Thursday, January 24, 2019
by Tom Grandy
What have you learned over the past several months? What do you know now that you didn't know six months ago? Take a deep breath, turn off your phone, close your eyes and think for a couple of minutes. Now, grab a paper and pencil and write down half a dozen things that you did not know this time last year. Is it a long list, short list, or is the paper still blank?
This is what I came up with:
- Learn To Be Less Judgmental And More Compassionate - There are few things more sobering than being in the hospital for six weeks without the assurance that you will live or die. I'm fine now, thanks to the Lord and a lot of prayers from a lot of people. However, I've learned more fully the value of relationships and how to be more compassionate, less judgmental, for those that are in similar positions. The stay in the hospital with weeks of recovery afterwards taught me that.
- Pay It Forward - My wife and I were recently with a close friend who shared how she had invested significant amounts of time and money into someone else. That other person wanted to pay our friend back but her comment was "Don't pay me back, pay it forward". The meaning was clear. Take what you have been given and pass it onto someone else when you have the opportunity. Great life lesson.
- No One Can Make YOU Change - I was listening to an old Zig Ziglar presentation and he was talking about setting and reaching goals. He was in his 40's at the time and overweight by nearly forty pounds. Many people, including his doctor, told him he had to lose weight but it never happened. He shared, in a most entertaining way that only Zig Ziglar can on how "he" had to make the decision to lose weight. Until he decided to set a goal and work towards that goal it wasn't going to happen. Life lesson - we are the only ones that can make us change. It's our responsibility and no one else's.
- Abandon A Quarrel Before It Begins - This is a proverb that I have read many times but it wasn't until I read a book that it hit home. The book was about King Solomon and the proverbs he wrote in the Bible. If you take a good look at what causes most quarrels it’s when we are trying to convince someone else that we are right. Before long both parties are upset and there are no winners. There are times we need to stand our ground but much of the time the quarrel was worthless. I've found abandoning a quarrel before it begins is a wise thing to do and it preserves relationships.
The items mentioned above were learned by observing others, reading books, and listening to audio presentations. There is little learned living in a vacuum. We all live busy lives and if you are a company owner busy is an understatement. However, there is a lot of value in reading, listening, and simply paying attention to the world around you. If you’re interested in growing and changing then take time to expose yourself to what others have learned. It might just change your life.
Thursday, January 24, 2019
By Dave Ramsey
The great statesman Benjamin Franklin once said, “When you are finished changing, you’re finished.” And even though it’s been 200-plus years since he uttered those famous words, they still hold true — especially in today’s business world.
Long standing ideas about how to lead a team are no longer viable. Workers won’t stick around for a bad boss these days, no matter how much they’re paid. They want to be motivated and inspired. So, how can you ensure that you’re functioning as an awesome leader? Start by avoiding these common, but mistaken, leadership beliefs.
The Myth: They’re inspired by their paycheck. As the owner of your company, you have the power to change lives. After all, you’re the person signing the paychecks. Everyone should be happy, and even grateful, to do their jobs with no questions asked.
The Truth: Great leaders know that power comes from persuasion, not position. Simply offering a paycheck, or intimidating workers by holding their jobs over their heads will not make them more productive or creative. Leaders who take the time to communicate, support and encourage earn loyalty and respect from their teams.
The Myth: No news is good news. Your team doesn’t need to know when something bad happens. If sales are down, they’re going to become scared and maybe even leave. As a matter of fact, they can’t be trusted with any sensitive news — good or bad.
The Truth: Winning organizations have a culture of communication. Your team wants to know what’s happening and why. Sure, there’s some information you can’t share. But when you have the right team members on board, you can trust them with almost anything. Make a habit of over-communicating. Your team will respect you for it even more.
The Myth: You can’t find good workers anymore. Today’s generation doesn’t listen. They lack initiative, and they never show up on time. They want the world handed to them.
The Truth: You’re probably not good at finding and recognizing talented, responsible workers. Think there are no young people who are willing to do an awesome job? Look at Chick-fil-A. The company has thousands of them. Part of being a good leader is knowing how to hire. You have to be willing to wait for the perfect person — one who shares your values and work ethic. At Dave Ramsey’s company, team members are interviewed four to six times, and the process can take three or four months.
Becoming a great leader is not easy. It’s a skill that needs to be developed, and it’s one that takes time, patience and a willingness to learn and improve one’s self. But if you’re willing to put in the hard work, you’ll find yourself with a team full of talented, passionate people — a team willing and able to slay dragons right alongside you, and do whatever it takes to win.
