When it comes to business, little things do mean a lot. You are not the same company you were last year, or even a month ago, and things will definitely be different this time next year. As time goes on, the costs of doing business change. Changing costs are a fact of life, but the question is, “How will the company respond to the change?” When it’s all said and done, one of two choices will be made, whether you are aware of it or not.
Choice No. 1 (unconscious)
Choice No. 2 (conscious)
Wise business owners and managers understand the foundational law of doing business. “If any cost of doing business changes, it is going to affect bottom-line profitability.” What’s the bottom-line effect of worker’s compensation going up $3,000 and/or the office manager getting a $2,400 annual raise? If pricing is not adjusted, the bottom-line profit of the company is going to decrease by $5,400. Yes, these types of changes do affect the company’s bottom-line profit.
Let’s think about a few common annual cost increases that most companies experience every year. To keep it simple, consider a service department with three employees. (However, keep in mind that these principles apply to every department in your company.)
- Salary Increases — The service manager and dispatcher each receive a $150 monthly raise. That totals $3,600 per year.
- Drug Testing — The company decides to begin random drug testing throughout the year, costing the service department $300 per year.
- Part Costs Increase 10 percent — The average service tech is responsible for $20,000 in part costs per year. That cost increase alone is going to add up to $6,000 ($20,000 per tech times 10 percent).
- Maintenance on Vehicles — The three service vehicles are getting older. The average maintenance costs are estimated to go up $200 per vehicle, or $600 per year.
- Miscellaneous Increases — Now think about increases in worker’s compensation insurance, office supplies, gasoline, uniforms, tech-wage increases, bad debt, interest on your line of credit and a whole host of other costs that go up on a pretty regular basis each year!
A New Way of Thinking!
Begin to think in terms of dollars per hour charged the customer. Force yourself to think about how every extra dollar you spend is going to affect the hourly rate you charge the customer. Our three service techs are going to bill out roughly half their hours each year, or roughly 1,000 hours each. The increase in part costs alone was $6,000 per year, so at 3,000 billed hours, that will require the company to increase the hourly rate by $2 per hour, assuming the company wants to maintain its current profitability.
For example, let’s say you are considering purchasing a new truck for one of your service techs. That new truck will create an additional monthly loan payment of $734 per month, or $8,808 per year. Now divide the cost increase of $8,808 by the 3,000 billed hours per year.
Now you know that if you are going to purchase that new vehicle, you’d better be ready to increase your hourly rate by $2.94 per hour to cover the costs and maintain profitability. This simple process will apply to any additional cost of any amount that occurs during the year.
This process supports the philosophy that all companies need to create a projected annual budget for each coming year. This process will help to capture all projected additional costs and serve as the foundation for setting proper hourly rates in each department.
Tom Grandy has more than 35 years of experience in industry and small business. He has worked as the general manager of a service company and is the founder of Grandy & Associates, a firm that holds seminars, two day workshops and one-on-one consulting for business training. Grandy & Associates also writes articles for numerous trade publications. Tom routinely presents at national and state conventions. For more information, go to www.GrandyAssociates.com or call 800/432-7963.