How to maximize growth, profit and value in the coming year.
Everyone wants a large, profitable company that could fetch the maximum value for its owners should they want to cash in their chips. Growth and profit are components of the box score in business. Company value is the pot of gold at the end of the rainbow. If you are looking to build a high-growth, profitable firm that garners the most in terms of value in 2018, you need to focus on these three strategies:
1. Design a meaningful COA.
Creating financial goals is vital. Having a standardized method to measure actual results against these goals begins with creating a chart of accounts (COA) that considers your objectives, your “actuals to budgets,” and your comparisons to others in the industry. When designed properly, your COA will allow your profit and loss (P&L) and balance sheets to provide you with laser-guided visibility into the health of your business.
A COA is a series of codes categorizing all money that comes into your business, and all money that goes out of your business. It gets set up and maintained in your general ledger system.
To set up a COA for a pest management business, see “Create your COA.”
2. Keep that gross margin over 50 percent.
In retail, gross margin is an easily calculated number. It’s the difference between how much you purchase a product for and how much you sell the product for, stated as a percentage. For example, you sell a widget for $100 that you purchased for $60. Your gross profit is $40 ($100 minus $40), and your gross margin is 40 percent.
Why is this number so important? It matters because the total gross profit on all products sold initially is used to pay off overhead (fixed costs). Once overhead is paid off — also known as the breakeven point — you begin to make profit at the rate of gross margin times the sales price of all items sold in excess of breakeven.
After the breakeven point is reached, the gross profit contributes to net profit of the company. This is the reason why many accountants refer to gross margin as contribution margin. This concept is known as breakeven analysis, and it is one of the elementary cost control and pricing strategies taught at business schools.
As you increase or decrease selling prices while holding product cost constant, your gross margin rises or falls. Therefore, your breakeven point in number of units to be sold increases or decreases based on selling price. Let’s run through an example:
Assume it costs $10,000 per month to run our office. Such so-called fixed costs include rent, salaries, utilities, office supplies, etc. Let’s again assume our selling price is $100, and we make $40 per widget gross profit. We would need to sell 250 widgets per month to get to the breakeven figure of $10,000 ($100 minus $60). Once we sell 250 units, we start making net profit at a rate of $40 per widget.
If we raise our selling price to $160 per widget, we make $100 per widget gross profit. Then we only need to sell 100 widgets per month to break even at $10,000 ($160 minus $60). Once we sell 100 widgets, we start making net profit at a rate of $100 per widget.
Conversely, if we lower the selling price to $85 per widget, we make $25 per widget gross profit. We would need to sell 400 widgets per month to break even at $10,000 ($85 minus $60). Once we sell 400 units, we start making net profit at a rate of $25 per widget.
All this works for a product-based firm, but we are in the service business. We don’t produce widgets — or any other product, for that matter. In the pest business, I like to call our product “hours of service.” So, if we can make 50 percent to 55 percent gross margin on an hour of service, that is the sign of a well-run pest management company. For a more detailed discussion and a video presentation on breakeven analysis for the pest industry, please visit PCOBookkeepers.com/accounting-videos.
3. Arm yourself with accounting information from the office of the future.
Today’s business owners and managers are smarter than ever, and demand an ever-increasing amount of real-time information. They embrace technology, digital and social media, and can make decisions quickly based on financial and operational dashboards. (For a breakdown on this, see “5 new business trends.”)
2018 looks to be a good year for the economy, as well as for business conditions. With the many business tools at your disposal, there is no better time to grow a profitable operation that provides you with a great living and long-term security. Organizing your business, watching your gross margins and using the technology of the future will provide a lucrative path.
Create your COA
Here’s the basic structure of a typical chart of accounts, or COA:
- Income — How do you measure your income? What you’re interested in is your recurring revenue. This is where the value of your business is derived. You can break up your work by division — for instance, commercial vs. residential — to give you some insight into your client mix.
- Variable (direct) costs/Cost of goods sold (COGS) — What are your direct or variable costs? This is the cost of putting a technician on the road. The more work you sell, the more technicians you need. The more technicians you have, the higher the variable cost. Some examples of variable costs include technician wages, workers’ compensation, uniforms, truck leases, chemicals, etc.
- Sales and marketing costs — Anything you pay a salesperson — such as salary, commissions, etc. — falls into this category. It also includes any amounts you pay for marketing, such as print, broadcast, internet, social media, as well as signage and other items.
- General and administrative costs — Many of these are your fixed costs: rent, utilities, office supplies, etc. Fixed costs are those that you incur regardless of how much or how little work you sell.
5 new business trends
At our accounting firm, we noticed that to flourish, we need to be able to accommodate our clients’ thirst for services and information in a much different manner than in the past. Our clients are using technology in many ways to quench this thirst for real-time information. Here are our Top 5 trends:
- Paper is out, digital is in. In our experience, today’s management teams overwhelmingly prefer digital document storage over paper. Customer estimates, communications and digitally stored documents are becoming the norm for efficiency and cost savings. Important papers from accountants and lawyers are also being stored and retrieved in this manner.
- Safe storage practices. Rather than calling the accountant or attorney to get a copy of a financial statement or a tax return, accounting and law firms that have gone paperless provide access to data vaults that are encrypted and provide tiered access to clients, depending on their role within the company. For example, the owner can view tax returns, personal financial statements, corporate governance documents and other sensitive information, whereas the general manager may only have access to operational or sales reports. These data vaults allow clients 24/7 access without having to wait on a document request from the accountant or lawyer.
- Cloud-based accounting systems. Companies that use cloud-based software know it provides flexibility in terms of 24/7 access anywhere and anytime there is internet access. Cloud solutions are usually subscription-based, making the monthly fee predictable. The most advantageous aspect of a cloud application is that there are no updates to install and the user always is plugged into the latest version. Because the application is hosted remotely, all users log in and are instantly connected in real time. Most of our clients use QuickBooks Online, which is easy to use, reasonably priced and provides powerful reporting.
- Outsourcing bookkeeping, bill paying and invoicing. Companies are becoming more comfortable with outsourcing non-core, back-office tasks to save money and focus on core activities like sales and operations. With cloud-based accounting software, it’s easy and efficient for accounting firms to provide bookkeeping, accounts payable and invoicing services remotely.
- Business consulting, coaching and strategic guidance. We have more tools at our disposal to dissect and analyze our businesses than ever before. However, that means we need to have expertise in non-pest management-related activities, such as data compilation, presentation, interpretation and analysis. It may seem a little overwhelming to compete where we need such an abundance of skill sets. What we see the best-run firms doing is reaching out to business coaches and consultants, as well as participating in industry peer groups. Trying to be an expert in everything as your firm grows may prove to be overwhelming, but working with consultants and participating in peer groups allow you to understand what it takes to grow. It also removes some of the burden of having to know “everything.”
Contributor Dan Gordon is a CPA in New Jersey who owns PCO Bookkeepers, an accounting and consulting firm that caters to pest management professionals across the country. He runs several PMP peer groups that meet semi-annually. He can be reached at firstname.lastname@example.org or visit PCOBookkeepers.com.
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