In my last column, I wrote about determining your company's overhead costs. This month, I will finish the calculations so you can see what the overhead cost per hour is for each of your departments.
Once you have the overhead cost for each department you need to find the "productive payroll" for each department. Productive payroll is the total number of revenue-generating hours. It does not include any hour that you cannot bill a customer for.
Training hours don't count. Travel hours don't count unless you bill them to the customer. Running-to-the supply house hours don't count unless you can bill that as well. Productive payroll hours are only those hours that the customer gets billed for.
If you don't have payroll broken down by the type of hours billed, then you need to estimate those hours - and from now on, start tracking them.
The overhead cost per hour is the total overhead cost divided by the total number of productive hours in that department.
What should that number be? Less than $20 per hour for new construction and less than $40 per hour for service or replacement work.
These are averages. If you are starting up a department with only one or two people, these numbers may be higher.
If you have a department with 25 productive people, these numbers may be lower.
Making moneyThere's another important money-related issue I want to mention: cash flow. If you don't have the cash to make payroll, it doesn't matter what your sales are.
Many business owners are more concerned with making the sale rather than collecting the money for it. But if you don't collect on those sales, you can't pay your bills. I know many contractors who have gotten in trouble because their customers went out of business owing them a lot of money.
So what can you do to prevent this from happening? The critical thing is to watch your sales, collections and payables each week.
If you are like most HVAC contractors, you don't have a lot of time to deal with these issues. I suggest you delegate the tasks and oversee the actions.
For example, your bookkeeper should print a weekly cash-flow report for you to review each Friday. This report describes how much money you had in the bank at the beginning of the week, how much was added through collections on sales, and how much was subtracted through bill payment. This gives you a cash balance at the end of the week. The next part of the statement is critical. It tells you how much money you can expect next week and what you expect to pay. If you don't have enough to cover all of your bills, then someone needs to start making telephone calls to people who owe you money.
That person does not have to be you; it might be your bookkeeper.
Just remember, unless you direct someone to make those calls and follow up with you, they won't happen.
It is important to estimate the money coming in and going out weekly. This way, on at least a weekly basis you are keeping track of where you are financially. It doesn't need to take up much of your or your bookkeeper's time.
Once the information needed to complete these sheets is in place, it should only take 10 to 15 minutes each week to create this critical business management document.
Sales count. But they are worthless if you don't collect the money they generate.
(Copyright 2004, Ruth King. All rights reserved. Write to Ruth King, 1650 Oakbrook Drive, Suite 405, Norcross, GA 30093. Call (800) 511-6844; e-mail firstname.lastname@example.org.)