CO2 Presentation - The Largest Profit Levers

UP NEXT:THE LARGEST PROFIT

LEVERSDan Gordon, PCO Bookkeepers

THE RADICAL PEST AND LAWN CARE OPERATOR

The Ultimate Guide to winning at business by understanding how to set up

financial and operational systems

Daniel S. Gordon, CPA

WHO ARE PCO BOOKKEEPERS & TURFBOOKS?

● We are a firm dedicated to helping pest & lawn companies grow by providing them with the business intelligence they

need to prosper in today’s competitive environment.

● We work with service firms around the country to provide bookkeeping / accounting and CFO services using the most

widely used computer programs such as QuickBooks, Pestpac, Real Green, Servsuite and many others. We are experts in these technologies and understand how to use them to provide the critical information needed to grow

your business in terms of revenue and profit.

We are a team of industry professionals that include degreed accountants, CPA’s, Enrolled Agents, and full charged

bookkeepers who have the specific knowledge to produce meaningful information specific to PCOs with regard to

building recurring revenue, increasing profit, and reducing taxes.

● We work with over 300 companies in 42 States

● Our clients have combined revenue of over

$500,000,000 in annual sales

● Our data is real not just answers to industry surveys

● We work with service business who are interested in selling their

business

● We represent sellers in getting them maximum value

● We structure deals that minimize taxes

From Technician to CEO

Published by NorthCoast Media Available on at Amazon.com

DANIEL S. GORDON, CPA

The Evolution of a High Growth Pest Control and Lawn Care

Company

LET’S BEGIN

WHY ARE WE IN BUSINESS?

To maximize the value of our business...Period!

There is no other reason!

IN MAXIMIZING THE VALUEOF 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 let’s go over how we run a successful business with a recurring revenue model

This 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

Identifying a customer need

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.

THE CONCEPT OF SELLING TIMETime is a perishable commodity.

Once it is gone, you can’t resell it.

If you route your calls effectively you will be able to maximize the amount of time that you can sell.

THERE ARE SEVERAL WAYS THAT WE CAN GROW

Are we growing the number of employees?

Are we growing sales?

Are we growing our current income?

Are we increasing the value of our firm?

Let’s assume we are growing the

value of our firm

How do we MEASURE THE VALUE

of our firm?

Accounting approach: Assets minus

liabilities

ASSETS INCLUDE Customer Lists (The most valuable asset)

Accounts Receivable

Trucks and Equipment

Furniture and Fixtures

Real Estate owned

Other Assets

LIABILITIES INCLUDE Accounts Payable

Credit Lines

Loans Payable

HOW A RECURRING REVENUEBUSINESS IS VALUED

Consider this: The selling price of many service firms can be equal to about one year’s gross revenue or more. If you

grew your firm’s sales by $250,000 last year, you have increased your net worth (or wealth) by a quarter of a

million dollars or more.

BUT HOLD ONThe gross revenue needs to be profitable recurring work. One shot work is helpful in meeting current expenses but

adds very little value to the your firm.

T

THE CUSTOMER LIST(YOUR MOST VALUED ASSET)

Long TermCan 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

THE CUSTOMER LIST(YOUR MOST VALUED ASSET)

Short TermCan be compared to a life insurance salesman setting up a book of renewable policies that generate current income.

YOU NEED A PLANThe plan must focus on growing your customer list as well as

selling more to existing customers

This is the asset that will spit out the profits.

YOU NEED A PLANRemember:

We are not in 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

SERVICE CONTRACTS VS. ONE TIME WORK

Consider that it costs anywhere from $25.00 to $250.00 or more to generate a lead from various sources

Which is better, a one time at $500.00 or an ongoing service agreement at $75.00 per visit?

FUTURE CUSTOMER ACQUISITION REQUIREMENTS

Target annual revenue per customer: $500.00

Cost to acquire 1 new customer (average): $150.00

Expansion goals: Double revenues over 4 Yrs (20% per Yr)

Assume 100% retention

Year Revenue # Customers Current New

Customers Cash

Projection Needed # Customers Required RequirementCurrent Yr $500,000 1000 1000 0 $0

1 $600,000 1200 1000 200 $30,000

2 $720,000 1440 1200 240 $36,000

3 $864,000 1728 1440 288 $43,200

4 $1,036,800 2073.6 1728 345.6 $51,840

MONEY REQUIREMENTSOver 4 years, we need $161,040 in marketing dollars.

How does it get paid for?

SEVERAL OPTIONS EXISTThrough daily operations and cash flow.

Through financing (i.e. bank, finance companies, etc.)

By giving up equity (i.e. silent partner, not so silent partner,

joint venture)

Benchmarking Revenue Per CustomerMost companies look at revenue for the company or revenue for the branch and determine profitability

from there.

Disadvantages to Looking at Your Business This WayYou can have unprofitable customers

You will never understand your profitability as you will always be looking at the sum of the parts as opposed

to the parts themselves

SuggestionLook at dollars per hour or dollars per sq ft of

coverage per customer

Look at revenue per customer per year

-Benchmark that number-Try to increase that average each year

By doing this you guarantee profitability as well as maximize the amount each customer is spending with you

ACTION PLAN1. Calculation: We sell time – how much time does it take

including call backs to service an account?

2. We want to grow: By how much over what time period. dollars & number of accounts

3. What is the plan for growth – details/budget

ACTION PLAN4. Calculation: What it will cost to achieve the growth and

where does the money come from to grow?

