Measure what matters: Growth vs. costs

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Editor’s Note: This is the third part of a four-part series in which Dennis shares benchmarks that ensure his company is on the path to growth. Read Part 1 and Part 2 now.

I am addicted to growth. I am a firm believer that if you are not growing, you are declining. If you are not growing, it is harder to make a profit and pay your bills. It is harder to find employees and keep customers. And just in general, life is not much fun.

I shoot for double-digit growth every year, ranging from 15 percent to 30 percent depending on the circumstances. In a company’s early years, it is easier to grow at a higher rate; when you get bigger, the percentages generally are lower. The amount of growth depends on many factors, but the biggest factor is you, the owner.

I recommend becoming involved in our industry. People share at a national level way more than they do at a state or local level, where some of those people gain the customers you lose. I love having local friends, but when you have buddies across the nation, they will open their doors to you and share exactly how they grew their businesses.

Remember, it is not about what you know, it’s about what you do with what you know.

PAYROLL: 45 PERCENT

Back in 1980, my dad believed labor should be at a total of 40 percent. Honestly, we aren’t there anymore. But shooting for between 43 percent and 45 percent, depending on your service mix, is still attainable.

Remember that this has to include you. Owners should never take a salary of more than 4 percent of gross revenue. When that is not enough for the owner to live on, the owner must “earn” more money by providing services or making sales to make a higher income. This is the No. 1 determining factor in whether your business is profitable. You will find that for every 1 percent you are over 43 percent, it will cost you another 2 percent in other areas. Materials, vehicles, insurance and more will go up incrementally when your labor costs are too high.

MATERIALS AND SUPPLIES: 6 PERCENT

Many companies are able to keep the number for materials and supplies lower than 6 percent. I have no beef with them, but I do feel it takes about 6 percent to keep your service level high and customers happy because of the effectiveness of your service.

Keep in mind that when you enter other lines of service, you will find that materials in other areas may cost much more than 6 percent. In those cases, you combine labor and materials. As materials go up, your labor percentage comes down. For example, if you go into lawn fertilization, your materials will be about 10 percent, which means that you may only be able to pay about 17 percent for commissioned labor.

ACCOUNTS RECEIVABLE: 30 DAYS OR LESS

Accounts receivable (A/R) is the lifeblood of your business. Thirty days means the total that is owed to you is equal to the revenue (plus tax) you produce in 30 days.

Early on, I had a bunch of apartment complex accounts that paid slowly at best. My A/R was at
90 days. Those days were filled with vendors calling my office constantly, demanding money I did not have. Why didn’t I have it? Because my customers still had it.

You deserve to be paid for the services you perform, on a timely basis. If you are over 30 days, life is difficult. Conversely, if you are under 30 days, life is good! When your A/R is healthy, banks will be much more likely to loan you money for vehicles, for expansion and for unexpected needs.

Aim to get to something in the low-20 days or better. How?

• Offer discounts for paying early.
• Don’t take on customers without obtaining a credit card to charge for all services.
• Charge the customer each month for 1/12 of the total spend they will have with you all year. It becomes like a gym membership, and you save money by not having to bill those people. Cancellations go down and route completion goes up when customers are not making a decision as to whether they have the money to pay you this month.

JENKINS, who rotates this column with his brothers Bobby and Raleigh, is president of ABC Home & Commercial Services, Dallas, Texas. He can be reached at djenkins@abcpest.com.