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If You Can’t Measure It You Can’t Manage It
Dan Gordon, CPA
Enduring Business Lessons for the Savvy PCO
AGENDA
Why Are We In Business?
The Current Economic Environment for the Pest Control Industry
Growing The Bottom Line
Measuring:
• Quality Service
• Customer Retention
• The Quality of Accounts Receivable
• Credit Worthiness to Banks, Vendors and Other Interested Parties
• Sales Performance
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
Price Increases –YES YOU CAN, AND HERE IS HOW!!
What You need to do next
Why Are We In Business?
Why are we in Business?
To Maximize the value of Our Business…. Period ! There is No Other Reason !!
In Maximizing the value of our business we:
Create a great Place to Work
Increase Salaries & Benefits
Create Job Security
Do business in a Socially Responsible Manner
Why are we in Business?
The Current Economic Environment for the Pest Control Industry
PCO Bookkeepers 2009 Profit / Loss Data
Our Data is not the result of a survey where the respondents can sKew data either purposely or non purposely. Our data comes from the transactional accounting records found in our clients Pestpac, Service pro, QuickBooks and payroll records that we maintain. And that we create financial statements on a monthly basis. As a result of my accounting practice and expertise…..
The Current Economic Environment for the Pest Control Industry
Smallest Annual Revenue – about $400K Largest Annual Revenues – about $15 million
With over 40 clients throughout the U.S., We find some very interesting facts
Range of clients:
The Current Economic Environment for the Pest Control Industry
Revenues:
Average Growth for all clients 2009: down about 1%
Average Growth for 2010 for all clients has Stabilized and
is actually INCREASING a few points
From down 10% to up 25%
Those with growth over 5 % do less than 1 million in annual sales
Those with growth over 12% do less than $700K in Sales
Profits are UP!!!
The Current Economic Environment for the Pest Control Industry
While the whole world was preparing for economic Armageddon, PCOs tightened our belts, prepared for the worst, and those adjustments were stronger than the overall negative darts the economy shot at us allowing us to increase our profitability in the worst economic times since the Great Depression
The Current Economic Environment for the Pest Control Industry
Conclusion from the Data
Why can’t we tighten our belts in good times this way and become wildly PROFITABLE?
The Current Economic Environment for the Pest Control Industry
Question:
Growing Your Bottom Line
Business today has become a race to efficiency. Those companies who can become more efficient in managing their businesses will grow their bottom line.
Efficiency can be improved through Effective Measurement.
Growing Your Bottom Line:
Measurement is a collection of quantitative data. A measurement is made by comparing a quantity with a standard unit. Since this comparison cannot be perfect, measurements inherently includes error.
Efficiency is not as necessary to grow the top line. In fact growing the top line without profitability is quite easy.
Overpay for Acquisitions Invest in advertising that provides some results but not enough to yield profits
• Does anyone advertise in the Yellow Pages? Is this model changing?
Sell unprofitable work by low balling the competition My favorite: Sell unprofitable work and make it up on the volume
Growing Your Bottom Line:
Strategies to grow top line without Profitability:
Measuring Quality Service
Definition: Quality Service
The customer’s perception that the Pest Management firm’s performance meets or exceeds his or her expectations in addition to solving the customer’s problem.
Knowing what customer wants
Understanding customer expectations
Designing services to meet customers’ needs;
Setting service standards;
Setting performance measurement indicators;
Measuring performance.
Improving performance
Measuring Quality Service
Important measurement elements include:
Technician is on time The problem is taken care of with the appropriate treatment The technician is courteous Call backs are held to a minimum
Measuring Quality Service
Indicators of Quality Service In the field:
What can be easily
Measured, Benchmarked and Improved?
Call Backs are normal in the course of any pest control business.
Call Backs Need to be minimized.
Measuring Quality Service
Call Backs:
How can Call Backs be measured?
1. Ratio of Callbacks to regular service calls under a contract (i.e. Callback ratio is 25% - this means that for every 4 regular services, there is one call back)
2. Ratio of call back time taken to regular service time taken
under a contract (i.e. The initial work takes two hours and over the next 6 months there were 2 call backs at ½ hour each – Call back ratio is 50%)
3. By calculating our dollars per hour received for work on a
particular customer over a period of time. Assumption: That our services are priced properly for profit.
