meeting or exceeding the goal, the competitiveness kicks in.  Service techs need a goal to shot for and they need a defined reward for meeting or exceeding that goal.

Consider measuring the techs gross dollars earned per billable hour as defined in the lead article.  Meeting and/or exceeding those specific goals will be a win-win for the tech as well as the company.

Is your goal to become an owner one day?  Is so, now would be a great time to start learning the “business side” of business.  Check out Grandy & Associates Online Training.  There are all kinds of programs designed to help you grow and prosper no matter what your job description is.  The modules are normally $39.95 each but the Website Special this month is only $29.95 per module.  Check out the Online Library and see what program best fits your needs.  Check out this month’s Website Special . 

Who Is Your Go-To Tech?

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by Tom Grandy, Founder

There are 30 seconds left in the game.  Your team needs a three-pointer to defeat your arch rival from across town. Coach calls a time out.  The question?  Who is going to take the last shot?  He could tell whoever is open to take it but more than likely he will ask Billy to try to take the last shot.  Why?  Statistics.  The coaches have been keeping records the entire season.  They know statistically who is the best three-point shooter.  As you might have guessed Billy has scored more three-pointers than anyone else and also has the highest percentage of made shots.  The choice was easy if stats are being kept.  Billy takes the last shot.

Let’s take a look at YOUR service techs.  Which one is the most productive in terms of dollars generated per billable hour?  Do you know?  If not, you should because it drastically affects the Service Department’s profitability.

The first step is to determine a goal.  How much “should” each service tech be bringing in per hour to hit your gross sales goals.  To determine that, you will need three pieces of information.

What is the current hourly rate you are charging the customer? Let’s assume it $145/hour.

What is the average cost of materials sold per billable hour? This varies by trade but for the HVAC industry, it’s about $20/hour in part sales (cost).

What is the average parts markup for parts in the Service Department? I realize it is sliding scale, but in general the average parts markup is usually around 100%.

Armed with the above information, we can now determine what each service tech should be bringing in per billed hour.  The number is $185/hour for each hour they bill the customer ($145 + $20 parts cost + $20 parts markup = $185).  Now we know what the goal is for each service tech. 

The question is, who is hitting that goal and who is not?  For this, we will need the gross dollars billed per tech for the month and the actual billed hours charged the customer. 

Note:  these are not the hours turned in on his time card, these are the hours he was able to actually charge the customer during the month.  Do the math.  Look at the gross dollars brought in for a period of time.  It might a week, a month or longer. Let’s look at a month for Sam, Ed and William.

Sam: 

He billed the customer $13,200 in gross dollar and he worked 77 billable hours. 

Note: these are not the hours he turned in on his time card, these are the hours he was able to charge the customer during the month. 

Revenue brought in per billable hour = $13,200/77 billed hours/= $171.43/billable hour

Ed:

Ed billed the customer $16,325 in gross dollar and he worked 83 billable hours. 

Revenue brought in per billable hour = $16,325/83 billed hours/= $196.69/hour

William:

William billed the customer $11,835 in gross dollar and he worked 74 billable hours.   

Revenue brought in per billable hour = $11,835/74 billed hours/ = $159.93/hour

Look at the three service techs.  Which one is the top performer?  Even though the number of billed hours varies by tech, it is pretty obvious that Ed is the Service Department’s top performer.  He is the go-to guy.

Armed with this information, what kind of decisions can be made:

If one of the service techs needs to be transferred to the Installation Department for a day, which tech needs to go? The answer is to send the lowest producing tech, which would be William. 

How would profitability be affected if Ed is transferred to Installation for a day instead of William? Ed bills out at $196.69/billed hour, while William bills out at $159.93/billed hour.  That is a difference of $36.76/billed hour.  If Ed is transferred and William is kept in Service, and 4 hours are billed out that day, it would have cost the company $147.04 ($36.76 x 4 billed hours = $147.04) in gross sales.  This doesn’t need to happen very often for the gross lost dollars to really mount up.

If one of the three techs needs to be laid off for a period of time, who goes? Again, the lowest producing tech needs to go which is William.  The last to go is Ed.

Once the goal is set, which in this case is $185/billable hour, it can be a pretty simply process of setting up a reward system based of productivity.  Keeping a few statistics to make decisions can scientifically affect the bottom-line profitability of the Service Department. 

Are you interested in being a better owner or manager?  If so, check out Grandy & Associates Online Training.  There are all kinds of programs designed to help you grow and prosper no matter what your job description is.  The modules are normally $39.95 each but the Website Special this month is only $29.95 per module.  Check out the Online Library and see what program best fits your needs.  Check out this month’s Website Special . 

Stick to Your Price

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By Tom Grandy

Trades companies today sell in a variety of ways.  Sometimes it’s the owner themselves in the sales role.  Other times the techs are doing the presentations while larger companies tend to have full time salespeople.  No matter who is in front of the customer there is a high probably that at some point, after the presentation has been completed, that the potential customer is going to request a lower price.  I guess we have the automobile industry to blame for that.  Who pays sticker price?  No one, especially since Americans have been bombarded their entire life with sales.  There are special holiday sales, good customer discounts, employee discount pricing and the famous savings of thousands of dollars at year end for the “Have to make room for new inventory sale!”  So why would anyone pay full price?

