[EDITOR’S NOTE: VITAL holds monthly CI Business Mastery Classes where it addresses important CI business topics via a webinar. Each class is supported by an industry brand. VITAL has agreed to share some of the information from these classes in a monthly column of highlights from its most recent webinar. The fifth CI Business Mastery Class was on gross profit and payroll, and it was supported by the Paradigm group of brands, including Anthem and Martin Logan.]
Last month, we identified the various levers available to CI business owners and which ones matter most. Today, we will discuss the two most important levers — gross profit and payroll (a.k.a., compensation). These two big levers ultimately determine the success or failure of a CI business and, more importantly, they can make the difference between a business result that is “good enough” or one that is truly exceptional.
What is so important about gross margin and payroll? Gross margin is what ultimately pays the bills. We need a strong enough gross margin to cover our payroll and overhead and have net profit left over to invest into the business and reward the owners for their investment and risk. Payroll is the largest expense in the business, and thus it is the most crucial cost to manage.
Last month we introduced you to the concept of blended margin and contended that 47 percent was a useful target. Now we will introduce you to the concept of top-line gross margin, which, simply put, is not including tech pay as a cost of goods in your gross margin calculation.
It’s important to understand the difference between top-line gross margin and blended gross margin. Top-line gross margin is a better reflection of the bidding function of the business, and it allows us to manage payroll as a single bucket that’s also divided into smaller categories of compensation. Top-line gross margin also drives the profit and many other very important concepts for pushing levers in the business.
Top-line gross margin measurement is the number one lever or metric in the business. Quite simply, it is the revenue you collect from your customers minus what you pay for your vendors for the equipment and parts. A very good top-line gross margin is 60 percent or better.
What if you are not achieving a 60 percent top-line margin? Here are some tips that can make a huge impact with very small changes.
Ensure that you sell brands and categories that produce strong margins to begin with. Sometimes you’re forced to sell low-margin products like TVs and soundbars. We get it — there are times when those products are ideal for your customer. See how you can add on accessories and other categories to make that a more profitable sale for you.
Don’t eliminate margins through discounting. Put your bids through a mix analysis to make sure that you’re charging enough for labor and then stand firm in why you deserve to get paid. Your labor is the added value to the products you sell. Those products by themselves are not what your customer wants — they want that full solution.
Put expiration dates on your proposals. Stay on top of those price changes and increase your miscellaneous parts allowance. Have you compared the prices on tape, zip ties, screws, and the fuel just to get to and from Home Depot these days? It’s massive. If you’re charging the same today as you were six months or a year ago, you’re leaving a lot of margin on the table.
Make sure that you are measuring and tracking gross margin accurately. This way you will know that the changes you are making are improving your outcomes.
Now let’s talk about payroll, which, for our conversation, is meant to include all payroll for the entire company, including owners and managers, as well as taxes, payroll benefits, payroll expenses…everything. If you don’t pay yourself through a paycheck that’s totally fine — your payroll percent will be lower because you’re not including your owner’s pay and your net operating profit target should be higher than our recommendations because you’re building your personal income into that net operating profit.
If the top-line gross margin is less than two times your compensation, then you’re likely discounting the value of your people — you’re simply not charging enough. Here are some of the best overall compensation management strategies that we’ve seen our clients implement with great success.
Make overtime optional. Have your team ask for approval and you will see things change dramatically. You must still manage the quality of the outcomes, but overtime is not managed well across our industry. And that’s paid at time and a half — if you have two people on overtime, it’s like you’re paying three people to do the work every hour.
Realistic compensation. The overall sales compensation should be somewhere between 4 and 7 percent of overall revenue and should max out at around 8 percent. Some markets with a really high cost of living may have to push this up to 10 percent. Remember, as your overall compensation moves up so should your gross margin target.
Improve the productivity of your company as a whole. Be strategic with scheduling and dispatch, reduce windshield time overall for your entire team, and make sure your teams have a plan. One of the biggest opportunities in productivity is sending our teams out with a great plan. Without one, they figure that plan out while they’re on billable time. Send them out with a wonderful plan and have them execute it.
A simple test of your company’s productivity and staffing is the revenue-per-employee test. Each employee should allow you to produce at least $200,000 in revenue per year. Frankly, today it should be closer to $225,000 or $250,000 with inflation and all the costs that we’re dealing with. But if we use the $200,000 number as simple math, a six-person company should produce at least $1.2 million in revenue. That takes intention, practice, and focus.
Execute on the numerous improvement strategies we talked about here — one at a time — and measure the results of those improvements. You want to improve it by half a percent. Using benchmarks, set the objective then make one, change — just one tweak and give it some time. Observe the outcomes and results. The most important piece is to reward your team when you see those improvements and you reach those goals.
Each month, a different CI Business Mastery subject will be addressed. Participants will receive a CI Mastery Business Class Certificate at the end of the 12-month series. Dealers can register for live and recorded sessions at https://growwithvital.com/