As I work with different ESCs throughout the country, I find a repeating pattern: owners who understand and regularly analyze their financial statements are more profitable than those who feel that the ‘financial stuff’ is best left to the bookkeeper and tax preparer. This is not a scientific poll, but I am consistently impressed by the owners who are serious about managing their business by the numbers. Unfortunately, these owners appear to be in the minority in our industry.
When I spoke at the CEDIA Management Conference on Building a Financial Future, I discussed some key numbers that owners should be using to manage their businesses. While some numbers require you to have accurate financial statements, there are a few numbers you can start to watch immediately, while you put your financial house in order.
One Key Metric
The Revenue per Field Technician most powerfully determines potential changes needed within your company. It is an easy number to determine even if you don’t have good job costing or accurate financial statements. Simply figure out the total revenue you sold last year (you should at least have this information for your tax return) and divide it by the average number of field technicians you had (another number you can find from the payroll tax forms). At the same time, you should also determine the Revenue per Total Employees, especially if your company is small and many people wear different hats.
Now, take that number and compare it to the previous year and earlier. Go back as far as five years if you can. Don’t forget to include yourself and other unpaid staff (such as a spouse) in the employee count. Remember, just because you don’t pay a spouse, doesn’t mean s/he’s free! (In fact, some would argue that unpaid spouses can be more expensive than a ‘paid’ employee.)
So, you are probably asking: “What number should it be?” This metric is specific to your company and depends on several factors. The average job size can influence the revenue per employee; service work has much lower revenue per employee than large custom jobs. Larger jobs with significant equipment have much higher revenue per employee. If you subcontract significant parts of the job, that will lower your number.
While there is no right or wrong answer, I’ve worked with profitable companies who have set a minimum target of $150,000 per total employee. Does it make sense that four full-time people are needed to run a company that generates $600,000 per year? Can eight people generate $1.2 million? Is this a number you can work with? Again, it is important to create this number in relation to your own company, the types of jobs you do and the average job size.
When looking at your own number, also consider your volume in relation to your profit. Look back over that five-year (or longer) period to see the fluctuations in revenue per employee. Compare that number to the profit each year, both profit dollars and profit margin. Can you see that as the revenue per employee rose, so did your profits?
If your volume fell in the last 18 months, you may find that the revenue per employee fell dramatically. If so, it signifies that you may have not made the necessary staffing adjustments quickly enough.
So, as the economy begins to rebound, you can use this number to decide when to start hiring again. Be aware that over-hiring can certainly put a dent in the bottom line, but under-hiring can also affect profits. If your revenue grows and you don’t bring on the staff needed to perform the work, you will become less efficient, less productive and less profitable. Therefore, spend the time now to determine your own Revenue per Employee metric.
A second metric that you should consider is Employee Utilization. Gathering the numbers to calculate this requires a little more work, but you can still analyze it with relative ease. First, determine your billable labor revenue from last year. You may run T&M jobs and have good financial records so that you can easily determine this. If so, good for you! But if you don’t, look at the jobs completed last year. Go back to the original proposals and determine how many hours were included in each job.
Once you’ve determined the billable hours, determine how many hours you actually paid your designers, installers and programmers. A salaried employee, who works full time, is paid a standard number of 2,080 hours in a year. Hourly employee information should be readily accessible from your payroll records.
Now compare your billable hours paid to the total hours paid to determine your Employee Utilization rate. The higher the number, the better. Consider a company that has a 50 percent utilization rate. This means that for each billable hour, you pay for an additional hour that is not billable to the job. If that is the case, when creating budgets for jobs, you must realize that your employees are twice as expensive as you thought.
As the nature of the jobs you perform changes, the Employee Utilization rate becomes more important. In the old days, the significant margins on equipment allowed for inefficient production. But as those margins erode, labor must be as profitable as (if not more than) equipment sales. Companies with a low Employee Utilization rate will find that as they increase volume, jobs not only become less profitable from a gross margin perspective, but they may discover that there isn’t enough money to cover overhead.