It’s definitely worth the wait!
Thursday, January 24, 2019
by Tom Grandy
Over the past 29+ years of working within the trades industry I have noticed some profound changes within individual companies in an effort to become more "customer friendly". As the new year moves forward I would like to highlight a few things that different companies are doing in order to become more customer friendly.
You will notice one item that is glaringly absent from the list. I have not listed the need, or desire, for top quality work. The reason is simple. Today's customer expects top quality work all the time. That no longer impresses the customer. From the customers perspective - quality work is a given.
So let's look at a few things customers really like about the companies they work with:
• Relationship with the Person that Answers the Phone
First impressions are lasting impressions. When it comes to Five Star Hotels the position at the registration desk is NOT an entry level job. In some cases the position must be earned over a period of years. That is how important the first impression is. Customers within the trades industry desire a long term relationship with the person that answers the phone. That means placing individuals in that position that are friendly, knowledgeable, and truly care about the customers they serve. This is why smaller companies often have a member of the owner’s family in that position. They know there will be very little turnover therefore allowing relationships to be built. Having software that calls up the complete customer history, including notes about the last call, can be invaluable. How would you feel if you called your local trades company and the first words out of the Customer Service Reps mouth were "Hello Mrs. Smith, how is Johnny doing in his first year of college?" After a brief but friendly conversation the CSR then says "I noticed Bill was at your home a couple months ago when he worked on your XYZ. Is that still working ok, and if so, how can I help you today." That is being customer friendly.
• Being Contacted When the Technician is on the Way
It's a busy world out there and plans change. Sometimes the customer was supposed to be home but an emergency occurred that forced them to leave the house, unexpectedly. The technicians day changes as well. The service call was scheduled between 10:00 and 11:00 AM but the calls earlier in the day took longer than expected. Customer friendly companies tell the customer they will be called (or texted, or emailed - customers preference) when the technician is on the way. That call allows schedules to change if something comes up and also allows Mr. or Mrs. Jones time to drive home if they are out doing an errand. Customers seem to really like that kind of communication.
Security is a huge issue in today's world. Customer-friendly companies have technicians arrive at the home with pictured name tags, easily seem, and with a calling card in hand. Many companies also text or email the name of the technician, and a photo as well, before the technician arrives so the customer knows who will be coming. All this makes the customer feel more secure.
• Respect the Customers Property
Respecting a customer’s property should be a given but in today's world it's not. The truck should be parked on the street so the homeowner can get out of the driveway if needed. If you need to park in the driveway confirm that it's ok with the customer, don't assume. Don't walk on the grass and always put on booties before entering the customer's home. If the customer says you don't need to do that it instantly becomes a moment to create a customer cheerleader. Tell the customer "Mrs. Jones, it’s company policy. We don't want to risk bringing dirt into your home!" Also, don't smoke. If you do, the odor follows the technician right on into the home. Use clean, yes clean, drop cloths as well. Again, it's all about respecting the customer’s property.
• Customer Friendly Hours
Today, most husbands and wives work outside of the home. However, that doesn't mean the customer doesn't want to be there when the work is done. That calls for change on the company’s part. Many companies now have staggered hours allowing calls to be made into the evening without paying overtime. Many companies work on Saturday, and some even on Sunday as well. This is a teaching moment! It's about what the customer wants......not what's convenient for you.
• Ability to Schedule a Service Call Online
What do Generation X, Y, and Millennials all have in common? Nearly all communication takes place on an electronic device. Progressive, customer friendly, organizations are now providing the customer the option of scheduling their own service calls right online. Few baby boomers will do that but the younger the customer, the more likely it is to happen. One principle of life doesn’t change. Older people will get older and there will be a mass of young people right behind them. Again, it's not about your convenience, it’s about meeting current and future customer needs.
• Easily Understood Billing
I can't tell you how many contractors I have talked to in the past that were still on time and material. As we discussed billing, it wasn't unusual for a contractor to tell me how much they charge per hour. In addition to their hourly rate they charged a show up fee, disposal fee, gas surcharge, etc. My reply is always the same. That is like handing the customer a gun with six bullets and asking them which one they want to shoot me with! That is too much information and is confusing to the customer. Sure, all those costs are real but roll all the costs into one simple hourly rate that covers it. Too much information invites unwanted questions. Go to flat rate pricing so the customer knows the cost up front and explain that payment for service is required before they leave the home. Make it simple and easy to understand.