There is a phrase I have heard and reflected on for many years.  The phrase is “Just because you can, doesn’t mean you should.”  The calculated price provided the customer should cover all costs while generating a reasonable profit.  If this is true, why negotiate and reduce your profit?  If you negotiate, word will get around, like the automobile industry, that your initial price is not the real price!

I just finished working with a 30-old company that builds custom cabinets for very high-end customers.  Most of their sales are through designers, architects or directly through general contractors.  They have built a reputation of doing top quality work, doing it on time and ALWAYS backing up their work.  That is reflected in the fact that nearly all their work comes from word of mouth recommendations.  Their communication with their customers exceeds all expectations.  Their word is their bond…old fashion perhaps, but refreshing in today’s world.

Their salesman, we will call him Jack, shared a recent experience with me.  He had made his presentation to the general contractor which was $78,000 for all the cabinets in the house.  He had worked with this contractor for many years providing quality work and outstanding communication.  The contractor told him he had another bid for roughly $50,000.  He then asked if he would lower his bid.  He refused, telling him about the quality of work, timeliness of their installations and responsiveness when minor problems popped up.  The general contractor then told him if he would drop his price $5,000 the job was his.  Jack refused.  The contractor told Jack he could not believe he would walk away from a job that big over $5,000 dollars but Jack did.  Guess what?  The general contractor called him the next day and accepted the bid at the full $78,000 price.

Now granted he stood his ground because of the reputation the company had earned for over 30 years.  If your company provides the kind of quality of work this contractor does, don’t lower the price… unless you want to negotiate price with all your customers for the rest of your life.

Knowing that the company MUST charge $XX.XX/hour to generate a profit also provided a bit of extra confidence when speaking to the potential customer.  As the company grows, hourly rates are “forced” to increase.  The problem lies in the fact that most techs and/or employees do not understand why those rates need to increase.  They already think you are ripping off the customer while getting rich yourself.  There is good news.  We have a program entitled “Why do we need to charge so much?” walks the viewer through the process of setting proper hourly rates.  When tech/employees understand “why” you need to charge what you are charging they tend to stop underbilling the customer.  This program is normally $99.95 but this month it’s featured as the Website Special for only $79.95.  Order today!  As always, our products carry a 100% satisfaction guaranteed or you money back.  If for any reason you don’t like the program, simply return it for a full refund. 

Communication Is The Key

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By Tom Grandy

You may or may not fly a lot.  I have been in the air most weeks since Grandy & Associates was founded in 1987.  Flying has undergone major changes over the years, especially since 9/11.  Most have been a bit irritating from metal detectors and fuller flights, to less and less leg room.  With that said, one area has significantly improved. That area is communication.  A few years ago, I began receiving texts when flights were delayed or even canceled.  The next giant step involved my bags. Since I live in a small town in western Kentucky, every flight involves at least one stop and often two or more, to reach my destination.  I began receiving texts telling me my bag had been properly transferred from Flight A to Flight B.  It was really comforting to know that my bag was going to meet me at the end of a three-hour cross-country flight.

The newest communication improvement was when they started texting me before my flight, and in the air to tell me my flight or next flight was leaving from Gate 27 in Terminal B.  These kinds of communications have provided a great deal of peace of mind.  I may not like the fact that my fight is delayed or canceled but it’s better to have lead time to go to Plan B than to show up at the gate, breathless, only to find out my flight took off 10 minutes earlier.

Communication provides peace of mind.  Few of us have perfect days where everything goes as scheduled, especially if you are a technician.  The repair may have taken longer than expected or an accident along the way caused a delay.  Things happen.  Just remember to communicate with Mr. and Mrs. Jones.  It’s a lot better for them to know you will be two hours late than for them to sit around the house waiting for you to show up with no idea of when you might arrive.

Be sure the office is aware of how the customer prefers to be communicated with.  Some still have land lines, others prefer you call their cell or perhaps, a text is a better form of communication.  The point is clear, communicate.  Most people understand when things change and they can, and will, deal with it.  However, simply not showing up when expected and not letting them know will irritate the individual, and in some cases, cause the company to lose a customer.

If you are a tech thinking about starting your own business, you will need to learn the “business side” of the business.    The Profit University Audio Series does just that.   Each month it features a different business topic, by a different national speaker.  In addition to a new program being posted each month, there are over 275 past presentations on every conceivable topic.  The series is normally $24.95/month but if you take advantage of the Website Special it’s only $19.95/month -for life.  Cancel at any time.  Order today!  

Green Bay, WI Office
2671 Continental Dr. Suite C
Green Bay, WI 54311
Toll Free: 877-202-8891
Sales@GrandyAssociates.com

Owensboro, KY Office
1028 Standish Place South
Owensboro, KY 42301
Toll Free: 800-432-7963
Phone: 270-926-3212

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