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Danspresentationnpmaacademy09 12566688864796 Phpapp02 Danspresentationnpmaacademy09 12566688864796 Phpapp02 Presentation Transcript

  • If You Can’t Measure it,You Can’t Manage it
    Daniel S. Gordon, CPA
  • Overview
    Can We SURVIVE this economy?
    Let’s Grow Our Business – What Resources are Required?
    Let’s Measure:
    Financial Performance
    Marketing Performance
    Sales Performance
    Operational Performance
    Case Study: Pricing your Pest Program for Profit
    Your Next Steps
  • Can we survive this economy?
    Major events of 2008
    Stock Market Collapse
    Housing Crisis
    Record Prices at the Pump
    Implosion of the Auto Industry
    Meltdown of Financial Services
    Exodus of Manufacturing
    Our Great Nation is involved with 2 wars
  • Can we survive this economy?
    But hold on – NOT SO FAST!!! We can still succeed…
    America is the strongest economy in the world!
    Spending doesn’t stop because we don’t have money
    We go into debt to get what we want.
    It’s not good for the long term but it will help to pull us out short term
    We are a nation of spenders helping to keep the economy moving
    Most of the rest of the world are savers
    Contd…
  • Can we survive this economy?
    • Americans find ways to put “stuff” with consumers.
    • Never Count out The U.S. Consumer!!
    • Can’t afford a vacation home? Carve one up… buy a time share
    • Can’t afford to buy a car? Lease one
    • Don’t have money for merchandise at the department store? Get a credit card at the cash register and receive a discount
  • Can we survive this economy?
    What ADVANTAGES do we have as PCOs?
    Fuel Prices have dropped significantly
    Our Services are need based and sometimes mandated by law
    In most areas of the country we are seasonal, we are used to managing downturns. The winter comes every year – doesn’t it?
    Long before the recession, experts have predicted the U.S. will become a service economy. Here we are in service businesses and we have a big head start!
    No matter what your political views, you can’t argue the fact that the government is implementing the largest stimulus program in history - over 750 billion dollars. This money will ultimately trickle down.
    For the most part our costs are variable, we can make drastic changes quickly (not always an easy decision but it can be done)
  • Can we survive this economy?
    Can we survive?
    YES… and the strong companies
    will emerge STRONGER!
    Is it going to be tough? Yes
    Is it going to take a long time? Possibly
    Is time going to pass no matter what we do?
    Yes, so we should get to work!
  • How do we weather the storm?
    PREPARE for the recession to be long and deep 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
  • How do we weather the storm?
    • 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!!
    • Get ready for the upturn!! Create your 5 year plan; and EXECUTE!
  • Let’s Grow Our Business
    Whyare we in Business?
    To maximize the value of Our Business…. Period!
    There is no other reason !!
  • Let’s Grow Our Business
    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
  • Let’s Grow Our Business
    First lets go over how we run a successful Pest Control Firm
    The Pest Management business model is Simple
    (Not Easy But Simple)
    We are in a Service Business and Sell our Time.
    This time that we charge for includes:
    Diagnosing the Problem
    Providing a solution
    Setting the Customer up on a Service Contract
    Doing the Same thing Over and over until you have built a route or several routes.
  • Let’s Grow Our Business
    The Customer List (Your most Valued Asset)
    Long Term – Can be compared to machinery in a manufacturing business:
    Must be “well oiled” by providing great Service
    Routes must be tight allowing for the greatest output from this machine
    Short Term - Can be compared to a life insurance Salesman setting up a book of renewable policies that generate current income.
  • Let’s Grow Our Business
    You need a Plan…The plan must focus on growing
    your customer list as well as selling
    more to existing customersThis is the Asset that will spit out the profits.
    Remember- The PCO business is not a high margin business. Rather it is a moderate margin business where you generate high profits from customers that use your service on a scheduled recurring business
  • Let’s Grow Our Business
    Future Customer Acquisition Requirements
    • Target Annual Revenue Per Customer: $500.00
    • Cost To Acquire 1 New Customer (average): $250.00
    • Expansion Goals: Double Revenues over 4 Yrs (20% per Yr)
    • Assume 100% retention
  • Let’s Grow Our Business
    Money Requirements
    If more People or Equipment is Required For Expansion,
    How does it get Paid For?
    Several Options Exist:
    • Through Daily Operations & Cash Flow
    • Through Financing (i.e Bank, Finance Companies, etc.)