• Clean Up the Area When Work is Completed
I saved this one for last for a reason. This is one thing, from the customer’s perspective, has NOT changed over the years. Most customers, especially women, see a direct correlation between how well the technician cleaned up and the quality of the work that was performed. Is that right or fair? No, but it really doesn't matter because from the customers’ perspective it's true. Customer oriented companies recognize that fact and require all service technicians to take a small vacuum into the home to clean up the work area before they leave. Yes, it will take an extra 5-10 minutes per call. Simply add the time, and therefore the dollars, to your flat rate pricing guide and the cost is not only covered but you will then have a happy customer that is likely to mention how well the technician cleaned up to her friends and neighbors.
Repeat customers that recommend your company to others are the foundation stone for profitable growth. Creating programs that are centered on the customer’s wants and needs will become more and more important as time goes on.
Here's a parting thought. Think about creating a "customer" board of directors. Meet quarterly and ask for suggestions on how your company can become more customer oriented. It might change the way you do business and will increase your bottom line profitability!
Thursday, January 24, 2019
by Tom Grandy
Eating cottage cheese will obviously not help you lose weight. Why? Well look around, only fat people seem to eat it! Now, is that totally true? Of course not; there are a lot of people who love cottage cheese, I just don’t happen to be one of them.
So what does eating cottage cheese have to do with running a profitable business? Before I answer that let me share one more real-life example and you just might figure it out. One of my responsibilities at Grandy & Associates is to line up speakers/content for our Profit University Audio Series that features a different business topic by a different national speaker each month. Sometimes I scan websites of potential speakers to see if they have material that might be suitable for the series. Like most reading this article, I had heard of Zig Zigler my whole life. He died in 2012 but was one of the best known motivational speakers in the country and perhaps the world.
Upon reviewing his website, as you might have expected, there is a long list of presentation titles. It wasn't long before one of the titles caught my attention. The title was Biscuits Fleas and Pump Handles. I'm thinking to myself, "What in the world do those things have in common?" After a few clicks on the keyboard I had viewed the summary and purchased the CD. The presentation was outstanding, but guess what? The content was on goal setting. After receiving permission from the Zigler organization to use the material it became this month's presentation for the Profit University Audio Series.
What do cottage cheese and biscuits, fleas and pump handles have in common? You guessed it; they all got your attention. In the case of Zig Zigler’s presentation I heard an outstanding presentation that provided some really valuable tips on how to set and achieve goals. If I had reviewed the topic list on Zig's website and come across a presentation entitled “Six Ways to Set and Achieve Goals” I seriously doubt I would have explored the content and it would surely not be this month's featured presentation. The above title was not unique. There are a limitless number of presentations on goal setting but Zig’s title caught my attention.
The point is: What do you promote about your company? Before a potential customer becomes a real customer you have to initiate a contact and/or have a conversation. What are you saying about your company that makes it unique from all the rest? What catches your potential customers attention enough for them to contact you? Do the following phrases sound familiar?
- 73 years of combined experience
- Great customer service
- Family owned and operated
- We carry XYZ equipment
- Lowest price in town (if you want to go out of business quick, use this one)
With very little effort most reading this article could add another dozen topics to the list. Why? Because a huge number of trades companies use them. There were no fleas or pump handles to get your attention, right?
What is "really" going to get your potential new customers attention? Below are a few thoughts to ponder on:
Our most efficient XYZ system can be yours for only $XXX/month (Remember what made Sears famous years ago? You could buy nearly anything for $25/month)
- We know the history of your equipment (Promote how you record every call, what repairs were done, and which technician worked on the system)
- No extra charge for after hours or weekend calls (With proper personnel scheduling, and accurate pricing that absorbs the after-hours cost, this can be a reality)
- Relationships are important! (Promote your efforts to send the same technician to the same location as often as possible)
- You will KNOW when the technician is on the way (Put systems in place that allow the service customer to be notified by email, text, or phone call when the technician is within 15 minutes of arrival)
Get the point? Promote things that show your company is unique! Think about what makes your company different…from the customer’s standpoint? You can't catch a fish without bait and you can't create a new customer until you get their attention. Unless you can capture the potential customer’s attention with some kind of unique offering you will never even have the opportunity to add them to your customer base. If you want to increase your customer base--it’s time to think outside of the box!
