Know Your Numbers Episode 3.
Have you been watching this little series? I'm on Episode 3 of a four-part series
about knowing your numbers and I mean the numbers
that helps you understand what's going on in your trades business, so you're building business.
If you haven't seen eEpisodes 1 & 2 yet, head over to the website - it's smallfishc.om.au
and have a little nosy, I'm sure you'll find them.
I'm a business coach for trades and builders if you didn't realise
and a lot of my customers
don't really know their numbers, don't give them the attention
they deserve.
You pay attention to your trade
and you need to pay attention to your numbers and if you don't, if you don't do that,
you could be losing money
or not making as much money as you deserve
without realising. So I'm going to strongly encourage you to focus on your numbers
whether you want me to be a business coach or not.
I've built a tool above workbook called that Know Your Numbers Workbook
and an educational video
and a tracker called the Big Numbers Tracker to help you track your numbers
I think I've done enough teaching in there for you to be able to do it without me.
Of course if you want me to help you, I'd love to be a business coach
but I've tried to be generous
and give you enough information to do yourself.
This video is about understanding your costs. I talked in the first two
about your revenue and a gross profit what I call the Big Numbers and I talked about the lead indicators
your marketing and yourself. Now I'm talking about costs.
It's important to understand them.
It's important to understand them properly
and it's easy to misunderstand them.
I'm going to talk about labour
and I'm going to talk about your overheads. I'm going to ignore materials,
they're easy to understand.
You get an invoice from your supplier, don't you?
If you can't understand that, something's gone horribly wrong.
I'll start with labour costs
and how much your tradespeople
cost you. I'm not going to go into the maths now.
I've made a video called the true cost of employment, go ahead and search for it on my website and watch that
if you want to. Go ahead and get that Big Numbers Tracker
and do the calculations for yourself.
The gist of it is they cost you quite a lot more than you think.
Those trades people of yours certainly in terms of per hour
and in terms of how you charge them to your customers.
They cost you a lot more than you think.
You might think they're costing you 20, 25 30, 35, 40, bucks an hour
because that's what you pay them
but think of it like this: you pay them 40 hours a week,
52 weeks a year but they get 4 weeks holiday, 10 days sick,
10 public holidays or thereabouts and they spend time every day driving between jobs or driving to Bunnings
or picking up equipment from your wholesalers or materials from your wholesalers.
He smokes every day and they get toolbox talks where you're paying them,
they get cut team meetings and training or you're paying them and they're not working.
The million other things that take their time away from being charged to a job,
you're still paying them for that time
but you're not charging that time to a job. You need to account for that.
You need to understand that you need to recover
that additional cost where they're not charged to a job
and the way I like to do it is to add it into
the charge -what they cost you per charged hour, we'll do some calculations
about how many hours in a year you can charge them out for
and then we calculate their cost per charged hour and the answer is it's almost double what you think
you're paying them. So just have to think about that.
They cost you per charged hour almost double what you think you're paying them in an hour.
I do this to help people understand
what their cost of labour really are
and I'm usually doing it because they're not as profitable as we would like them to be or
feel like they should be
and we're looking at your increase in the price to make sure
we're charging enough to cover what they cost.
If you understand what you cost really are and you understand that you're really not charging enough,
it's much easier to be brave about increasing your prices.
I know that you're all afraid of putting your prices up. I know you're all afraid of being beaten on price by your
competition, we all are.
It's a fact of the world that this happens and we feel that pressure from our customers
but if you're not charging enough
to cover your costs, you might as well not go to work.
So you need to and you get braver then.
Here's the story. I've been using stories, true ones
to illustrate how this works in real life.
I'm working with a garden maintenance and lawn mowing company.
They've got five or six people, I think it's six.
Some permanent employees, some subcontractors, some casuals and an apprentice even.
And he's paying them between $20 and $35 an hour
and he was charging $45 an hour to his customers
and there wasn't much money around
and I was pretty much instantly sure that $45
is not charging enough for a professional trades business
but I've got a lot of resistance from my client. People won't pay that,
other people are charging that, people don't pay more, other people are charging $45.
I just lose all my customers to those other cheap people.
That kind of thing, that kind of resistance -an understandable resistance.
So off we went to the Big Numbers Tracker
to work out what's actually going on. We calculated what his people were actually
costing him and bear in mind is gardening.
It's a small job, they're often often not easily a full day so there's quite a lot of driving in between jobs.