5. Are all of your customers profitable? Calculate the dollars per hour spent on their services

FINANCIAL PERFORMANCE

AT THE CLICK OF A BUTTON, CAN YOU TELL ON A MONTHLY BASIS...

How much money you made?

How much termite or lawn care you did?

How much maintenance you did last year?

What your labor percentage was?

What your material percentage was?

How much you spent on sales and advertising?

What your gross and net margins were?

A WELL-DESIGNED LAND CARE AND/OR

PCO PROFIT AND LOSS STATEMENT INCLUDESRevenue

Broken up by department with recurring & non-recurring revenue accurately displayed

Direct CostsAll cost associated with putting a truck on the road &

performing service


PCO PROFIT AND LOSS STATEMENT INCLUDESGross Margin

Revenue minus direct cost

Sales & MarketingAll cost associated with sales and marketing


PCO PROFIT AND LOSS STATEMENT INCLUDESG & A (General & Administrative) Expenses

The cost associated with running the office. Usually these costs are fixed with regard to transacting business up to a

certain level

EBITAEarnings before interest, taxes & amortization


PCO PROFIT AND LOSS STATEMENT INCLUDESIADT

Interest, amortization, depreciation & taxes

Net IncomeNet performance of the business

PROFIT/LOSS RATIOS & BENCHMARKS

● Gross Margin

● Technician labor cost as a percentage of revenue

● Material 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 AND

LOSS STATEMENT

WHY IS IT SO IMPORTANT TO SET UP A P & L USING THE APPROACH

DESCRIBEDIt 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.

BENEFITS OF HAVING PROFITABILITYINFORMATION IN THIS FORMAT

Allows us to create management bonus & incentive structures.

Allows us to determine which service is profitable & why.

Allows us to consistently value our company.

Allows us to identify specific improvement needed and measure

those improvements that are required.

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 use a ratio called number of days sales in receivables to see how close to our terms we’re keeping our customers.

● Calculation: AR balance/(average daily sales)

AVERAGE COLLECTION PERIOD Calculation: (AR balance/ ( Average Daily Sales)

FINANCIAL PERFORMANCE

ACTION PLAN1. Set up your chart of accounts:

A. Recurring and non-recurring revenue

B. Gross margin

C. Selling & marketing

D. General & admin

E. Net income

ACTION PLAN2. Measure your accounts receivable

A. Aged

B. Days of sales in A/R

SALES PERFORMANCE

WHAT ARE THE IMPORTANT DATA POINTS

● Number of leads received● Number of leads closed

● Number of proposals written● Dollars proposed

● Dollars sold

WHAT ARE THE IMPORTANT DATA POINTS

Closing percentages Follow up actions including dates

Commissions earned by sales staff Base pay for salespeople

NUMBER OF LEADS RECEIVED/CLOSEDSometimes we draw conclusions based solely

on the numbers.We need to distinguish between creative leads and inbound leads, as the latter will yield much

higher percentages.

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

=

ACTION PLANNothing Happens without Sales!

A. Set up your sales metrics

B. Explain and review with your sales people

C. Monitor the sales KPIs

OPERATIONAL PERFORMANCE

EFFECTIVE ROUTINGHOW TO…

-Increase sales

-Lower expenses

EFFECTIVE ROUTING

Routing will affect both revenue and expenses.

The single largest expense for a pest control company is

LABORLand care 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

Technicians are paid an hourly rate

This rate climbs by 50% (overtime) after the technician works 40 hours in any given week.

Technicians are compensated as a percentage of their route

As a percentage of the dollar value of the jobs that they complete

TO INCREASE PROFITABILITY WE NEED TO INCREASE EFFICIENCY

(Fit more work into less time)

This increases profitability by increasing total dollars of profit

USING OUR TECHNICIAN WHO ISPAID HOURLY

Example 1Let’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)


Example 2Let’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).


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 hourHere we have increased our revenue in dollars and decreased our labor expense as a percentage of revenue.

USING OUR TECHNICIAN WHO IS PAID A PERCENTAGE OF HIS ROUTE

Example 1Let’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)


Example 2Let’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)


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%

UTILIZATIONOne of the most important benchmarks in judging how efficient your routing is 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:

UTILIZATION

Total Technician Hours Spent at All Stops During the Time Period

Total Technician Hours Clocked in (Paid Hours) During the Time Period

UTILIZATIONExample

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.

UTILIZATIONExample Cont.

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).

UTILIZATIONExample Cont.

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.

UTILIZATIONThis 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.

ACTION PLAN (REVIEW)1. Calculation: We sell time – How much time does it

take, including call backs, to service an account?

2. We want to grow: By how much over what time period? Dollars & number of accounts

ACTION PLAN (REVIEW)5. Nothing Happens without Sales:

a. Set up your sales metricsb. Explain and review with your sales person

c. Monitor the sales KPIs

ACTION PLAN (REVIEW)6. Efficiency and pricing are the most important determinants a. Set up your routes with estimated service and drive times

b. Plan your utilization percentagec. Make your technicians accountable in adhering to

minimum utilization standards

QUESTIONS?Don’t be shy.

The Radical Pest & Lawn Care OperatorDan Gordon, CEOPCO Bookkeepers

[email protected]

linkedin.com/in/dangordoncpa

@pcobookkeepers

CO2 Presentation - The Largest Profit Levers

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