Thursday, January 24, 2019
By Nancy O'Hare Zika
Recruitment … it is at the forefront of every person’s mind in the PHCE industry, and for very good reason. This is a real problem! We are currently looking at a 340,000 position shortage of tradespeople in the US, and with 60% of the current workforce retiring in the next ten years, that number could very well rise to 1.1 million. So, as business owners, what do we do? Honestly, you have two viable options: grow your own or hire existing technicians from the competition. To be successful at either one requires you to be the employer of choice in your area. Seems simple… right?? There are a number of ways to become the “Employer of Choice” in your area. It starts with making it known to the outside world why they should come and work for you. For someone on the outside looking in, the culture of your company is virtually invisible. When you’re working within (or “inside”) your own business, it seems like everyone should know what a great company you have… But they don’t. Recognize this and figure out a way to make it known! The best way is through effective marketing. Believe it or not, there is actually a way to “market” your company that will both increase your customer base and also have potential technicians flocking to your door.
You need to tell your story. By doing so, you will make an emotional connection with the potential technicians of your area. This needs to be done honestly and openly. As much as we think we are in the plumbing business, or the heating business…we are really in the PEOPLE business. Be sure you understand the difference.
I am fortunate to have the opportunity to travel around the country visiting PHCE companies, and there is definitely one sentiment that I routinely hear from company owners and management…”We have too much competition in the area.. there are just not enough technicians!” But… perhaps it’s all about perspective. You have 15 companies in your service area?? Well, I view that as 15 companies that are currently employing your future technicians.
A quick story: In 1935 a US shoe company was looking to expand its business overseas. They sent two of their top sales guys to different areas within this new region. The owner of the shoe company told both of the salesmen to send word back once they were settled in the new uncharted territory as to how many pairs of shoes they needed shipped over. A week went by and finally word came from Salesman #1. He wrote: Disappointing news. Do not send any. No one wears shoes here! The ownership was discouraged and decided they should contact Salesman #2 to tell him to pack up and head home, but before they could get in touch, they received the following message from him: GREAT NEWS! Send me as many as possible! NO ONE WEARS SHOES HERE!
It’s all about perspective. Be sure that you are effectively marketing your company as THE company of choice in your area- then watch both your customer base and your talent base GROW!
* Nancy O'Hare-Zika is the co-owner of Swick Media Services, a Michigan based media company that focuses on the marketing needs of companies in the PHCE industry. You can find more information from Nancy O'Hare-Zika at: www.SwickMediaServices.com.
Thursday, January 24, 2019
By Tom Grandy
A study was recently conducted at a busy intersection of a major city. A man, we’ll call him John, was dressed in dirty jeans, hair uncombed, unshaven and his shirt tails were hanging out. John was placed at a busy intersection in front of dozens of unaware bystanders and instructed to walk across the intersection when the light was still green but there were no vehicles in sight.
The moment arrived and John walked across the intersection alone no one followed.
Fast forward a day or two. John is on the same corner with the same instructions. However, this time John had shaved, showered, and is dressed in a really sharp suit and tie with shoes polished. The light is green with no cars in sight. John steps off the curb and heads across the street. One other thing happened. The dozen or so people behind him also stepped off the curb and followed him across the street!
What's the point? When it comes to providing leadership appearance does make a difference. Now I am not promoting a suit and tie wardrobe for technicians but I am strongly suggesting that appearance does make a difference when it comes to leadership. It makes a difference in the eyes of the customer. It makes a difference in the eyes of your manager and it sets the technician apart from the other technicians.
A customer's assessment of a job well done is not simply based on technical expertise in term of fixing a problem. Neatly dressed, polite technicians make a statement to the customer as well. Let's face it. If two technicians arrived at your house, each with similar technical expertise, and one was clean shaven with a clean uniform on and the other was un kept in a dirty uniform (if he even had a uniform on) which one would give you a warm fuzzy feeling? Now some are thinking "But Tom, that's not fair." Well I agree, but it's the impression left with the customer that counts!
Wednesday, February 28, 2018
By Tom Grandy
If you want to get better at what you do, then set specific goals and measure your progress against that goal on a weekly or monthly basis. It’s a simple process but few of us practice it.
Most technicians wish to advance and earn more money. If that is your goal, don’t depend on your supervisor to set goals for you, set your own. Believe me, if your sales and/or productivity substantially increases you will be noticed (and rewarded) by management.