    • By Giving Up Equity (i.e. Silent Partner, Not so Silent Partner, Joint Venture)
  • Financial Performance – Measuring The
    Health of Our Firm
  • Financial Performance
    What Are Financial Statements?
    Financial Statements are the Box Scores in the game of Business.
    They are the culmination of the accounting process. They are used to convey a concise picture of the profitability and financial position of your company.
  • A well-designed Pest Control Profit & Loss Statement includes:
    Revenue - Broken up by department with Recurring & Non- Recurring Revenue accurately displayed
    Direct Costs - All cost associated with putting a truck on the road & performing service
    Gross Margin - Revenue minus Direct Cost
    Sales & Marketing - All cost associated with sales and marketing function
  • A well-designed Pest Control Profit & Lossalso includes !!
    G & A Expenses - The cost associated with running the office. Usually these costs are fixed with regard to transacting business up to a certain level
    EBITA - Earnings before Interest taxes & Amortization
    IADT - Interest, Amortization, Depreciation & Taxes
    Net Income - Net Performance of the Business
  • Profit & Loss Ratios & Benchmarks
    • Gross Margin
    • Technician Labor cost as a percentage of revenue
    • Chemical Cost as a percentage of revenue
    • Selling Cost as a percentage of revenue
    • Office Labor as a percentage of revenue
    • Other G & A as a percentage of revenue
  • Drilling down in Profit & Loss Statement
    Why is it so important to setup a P & L using the approach described?
    • It allows us to make accurate conclusions about how our management staff is executing our business strategy.
    • It allows us to isolate revenue types that will add to the value of our business
    • It allows us to isolate expense types so that we can implement cost controls
  • Drilling down into a Balance Sheet
    The Balance Sheet allows us to see the prior results of our operations plus any financing activity that has taken place.
    The P & L tells that how we are doing in terms of profit & the B/S tells us what we have as the results of those profits.
  • Drilling down into a Balance Sheet
    What is important about B/S?
    • CASH!
    • Accounts Receivable
    • Equipment
    • Credit Line & Loan Balances
    • Accounts Payable
    • Owners Equity
  • Drilling down into a Balance Sheet
    Rating our Accounts Receivable
    • We can age our Accounts Receivable
    • Current 30 days 60 Days Over 90 days with percentage
    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 No of days sales in
    receivables
    • Calculation: AR balance/(Cumulative Sales/Cumulative days)
  • Drilling down into a Balance Sheet
    Average Collection Period
    • Calculation: (AR balance/ ( Cumulative Sales / Cumulative days)
  • Drilling down into a Balance Sheet
    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.
    The two that are most commonly used
    Current Ratio= (Cash plus AR)/current liabilities
    Quick ratio= Cash/AP
    A Ratio over and above 1.0 means we are healthy. A ratio of less than 1.0 means we have cash flow issues.
  • Drilling down into a Balance Sheet
    Current Ratio= (Cash plus AR)/current liabilities
    So the rows colored in grey are healthy as the ratio is 1.0 or greater than 1.0
  • Marketing Math for the PCO
  • Marketing Math for the PCO
    We want Growth
    How Much? Over What Period of Time?
    What Resources Will We Need?
    Equipment, People, Money?
    Where Will the Growth Come From?
    New Customers, or More Business from Existing Customers?
    Is Our Current House in Order to Achieve this Growth?
  • Marketing Math for the PCO
    Define Growth – Set Goals
    Example of a Goal
    I want to take my Business from $500,000 in Annual Revenue to $1,000,000 in Annual Revenue over the next 4 Years, increasing my profit margin from 12% to 20% for the same period.
    Not an example of a Goal
    I want to get Bigger.
  • Marketing Math for the PCO
    More Business From Existing Customers
    Your Customers Already Know You
    The Cost associated with expanding your relationship is significantly less than new customer acquisition.
    An excellent way to guarantee yourself a predictable revenue stream while allowing your customers to do predictable expense budgeting.
  • Marketing Math for the PCO
    In defining your overall strategy, the MARKETING MIX concept is extremely useful. It is broken into four categories known as the Four P’sof Marketing:
    Product
    Price
    Place
    Promotion
  • Marketing Math for the PCO
    PRODUCT - From a marketing prospective our product is our service. We need to define:
    The Quality
    The Features
    The Services
    The Warranties etc.
    From a standpoint of practicality, it makes sense that as we grow our business we need to be uniform in our Service Plans.
    As our customer list grows, it will become extremely difficult to manage a business where every customer’s service is different. Thus, in defining our services we should design a core group of services that are standardized.