Callbacks will drive this dollar per hour down
Measuring Quality Service
Measuring Customer Retention:
For our purposes lets define customer retention as those customers who extend their contract beyond the initial period of service.
Renewal
Extension of Route work
Measuring Customer Retention:
Definition: Customer Retention
They can extend by:
Important measurement elements include:
First Year Retention – First year retention becomes extremely important as this demonstrates a customer’s willingness to employ a pest control service beyond solving his initial problem.
Second Year and beyond Retention – Once first year retention is striped out of the equation, we are left with customers who have the propensity to spend on pest control services. These folks:
Know they need it Are willing to spend to get it Are willing to purchase those services from your company
Measuring Customer Retention:
Benchmarks to Measuring Customer Retention
Total Advertising Spend percentage – This is one that most don’t think about but is the key to success in any pest control company.
A brand new company with no clients and in Year One:
He spends $20,000 on advertising
That 20K yields him 100K of new service contract work
Year 1 Advertising is 20% of revenues
Measuring Customer Retention:
Explanation:
Example:
Retention is 80% or he has $80,000 of business from prior year customers
He spends the same $20,000 on advertising
Again, That 20K yields him 100K of new service contract work
Year 2 Advertising is 11.11% of revenues
Measuring Customer Retention:
Example – Continued
Figured: 20K of Advertising divided by 80k of prior year customer revenue plus 100K of current year customer revenue
Year 2
20,000 180,000
= 11.11%
As long as advertising as a percentage of revenues is falling then we are experiencing positive customer retention. This is why for smaller companies they don’t understand why the bigger companies report to the industry surveys that they spend about 6% of revenues on advertising. That 6 % is on total revenues. Retained customers where there is no advertising dollars spent as well as new customers. Smaller companies spend a greater percentage on advertising because they don’t have as many retained customers.
A better way to think about advertising is the total spend divided by the revenue of the actual customers garnered by that spend.
Measuring Customer Retention:
Conclusion:
Problems with the example:
What happens when we increase or decrease the dollar amount spent on advertising in the year of measurement? In this case it skews our retention percentage so for purposes of our example, we need to substitute the actual spend in year 2 with the same spend as in year one.
Measuring Customer Retention:
Measuring The Quality of Accounts Receivable
We can age our Accounts Receivable Current 30 days 60 Days Over 90 days with percentages of Total We can try to improve those percentages on monthly basis We can see how close we are keeping our customers within our terms using a ratio called Number of days sales in receivables Calculation: AR balance/(Cumulative Sales/Cumulative days)
Measuring The Quality of Accounts Receivable
Average Collection Period Calculation: (AR balance/ ( Cumulative Sales / Cumulative days)
MonthAccounts
Receivable
Cumulative
Sales
Cumulative
DaysAR Collection
(In $$) (In $$) (In Days)
Jan 92,978.71 141,979.65 30 20
Feb 99,344.19 229,884.19 60 26
Mar 118,261.00 349,186.84 90 30
Apr 127,553.67 469,772.91 120 33
May 119,382.39 573,908.18 150 31
Jun 110,584.97 681,817.53 180 29
Jul 114,392.45 781,463.98 210 31
Aug 120,091.32 897,158.05 240 32
Sep 134,356.95 1,009,201.90 270 36
Oct 108,142.62 1,125,025.47 300 29
Nov 107,366.28 1,234,987.85 330 29
Dec 116,399.87 1,294,946.77 365 33
Measuring The Quality of Accounts Receivable
Measuring The Quality of Credit Worthiness to Banks, Vendors and
Other Interested Parties
Liquidity Ratios
A Liquidity ratio is one of the benchmarks that banks, vendor credit departments, and others used to determine our ability to pay bills.
Current Ratio=
A Ratio over and above 1.0 means we are healthy. A ratio of less than 1.0 means we have cash flow issues.