There was quite a lot of uncharged time going on
and they were costing him close to and in a couple of cases a little bit more
than $45 an hour per charged hour.
So for some of his guys he lost money every time they
work, every hour they work, and for some of his guys he only made a tiny bit not enough to cover his overheads.
And what happened was because he was working on the tools,
full-time a full 40-hour week and then doing it as an
admin work outside that time,
he was masking that because he wasn't charging himself to jobs so his work that he did
was covering up for the fact that those guys weren't profitable
but as he was growing and as he was wanting to grow his team
and grow the business and pull himself off the tools,
that masking was being reduced and the non profitability was becoming more and more apparent.
So, of course, he got it. He's not a stupid man. He got it, it made sense, he understood
and he put his price up to $60 an hour.
We started gently. We started with new quotes before we went back to all the old customers and said
prices are going up.
We staged it in but he's now charging $60 an hour for all of his customers.
He’s getting his quotes accepted. He's kept all of his old customers
and he's starting to run a profitable business.
It does work. This stuff really works.
If that could be you, please download the tracker,
do it on yourself and give your pricing right.
Now that brings me to overheads. That's your labour.
Let's go to overheads. If your cost of sales is materials and labour
then overheads is all your other costs -
Insurances, vehicles, your business coach - very important,
Marketing, accountants, bookkeeping, an admin person, everything the whole lot.
And the thing here
again is this is more than you think.
Your overheads are off more than you think. If you pay yourself away, even if it's
not massively generous $80,000 or thousand dollars a week or something like that, it's really easy
for your overheads to be a couple hundred thousand. I know a business who's
$600,000 to $700 000 turnover maybe less maybe $500,000, turnovers overhead I think is $200k including
his salary. That's not even a big trades business.
They need to make enough
in your materials in your labour to cover that $200,000
and also to make a profit. A business's job is to make a profit and you should
make a profit on top of your salary for doing the job. That kind of rewards you for the risk and the stress
that goes off. So let's go back to this $200,000.
The business has overheads $200,000, that's $4,000 a week.
If you've got four people in the field working 40 hours each that's 160 hours
being worked.
That 160 hours
has to cover that $4,000 doesn't it?
$4,000 divided by 160 is $25, so those guys have got to make $25
on top of what they cost you per hour
before your business starts turning a profit.
Now I'll be a little bit honest. I'm playing fast and loose with the numbers a little bit.
It's a bit more complicated than that. On the one hand, you've got materials and you can
make a margin on your materials which makes you a bit more profitable, makes that about $25 a bit less.
But on the other hand, I haven't accounted for holidays and all those things that are talked about before
here and stopping, sit down a bit, having accounted for mistakes and this, all that kind of thing.
There's a bit of swings and roundabouts. $25 might not be exactly accurate but it's pretty close.
If $25 an hour per person is right, you need to add that
to what those people cost you, that calculation we just did. If we're talking about our lawn mower friend,
$45 an hour plus the $25, they need to be earning you $70 an hour
before we start turning a profit, before you start having any allowance in there for the risk
and contingency and things going wrong.
It costs you,
your business costs you
more than perhaps you realise and understanding what those numbers are for you
for your business is really important.
I did this exercise recently with a fencing company.
A few months ago they changed their model. They used to use subcontractors so of course that meant they got
a price to install a fence and I could put some margin on it
and everything worked. The risk was on the subcontractors
for they shifted their model and now they have employed
fencers doing the installations and pictures changed a bit and they're losing money.
Well they're not making as much money as they should be. So we used the same approach.
We worked out what their fences were costing them per hour
and we took this approach for the overheads, another dot per hour
and they went “Goodness!” It brought it home to them and they've put the hourly rate that they're charging up
significantly so it covers both of those costs and some profit.
Now we still got some work to do. This is a recent activity so we haven't seen the results yet
but at least we've seen the problem, we've recognized it and we've taken action.
We still got some work to do to make sure we allow enough hours in our quotes
so that they recover enough money and we've got some work to do to make sure that their fencers
take the same amount of time as we've allowed in the quotes - also important.
But they've taken that first crucial step. They started with understanding and being confident that you're right now.
Hope this has helped you out, this has persuaded you
that your numbers are important, understanding your costs are important. Like I said
the track is free, all you have to do is share it to three of your friends. So press the button,
go ahead and download the workbook. Read it, watch the video and understand a bit more.
Download the tracker and start tracking your own numbers,
making your own decisions about what you need to change.