    All of our technicians can be trained to work using standardized methods. In addition our office staff is not faced with differing problems with each customer.
    STANDARDIZATION OF SERVICES IS KEY!
  • Marketing Math for the PCO
    PRICE
    Pricing is extremely important.
    You need to price for profit.
    Remember our discussion on Breakeven Analysis…
    Understand how high the bar is
    that you are trying to reach!
  • Marketing Math for the PCO
    PLACE
    Service Area Defined - In designing our business we need to define our service area. Again, if you go outside of your service area, you need to charge a lot more money in order to account for the travel time.
    The most profitable pest control companies have very well defined service areas. In fact, each office has sub service areas for each route. Sound routing methodology needs to be employed.
    At this point we should note that you should have well-defined service areas that you will not breach.
  • Marketing Math for the PCO
    PROMOTION
    • This is getting the word out. It’s is not my intention to speak about all of the promotional concepts of marketing a pest control company.
    • However, we should be able to track our advertising in our computer system and generate reports that will tell us which advertising works and which does not.
    • Promoting your company through advertising is the single most important thing that you can do to build your company.
    • However, too much of the wrong type of advertising can sink your company quickly. By tracking which advertising is working through your computer system, you can build successful advertising campaigns that deliver RESULTS.
  • 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.
  • 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
  • Sales Performance
    Number of leads Received/Closed
    Sometimes we draw Conclusions based solely on the numbers.
    We need to distinguish between creative leads and inbound leads. as the ladder will yield much higher percentages.
  • Sales Performance
    Batting Average = # Leads Closed
    # Leads Received
    Pitch Efficiency = # Proposals written
    # Leads given
  • Sales Performance
    Sales Dollars Efficiency = # of Dollars Sold
    # of Dollars Proposed
  • 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?
  • Sales Performance
    AND LAST BUT NOT LEAST……
    Sales Compensation as a percentage of Sales
    =
    Base salary + Commissions
    Total Sales
  • Operational Performance
  • Operational Performance
    Effective Routing
    HOW TO…
    • Increase Sales
    • Lower Expenses
  • Operational Performance
    Profitability
    It is affected by two factors:
    • Revenue
    • Expenses
  • Operational Performance
    Routing will affect both
    Revenue and Expenses.
  • Operational Performance
    The Single Largest Expense for a Pest Control Company is
    LABOR
    Pest control companies for the most part compensate their technicians one of two ways or a combination of both:
    • Technicians are paid an hourly rate.
    • Technicians are compensated as a percentage of their route
  • Operational Performance
    • Technicians are paid an hourly rate.
    This rate climbs by 50% (overtime) after the technician works 40 hours in any given week. and or;
    • Technicians are compensated as a percentage of their route
    As a percentage of the dollar value of the jobs that they complete
  • Operational Performance
    To Increase Profitability We Need to Increase Efficiency
    (Fit More Work into Less Time)
    This Increases Profitability by Increasing Total Dollars of Profit.
  • Operational Performance
    Using Our Technician Who is Paid Hourly
    • Example 1
    Let’s say we have a technician that earns $15.00 per hour.
    Further, let’s say that he can complete one job in an hour that produces $50.00.
    In this case our labor percentage is 30%(15/50 = .3). This means for every $100.00 of revenue we have a profit of $70.00 (ignoring all other costs)
  • Operational Performance
    Using Our Technician Who is Paid Hourly
    • Example 2
    Let’s say we have a technician that earns $15.00 per hour. Further, let’s say that he can complete two jobs in an hour that produces $50.00 each or $100 total.
    In this case our labor percentage is 15% (15/100 = .15).
  • Operational Performance
    Using Our Technician Who is Paid Hourly
    This means for every $100.00 of revenue we have a profit of $85.00 (ignoring all other costs).
    By fitting more work into one hour we have been able to increase our profit by $50.00 per hour.
    Here we have increased our revenue in dollars and decreased our labor expense as a percentage of revenue.
  • Operational Performance
    Using Our Technician Who is Paid A Percentage Of His Route
    • Example 1
    Let’s say we have a technician that earns 25% of dollars produced. Further, let’s say that he can complete one job in an hour that produces $50.00. In this case our profit is $37.50
    ($50.00 – (25% x $50.00) =$37.50) (ignoring all other costs).
  • Operational Performance
    Using Our Technician Who is Paid A Percentage Of His Route
    • Example 2
    Let’s say we have a technician that earns 25% of dollars produced. Further, let’s say that he can complete two jobs in an hour that produces $50.00. In this case our profit is $75.00
    (($50.00x2) – (25% x $100.00)) =$25.00) (ignoring all other costs).