Measuring The Quality of Credit Worthiness to Banks, Vendors and Other Interested Parties
The two that are most commonly used
Quick ratio=
Cash plus AR Current liabilities
Cash AP
Current Ratio = (Cash plus AR)/Current liabilities
Month CashAccounts
ReceivableCurrent Assets
Current
Liabilities
Current
Ratio
(In $$) (In $$) (In $$) (In $$)
Jan 15464.42 146,296.26 161,760.68 243,380 0.66
Feb 12877.43 132,795.59 145,673.02 241,993 0.60
Mar 18164.63 153,743.82 171,908.45 244,707 0.70
Apr -30861.21 182,235.61 151,374.40 234,523 0.65
May 19080.04 160,188.85 179,268.89 255,731 0.70
Jun 20140.13 163,733.64 183,873.77 248,087 0.74
Jul 13273.08 166,878.43 180,151.51 240,763 0.75
Aug 23384.19 197,268.87 220,653.06 258,781 0.85
Sep 31285.09 196,236.65 227,521.74 250,031 0.91
Oct 81064.63 154,337.98 235,402.61 230,781 1.02
Nov 58021.88 179,616.14 237,638.02 211,383 1.12
Dec (27,200.97) 314,572.16 287,371.19 288,739 1.00
The rows colored in grey are healthy as the ratio is 1.0 or greater than 1.0
Measuring The Quality of Credit Worthiness to Banks, Vendors and Other Interested Parties
Measuring The Quality of Sales Performance
Sales Performance
There are many schools of thought on how a sale should be made. Some sales techniques work better depending on the personality of the sales person.
Some Sales people Sell management on why Sales can’t be made
The best thing about what we do as Accountants, is that the numbers don’t lie – no matter which Sales technique are used.
Measuring The Quality of Sales Performance
What are the important data points:
Number of leads received
Number of leads Closed
Number of proposals written
Dollars Proposed
Dollars Sold
Closing Percentages
Follow Up actions Including dates
Commission’s Earned by Sales Staff
Base Pay For Sales People
Measuring The Quality of Sales Performance
We need to distinguish between creative leads and inbound leads. As the ladder will yield much higher percentages
Measuring The Quality of Sales Performance
Number of leads Received/Closed
Sometimes we draw Conclusions based solely on the numbers.
Batting Average = # Leads Closed # Leads Received Pitch Efficiency = # Proposals written # Leads given
Measuring The Quality of Sales Performance
Sales Dollars Efficiency = # of Dollars Sold # of Dollars Proposed
Measuring The Quality of Sales Performance
Using the proposal Dates and follow-up dates we can age our proposals, last contact dates and make estimates of likeliness of Closure.
What we obviously find is the older the proposal the less likely we close it.
What happens if we introduce telemarketing?
Measuring The Quality of Sales Performance
Sales Compensation as a percentage of Sales
= Base salary + Commissions Total Sales
Measuring The Quality of Sales Performance
AND LAST BUT NOT LEAST……
Speeding the Velocity of Cash Flow, by Billing Prior to Service –
AND YES IT WORKS
Well guess again! Human Nature, Is Human Nature!
The magic of billing prior to service or the lesson’s we’ve learned in smoothing monthly income and reducing A/R.
When I suggest Billing prior to Service, it’s as if I’ve lost my mind according to many of our clients.
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
Do you think your Business is different than other PMP’s?
Are your customers different than your competitors?
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
“Billing prior to Service ” - When you pre-
bill a customer (commercial or residential) you
send him a periodic bill prior to service.
This can be Monthly, Quarterly, Tri-Annually,
etc.
Definition:
Let’s just assume they will (as crazy as I may be). Let’s look at the benefits that you will receive as an independent business person from employing this strategy. Once we show you how it will improve everything you do in business, we’ll teach you how to make it happen. (If you are convinced once I am through here.)
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
Before you close your mind and say, “My customer’s will never go for it!”
But How Do We Improve Cash Flow???
The answer is simple – You need to employ a strategy of Billing prior to Service..
That is on the first of the month; send out bills for all route work that is expected to be preformed for the month.
It will lower your Days Sales in Accounts Receivable (remember that from a prior slide?) usually in an amount that is less than your credit terms.
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
How will this improve your cash flow?
Why you ask?
Because some customers (a good percentage of them) will pay as soon as they received the bill – prior to service, thereby leaving you with less money on the street. We have clients employing this strategy who have DSAR at about 15 days!
If you are doing $1.2 million in Annual Sales and your DSAR is 40 days, you have roughly $130K on the street. Improve your DSAR to 20 days and you have $65K more in your pocket. Look at what that $65K is costing in terms of poor cash flow!
Do you pay late fees to vendors?
Do you have a credit line?
Does your firm owe you money?
Ever have to hold your own paychecks waiting for cash in the bank to allow you to take what’s yours?
