Understand your business finances
June 19, 2016
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Understand your service business

 

The phone rings in the office. “My air conditioner’s stopped working. It’s going to be 35 degrees tomorrow. Can you fix it today?”.

For many service businesses, speed of response to their customer’s needs is one of the key criteria they’ll be judged on. At key times of the year, managing one of these businesses can be chaotic – a mix of urgent work, scheduled work, and job over-runs.

The owner’s time can be spent totally in the business. Meeting sales prospects. Preparing or reviewing quotes. Setting up the work schedules. Organising materials. Dealing with customer problems. There is no time left to actually plan the business direction.

Knowing your team

When all the owner’s time is spent doing the day-to-day work, how can they possibly be in control of the business? Do they really know which technicians are performing well and those who are not? Do they have a handle on the material costs for each job? Do they know which type of work or customer gives them the best profit?

An owner of a very small business will be close enough to his staff and customers to gauge performance. But once the number of operators is in double figures, it becomes harder to control.

This is where the owner of a growing business will do well to invest in cloud-based systems which help with management of the business operation, as well as providing information critical for measurement of performance. Features of these systems can include:shutterstock_264828095

  • Lead management – tracking sales opportunities and proposals in one place
  • Quotes – easy to produce with material costs and labour rates pre-loaded
  • Scheduling – allocation of technicians/contractors/equipment to jobs
  • Simple time-tracking of actual time against planned time
  • Recording materials used and stock management
  • Notes on job history, including photos
  • Connection with technicians in the field, allowing job data to be collected quickly on completion
  • Prompt invoicing
  • Profit reporting by job

Using a job management system like this will allow key business information to be more readily shared. The integration of the different functions into a single system also eliminates a lot of paperwork and duplication of effort.

This gives the business owner more time to focus on planning the business for greater success.

With quality data produced from a business management system, meaningful analysis can be done.

It’s important to ensure that costs reported in the business management system are matched in the accounting system:

  • The cost of sales in the accounts should include materials, wages and all payroll on-costs relating to production/service operators. This means technicians in the field, production workers, professionals working directly on client jobs.
  • Wages relating to administration and sales staff is then left as part of overheads.
  • Cost of sales also includes material costs.

You should then be able to correlate the costs in the job management system with the cost of sales from the accounts system, allowing for movements in stock and work in progress.

  • Any variances between the two will allow you to report on changes in rate/price, or on changes in anticipated volumes of work/materials.
  • If these variances are ongoing, then you should update the cost assumptions in the job management system.

Once you have a lot more understanding of your business profitability:

  • Your accounts will provide you with the monthly gross profit (sales less materials less production/service operator wages).
  • Your business management system will break this gross profit down further by job or service.
  • You can also analyse the gross profit by type of work or customer group, which will help you to plan your future strategy.

These reports are a powerful management tool.

  • The business owner can see where the good profits are being made and focus on that area.
  • They can see where there were problems and act promptly to prevent them re-occurring.
  • Reports showing KPI for revenue per operator staff hour and gross profit per staff hour also reflect staff performance.

The measures outlined above apply to many different types of service business. Trades such as plumbing, heating and cooling and electrical. Custom manufacturing work. Professional services such as legal firms and marketing services.

If you want help to set up a reporting system which gives you an incisive breakdown of your business profit by month, by job, by product or by service, you should consider using a Virtual CFO.

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