  • Operational Performance
    Using Our Technician Who is Paid A Percentage Of His Route
    By fitting more work into one hour we have been able to increase our profit by $37.50 per hour from $37.50 to $75.00 dollars.
    In this case we increased the revenue by $50.00 per hour while holding our
    labor expense constant as a percentage of revenue at 25%.
  • Operational Performance
    Utilization
    One of the most important benchmarks in judging how efficient your routing is called Utilization. Utilization is a calculation that CPA firms and law firms use to see how productive their accountants and lawyers are at billing their time. However this calculation fits our industry perfectly. Quite simply, utilization is the following fraction:
  • Operational Performance
    Utilization
    Total Technician Hours Spent at All Stops During the Time Period
    _________________________________________________
    Total Technician Hours Clocked in (Paid Hours) During the Time Period
  • Operational Performance
    Utilization
    • Example
    Let’s say that your technician spent 30 hours at various jobs doing actual work for a one week period. Let’s also assume that according to his time card he was punched in and paid for 50 hours.His utilization would be 60% (30hrs worked / 50 Hours Clocked in).
    This means that he was producing revenue 60% of the time he was clocked in.
  • Operational Performance
    Utilization
    • Example Continued…….
    Let’s say your average dollar per hour on your accounts for the day is $75.00. With a 60% utilization you’re actually taking in $45.00 per hour. If your technician clocks in 8 hours for the day, he will produce $360.00 for the day ($75.00 x 60% x 8hrs).
    If his utilization is 75% he will bring in $450 ($75.00 x 75% x 8hrs). If he is 40% utilized he will bring in $240 ($75 x 40% x 8hrs). These numbers are using the same $75.00 per hour but varying the utilization percentage.
  • Operational Performance
    Utilization
    This point illustrates the fact that there are two ways of increasing daily revenue:
    • Raising your prices (dollars per hour). This is not always feasible.
    • Increasing your utilization by making your routing more efficient.
  • The PMP Pricing Model
  • The Pest Management Pricing Model
    • It is based on two variables:
    • Money
    This is an hourly charge for our service that covers our costs and allows us to make a reasonable profit. How do we know what that hourly rate should be? Accountants calculate this number using a techniquecalledBREAKEVEN ANALYSIS.
    • Time
    The service time that it takes to fulfill the obligation of eliminating the customer’s Pests under the service program.This includes treatment time and call back time
  • Break-Even Analysis
    Fixed Costs
    Gross Profit per Hour.
    Break-Even point
    =
    in units (service hours)
  • Definition
    Fixed Costs
    Any cost that remains constant at any volume of business
    (i.e. Rent, Advertising, Utilities, etc.)
  • Definition
    • Variable Costs
    Costs associated with producing one unit of our service. For our purposes, one unit of a service will be one hour of service. Thus, variable costs are those costs that rise and fall based upon the number of hours that we provide service.
    • Examples Hourly pay for your employees, Workers Compensation Insurance, Material Costs, etc.
  • Definition
    Gross Profit
    The difference between the price charged per Unit (Hour of Service) and the Variable Costs.
    Example
    If we bill our service at $100 per hour and a technicians gets $20 per hour and all other variable costs associated with providing that hour of service are $35, our gross profit would be $45. (figured: $100 billed less ($20+$35) variable costs).
  • Breakeven Point
    in Units (Service Hours)
    What Is My Breakeven Point?
    Fixed Costs
    Gross Profit per hour.
    =
  • Example
    If rent, utilities and all other fixed costs are $10,000 and we useour $45.00 gross profit per hr example than our breakeven point is 222.2 hours of serviceat a $100 per hour selling price.
    After 222.2 hours of service we will start making a profit of $45 per hour.You see the gross profit contributes to paying the fixed costs. Once the fixed costs are paid, the gross profitcontributesto bottom line profit. This is the reason some accountants call gross profit thecontribution margin.
  • Gross Margin
    Break-Even Point
    $10,000 Fixed Costs
    $45.00 Per Hr Variable Costs
    222.22 Hrs to Break Even
    =
  • Is it Really That Simple?
    • YES!!!!
    However, at various sales levels certain fixed costs rise (i.e. after a certain sales level, a new piece of equipment might have to be added, thus the cost of using that piece of equipment must be added to fixed costs).
    Therefore, figuring your breakeven point can sometimes be confusing.