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ANALYZING YOUR ROUTE

ANALYZING YOUR ROUTE. OPTIMIZATION EFFORTS. Daniel S.Gordon, CPA. Agenda. Routing the Silent Killer Pricing for Profit Putting it all Together Your Next Step. Routing the Silent Killer. Effective Routing. HOW TO…. Increase Sales Lower Expenses. Profitability.

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ANALYZING YOUR ROUTE

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  1. ANALYZING YOUR ROUTE OPTIMIZATION EFFORTS Daniel S.Gordon, CPA

  2. Agenda • Routing the Silent Killer • Pricing for Profit • Putting it all Together • Your Next Step

  3. Routing the Silent Killer

  4. Effective Routing HOW TO… • Increase Sales • Lower Expenses

  5. Profitability It is affected by two factors: • Revenue • Expenses

  6. Routing will affect both Revenue and Expenses.

  7. The Single Largest Expense The Single Largest Expense for a Pest Control Company is LABOR Pest control companies for the most part compensate their technicians one of two ways or a combination of both: • Technicians are paid an hourly rate. • Technicians are compensated as a percentage of their route

  8. Technicians are paid an hourly rate. This rate climbs by 50% (overtime) after the technician works 40 hours in any given week. and or; • Technicians are compensated as a percentage of their route As a percentage of the dollar value of the jobs that they complete

  9. To Increase Profitability We Need to Increase Efficiency (Fit More Work into Less Time) This Increases Profitability by Increasing Total Dollars of Profit.

  10. Using Our Technician Who is Paid Hourly • Example 1 Let’s say we have a technician that earns $15.00 per hour. Further, let’s say that he can complete one job in an hour that produces $50.00. In this case our labor percentage is 30%(15/50 = .3). This means for every $100.00 of revenue we have a profit of $70.00 (ignoring all other costs)

  11. Using Our Technician Who is Paid Hourly • Example 2 Let’s say we have a technician that earns $15.00 per hour. Further, let’s say that he can complete two jobs in an hour that produces $50.00 each or $100 total. In this case our labor percentage is 15% (15/100 = .15).

  12. Using Our Technician Who is Paid Hourly This means for every $100.00 of revenue we have a profit of $85.00 (ignoring all other costs). By fitting more work into one hour we have been able to increase our profit by $50.00 per hour. Here we have increased our revenue in dollars and decreased our labor expense as a percentage of revenue.

  13. Using Our Technician Who is Paid A Percentage Of His Route • Example 1 Let’s say we have a technician that earns 25% of dollars produced. Further, let’s say that he can complete one job in an hour that produces $50.00. In this case our profit is $37.50 ($50.00 – (25% x $50.00) =$37.50) (ignoring all other costs).

  14. Using Our Technician Who is Paid A Percentage Of His Route • Example 2 Let’s say we have a technician that earns 25% of dollars produced. Further, let’s say that he can complete two jobs in an hour that produces $50.00. In this case our profit is $75.00 (($50.00x2) – (25% x $100.00)) =$25.00) (ignoring all other costs).

  15. Using Our Technician Who is Paid A Percentage Of His Route By fitting more work into one hour we have been able to increase our profit by $37.50 per hour from $37.50 to $75.00 dollars. In this case we increased the revenue by $50.00 per hour while holding our labor expense constant as a percentage of revenue at 25%.

  16. Utilization One of the most important benchmarks in judging how efficient your routing is called Utilization.Utilization is a calculation that CPA firms and law firms use to see how productive their accountants and lawyers are at billing their time. However this calculation fits our industry perfectly. Quite simply, utilization is the following fraction:

  17. Utilization Total Technician Hours Spent at All Stops During the Time Period _________________________________________________ Total Technician Hours Clocked in (Paid Hours) During the Time Period

  18. Utilization • Example Let’s say that your technician spent 30 hours at various jobs doing actual work for a one week period. Let’s also assume that according to his time card he was punched in and paid for 50 hours.His utilization would be 60% (30hrs worked / 50 Hours Clocked in). This means that he was producing revenue 60% of the time he was clocked in.

