if you cant measure it you cant manage it

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?

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…..


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:


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!!!


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


Conclusion from the Data

Why can’t we tighten our belts in good times this way and become wildly PROFITABLE?


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


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


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.


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 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


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


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


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


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.


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 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)


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 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.


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


We need to distinguish between creative leads and inbound leads. As the ladder will yield much higher percentages


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


Sales Dollars Efficiency = # of Dollars Sold # of Dollars Proposed


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 Compensation as a percentage of Sales

= Base salary + Commissions Total Sales


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.


Do you think your Business is different than other PMP’s?

Are your customers different than your competitors?


“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.)


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.


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!


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!


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!


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.


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!!


Conclusion:

Cash Flow is King!!

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.


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.


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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PCOBOOKKEEPERS.COM

ACCOUNTANTS For Growing Pest Control Firms

P.O. Box 810

Newton, NJ 07860

Phone: (877) 682-8118

Fax: 866-273-0101

Email: [email protected]

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