When Harvester Ed and I visit with a company, one of the first things we try and decipher is what is the company’s gross margin. This isn’t easy to do as most companies either don’t know what it is, don’t track it or their profit and loss statement can’t tell you what it is currently or accurately.
The point here is that the gross margin of the company is the “fiscal furnace” that keeps your financials and profits nice and warm. Without the right gross margin levels, it is extremely difficult to make money.
During our Turnaround Tour 2017 visits with the three companies we are working with this year, we discovered that all three did not recognize the importance of having the right gross margin. So, after we figured out the overall gross margins for the three companies ranged from the low of 30 percent next at 40 percent and the third over 50 percent, we decided to start at the very beginning of how to go about getting the margins in two cases up to 45 percent or above level and how to better estimate and get our pricing right with the third company so they could land more work and not be so overpriced in their market.
When we start looking at how to manage and get the right Gross Margin we start with your HAWs, yes, your HAWs.
Know your HAWs, your Hourly Average Wages, Ah-HAW!
At the very beginning of establishing your gross margin, you will need to learn what your HAWs are for each revenue stream you are doing work. This means maintenance vs. installs vs. trees vs. snow.
Here is how you do it. Take the hourly wages of the folks in each revenue stream, add them up and divide by the number of people.
Example: Joe $14/hr.; Sue $16/ hr.; Bob $12/hr.; Fred $11/hr. Total = $53/ hr. divide by 4 (# of folks)
So, $53/4 = $13.25 per hour. Next, you will need to add payroll taxes + worker compensation insurance + health insurance if provided (the company’s cost). This will vary from state to state, from company to company and from service line to service line.
We call this added expense your burden rate, and generally this will range from a low of 20 percent to a high of 45 percent (tree service with higher worker compensation rate). For most maintenance operations this will land around 25 percent. You really should find out your real burden cost and get this as accurate as possible because everything, including estimating, pricing and selling your services is based from this foundational number – your HAW.
In our example, the HAW with burden included would be $13.25 x 1.25 = $16.56
This HAW would now be used as your base cost per hour of performing your jobs and would be used in your estimating and pricing process. And that’s another topic we will review next.
Remember, your HAWs will need to be adjusted periodically say every six months to adjust for changes in your pay rates and insurance costs, most of which are going up! Right?
So, let me ask you: Do you know what your HAWs are? If so, when was the last time you reviewed them and made any needed adjustments? Get your HAWs right and you are on the right path to the right gross margins.