If you said “Yes” to any of the above…Improving your DSAR will relieve some of these pressures…And pre-billing your customers will reduce DSAR!
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
OK, you say I’m convinced that Billing prior to Service is a good thing – but my customers will never go for it! I say Bull…They will! Not all of them, but the majority will.
How do you do it? In the words of a great sneaker company…
Here are the steps:
Your computer system will allow you to see you’re route charges for the
upcoming month.
Run your route charges for the upcoming month Draft a letter to all clients that explains what you are doing – blame it on your “new computer system “(whether you have one or not). Tell them that this is the only way you can get it to work. Some will refuse (so deal with them), but most will fall in line & about 30-40% will pay prior to service!
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
JUST DO IT!!
That is if you have 1000 customers and 5% complain – you’ll get 50 phone calls – your CSR’s will think the world is coming to an end and tell you your company will go down the tubes if you don’t switch your policy back. After all, 50 phone calls with people screaming at you, is a lot! BUT 950 customers will quietly fall in line. You must stay the course though – Establish the rules – Then deal with the exceptions. We’ve done this with dozen’s of companies and those who have stayed the course are reaping the rewards…Not one of them is sorry they’ve done it!
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
Just Remember
“If I do the above without getting lynched by my customers, what else do you want me to do?”
Offer an incentive for allowing you to automatically charge their credit card for service at Billing prior to Service; or Offer an incentive for allowing you to automatically do an Electronic Funds Transfer (EFT) from their account to yours – you need to set this up with the bank of course, but why not – there are many people who pay their bills by EFT. Do you pay any of your bills this way?
It’s really a great way to get paid quickly with a minimum of hassles.
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
Want to Turbo charge your Billing prior to Service ?
WOW…you say,
Without keeping a watchful eye on it,
your business can fail. You can literally
go broke trying to get rich.
Keeping your DSAR to a minimum by
Billing prior to Service is an excellent
way to achieve this goal!!
Speeding the Velocity of Cash Flow, by Billing Prior to Service – AND YES IT WORKS
Conclusion:
Cash Flow is King!!
Price Increases – YES YOU CAN,
AND HERE IS HOW!!
Price Increases –YES YOU CAN, AND HERE IS HOW!!
Increasing Prices PRICING - KEY ISSUES
What prices need to be increased?
Anything less than our standard hourly rate
When to increase prices?
Usually the anniversary date of the contract
How do you determine HOW MUCH?
The difference between the standard hourly rate and what is currently charged
7 STEPS TO INCREASING PRICES
Your standard hourly billing rate should be analyzed and adjusted to ensure that your hourly cost and profit objectives are being met. Your estimated time to complete a job including time to retreat should be reviewed to determine if your estimated time to complete a particular job is accurate. Your standard pricing for new work and your customer service records should be viewed to determine the amount of time spent servicing each customer and the amount of money that each customer was billed for the year.
Price Increases –YES YOU CAN, AND HERE IS HOW!!
Divide the total amount of money billed, by the amount of hours of worked, to determine the dollars per hour on each account. Once the dollar per hour has been determined for each customer and each job type, compare that dollar per hour to the standard hourly billing rate. If necessary increase the price to bring the dollar per hour in line with the standard billing rate per hour. Once the price increase amount has been determined, the most important step is selling the price increase to your customers by showing the value of your service.
Price Increases –YES YOU CAN, AND HERE IS HOW!!
7 STEPS TO INCREASING PRICES
What you need to do Next?
PREPARE for the unpredictability of the economy and then build flexibility to adjust when needed
Make sure you have TIGHT ROUTES. You may not be able to raise prices but tight routing has the same effect as raising prices
NEVER SELL UNPROFITABLE WORK on the basis of “its steady work”… Shrink your business if you have to.
Make sure you have an accounting system that gives you accurate and timely INFORMATION
What you need to do Next
MEASURE the results of all your programs and increase the profitable services and decrease the unprofitable services
Increase your COLLECTION efforts – make sure you’re A/R is healthy and collectable
Tighten your CREDIT TERMS – shut customers off if needed
Increase your SALES & MARKETING effort – be effective!!
Create your 5 year plan; and EXECUTE!
What you need to do Next
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ACCOUNTANTS For Growing Pest Control Firms
P.O. Box 810
Newton, NJ 07860
Phone: (877) 682-8118
Fax: 866-273-0101
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