  19. Utilization • Example Continued……. Let’s say your average dollar per hour on your accounts for the day is $75.00. With a 60% utilization you’re actually taking in $45.00 per hour.If your technician clocks in 8 hours for the day, he will produce $360.00 for the day ($75.00 x 60% x 8hrs). If his utilization is 75% he will bring in $450 ($75.00 x 75% x 8hrs). If he is 40% utilized he will bring in $240 ($75 x 40% x 8hrs). These numbers are using the same $75.00 per hour but varying the utilization percentage.

  20. Utilization This point illustrates the fact that there are two ways of increasing daily revenue: • Raising your prices (dollars per hour). This is not always feasible. • Increasing your utilization by making your routing more efficient.

  21. The PMP Pricing Model

  22. The Pest Management Pricing Model • It is based on two variables: • Money This is an hourly charge for our service that covers our costs and allows us to make a reasonable profit. How do we know what that hourly rate should be? Accountants calculate this number using a techniquecalledBREAKEVEN ANALYSIS. • Time The service time that it takes to fulfill the obligation of eliminating the customer’s Pests under the service program.This includes treatment time and call back time

  23. Break-Even Analysis Fixed Costs Gross Profit per Hour. Break-Even point = in units (service hours)

  24. Definition Fixed Costs Any cost that remains constant at any volume of business (i.e. Rent, Advertising, Utilities, etc.)

  25. Definition • Variable Costs Costs associated with producing one unit of our service. For our purposes, one unit of a service will be one hour of service. Thus, variable costs are those costs that rise and fall based upon the number of hours that we provide service. • Examples Hourly pay for your employees, Workers Compensation Insurance, Material Costs, etc.

  26. Definition Gross Profit The difference between the price charged per Unit (Hour of Service) and the Variable Costs. Example If we bill our service at $100 per hour and a technicians gets $20 per hour and all other variable costs associated with providing that hour of service are $35, our gross profit would be $45. (figured: $100 billed less ($20+$35) variable costs).

  27. Breakeven Point in Units (Service Hours) What Is My Breakeven Point? Fixed Costs Gross Profit per hour. =

  28. Example If rent, utilities and all other fixed costs are $10,000 and we useour $45.00 gross profit per hr example than our breakeven point is 222.2 hours of serviceat a $100 per hour selling price. After 222.2 hours of service we will start making a profit of $45 per hour.You see the gross profit contributes to paying the fixed costs. Once the fixed costs are paid, the gross profitcontributesto bottom line profit. This is the reason some accountants call gross profit thecontribution margin.

  29. Gross Margin Break-Even Point $10,000 Fixed Costs $45.00 Per Hr Variable Costs 222.22 Hrs to Break Even =

  30. Is it Really That Simple? • YES!!!! However, at various sales levels certain fixed costs rise (i.e. after a certain sales level, a new piece of equipment might have to be added, thus the cost of using that piece of equipment must be added to fixed costs). Therefore, figuring your breakeven point can sometimes be confusing.

  31. What Happens if We Lower Our Price? Our Gross Margins ShrinksThereby Increasing our Breakeven Point

  32. Pricing – A Real Live Example Break Even Point (Service Hrs) = Fixed Cost Divided by Gross Profit Per hour Lets Calculate Our Variable Costs: 1st Lets Calculate Technician Salary: Salary Cost Technician $12.00Per Hr X 2080 Hrs Per Yr = $(a) 24,960.00 Plus: Normal OT Technician $12.00Per Hour X 1.5 X (Ave # of OT Hrs Per Week 7 Hrs) = OT Dollars Per Year $(b) 6552.00 Equals: Total Wages Paid Per Year for this Technician $ (c) 31,512.00 Continued…

  33. Continued… Add Payroll Costs: FICA (c) Above $31,512.00 X .0765 (FICA Amount) $ (d) 2,411.00 SUTA (c) Above$ 31,512.00 X $.03 (Your SUTA Rate) $ (e) 945.36 FUTA $7,700 X .008 (Base Amount) $ (f) 62.00 Workers Comp (c) above X Your WC Rate per Technician Class per 100 of payroll (5.5%) $ (g) 1,733.16 Family Medical Benefits (That you provide) $ (h) 4,800.00 Other Benefits (401K, etc) $ (i) 500.00 Equals: Total Salary Cost of One Tech for one Yr. ( (c)+(d)+(e)+(f)+(g)+(h)+(i) above) $ 41,963.52

  34. NOW: Lets Calculate Our Technician (Direct Labor) Costs: Annual Cost Of One Truck: Your Vehicle Lease Expense or Truck Payment per Month X 12 Months - $ 475 X 12 Months $ 5,700.00 Your Monthly Fuel Cost Per Truck X 12 Months $ 3,600.00 Your Monthly Repair Expense X 12 Months $ 1,800.00 Your Monthly Truck Insurance Costs X 12 Months $ 1,800.00 Your Annual Cost of Truck Registration Fees $ 150.00 Your Cost of Other Misc. Vehicle Expenses per Month X 12 Months $ 1,000.00 Annual Cost of Materials (Average used by one truck $ 6,000.00 Annual Cost of Uniforms Worn by one Technician $ 300.00 Total Annual Cost To Put a Truck on the Road (Add all the above) $ 20,350.00

  35. SO: Our Annual Variable Cost to Put a Truck on the Road Equals: Total Salary Cost of One Tech for one Yr. (From the prior Page) $ 41,963.52 Plus: Total Annual Cost To Put a Truck on the Road (From all the above) $ 20,350.00 Equals: Annual Variable Cost to Put a Truck on the road $ 62,313.52 At this point we need to estimate our Annual Productive Hours. This is probably the most important aspect of running a PMP business. Maximizing this number will determine how successful or unsuccessful you are in this business. What will determine how successful you are in this regard comes down to one word:

  36. Routing You must minimize drive time and keep your technicians on the job not on the road or in the office. Let’s do the Productive Hour Calculation: Total Workable Hours per Yr = ( 40 Straight Time Hrs per week + 7 Total OT Hrs per Week X 52 Weeks) 2,444 Hrs Less: Annual Vacation hours per Tech (80 Hrs) Annual Holiday Hrs per Tech (80 Hrs) Annual Sick Time Hrs Per Tech (32 Hrs) Equals: Total Available Hours to Work Per Year 2,252 Hrs Multiplied by: Utilization (ratio #of hours on the Job/ Total # of Hours Available to Work) 60.00% (This number is usually about 60% for a well run company) Equals: Total Available Hrs that are Chargeable per Yr 1,351 Hrs

  37. Now the Exciting Part!! What is Our Variable Cost per Hour? Variable Cost per Hour Calculation: Total Annual Cost To Put a Truck on the Road (From Prior Calculation) $ 62,313.52 Divided By: Total Hrs Available Total Available Hrs that are chargeable per Yr (From Prior Calculation) 1,351 Hrs Equals: Variable Cost per Hour $ 46.12 Total Variable Cost:

  38. Annual Fixed Costs. Fixed Cost Now:Its time to figure outour Fixed Costs. Remember that we need this calculation in order to calculate break even. Let’s take a look at the list of possible fixed costs.

  39. Break Even: Let’s figure out how many Hours it takes to break even. In this exercise we need to assume various selling prices per hour. From that we subtract our variable cost per hour to get our gross profit per hour. Once we know our gross profit per hour, we can calculate our breakeven point in number of service hours. After we hit breakeven we start making profit in an amount equal to Gross Profit per hour multiplied by the number of hours that we sell over breakeven!!!

  40. Break Even:

  41. Draw Your Own Conclusions about the pricing. Let me leave you with this thought using the numbers in the assumptions. • At $50.00 per Hour - You would need well over 20 Trucks to breakeven • At $95.00 per hour – You would need 2 Trucks to breakeven Use your own Numbers but; [Never Be a Low Baller – Beat the competition with Quality Service!!]

  42. Putting it all together How to Build Wealth in the PMP Industry • Create Standardized Services • Maximize Route Efficiency • Price your Services for Profit • Live the Dream

  43. Your Next Step… Daniel S Gordon, CPA daniel.gordon@wealthdepot.com www.PCOBookkeepers.com 973-300-0288 Services Provided • PestPac & QuickBooks Online Integration & Reporting • Monthly Conference Call to Help Improve Your Results • Year End Financial Reporting • Year End Tax Services If your CPA doesn’t know Your Industry, You Don’t Need Him!

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