Tracking your daily, weekly, or monthly sales can be fun. Set goals to reduce the number of callbacks you have. See what percentage of time you collect money at the conclusion of a service call or installation job. If your daily sales are increasing, the number of callbacks you have are falling and you are physically bringing money back to the office…I promise you, management will notice.
I fully realize some managers may not seem to care about those things. If that happens to be your situation…do it anyway, for these three reasons:
- It provides a wonderful feeling of personal accomplishment.
- When it comes time for your annual review you will be armed with information to back up your request for a raise.
- Should you find the need to change employers, setting goals and tracking your progress on a regular basis will demonstrate your initiative.
Your future growth and value to the company really does depend on YOU! Be a self-starter.
Wednesday, February 28, 2018
by Tom Grandy
Most of us have heard, "Do you have thirty years’ experience or one year of experience repeated thirty times?" The other one we have heard is, "The definition of insanity is 'Doing the same thing over and over again while expecting different results!'" The point is the same in either case. Are we learning and changing?
As the new year begins, it's important to reflect on our victories as well as our failures. What did the company do really well over the past year, and just as importantly, what area produced weak performance? My suggestion would be to have a company meeting to discuss this very topic with the objective of setting specific goals for the coming twelve months. Below are a few topics you just might want to include on your discussion list:
- Turnover - How many employees (techs or staff) left the company over the past year? If the number is high, the question becomes why? Sure, they may have been a poor fit but the larger question is to look at your hiring practices. How do you interview and utilize DISC testing? Are there core issues with how you treat employees? Yes, they may have done a poor job, but , take a good look at your new employee orientation program and training process. I heard a great quote a while back, "Seldom is the problem in front of you the real issue. There is usually a foundational problem behind the issue." Having an open and honest discussion with all employees on this topic can be very telling. If you are an owner or manager, remember being critical or defensive of comments being made will cause the room to suddenly become very quiet. Swallow your pride to accomplish the larger objective of getting better.
- Gain/Loss of Maintenance Agreement Customers - Maintenance agreements are literally the foundation stone for profitable growth. The final selling price for most trades companies is usually heavily dependent on the number of active maintenance agreements the company has. Keep accurate records of the number of maintenance agreement customers gained and lost during the past year. Compare total active maintenance agreement customers at the end of the year with each previous year. Is the number growing? If not, why?
- Did the Company Make a Net Profit in All Departments? - This can be an elusive number for a couple different reasons. The first, is cash flow verses accounting. As most are aware, it's not unusual to see an accounting P/L statement that says you made a profit (which you will have to pay taxes on) while noting there is far less money in the company checkbook. Be sure to look at net profit from both perspectives.
- The other issue is departmentalization - Few companies departmentalize all the way through sales, overhead, labor and materials, but look only at the overall company’s net profit. The potential problem is--one department can easily be subsidizing another one and no one knows it...until it's too late! Review your net profit by department and compare this year with past years. Are profits increasing or decreasing and why?
- Debt Status - This can be an eye opener. Simply list all outstanding debt including balances owed on loans, unpaid credit card balances, overdue money owed to suppliers, personal loans to the company, balances on your lines of credit, and overdue taxes. Totaling these dollars can be a wakeup call. The objective is to have the "total owed" figure substantially DECREASING each year. Hint: Build debt repayment into your overhead cost when setting proper hourly rates. If you don't, all that net profit you made will quickly be swallowed up by debt repayment.
- Closing Rate on Sales Presentations - An acceptable closing rate for sales presentations is at least 50% or more. What is your rate per individual? Is it going up or down year-to-year? If the closing percentage is not increasing, you need to know why. Do some or all sales people and/or selling technicians need some additional formal training? Reviewing these percentages, at least annually (monthly or quarterly is better), can keep the sales team on track.
- Total Dollars Tied Up in Inventory - How many dollars does the company have tied up in inventory? If the dollar figure is going up it might be because the company is growing therefore additional inventory is needed. It may be caused by your sloppy purchasing policy. Do yourself a favor and at least look at the number and ask the question.
- How Often Do You Meet with Your CPA? - This topic was purposely brought up last. It's hard to manage the company without taking a close look at the numbers. All the above topics are important but the bottom line is what is really important. Did the company make a profit this past month? It does little good to find out you had a rotten year three months after the close of the year. Company owners need to know how they did financially within 10 days of closing out each month. Make it a habit (not a goal) to sit down with your CPA by the 10th of each month to review your numbers. If they are not providing "practical" advice on how to improve your bottom line profit, it's time to find a new CPA!
Before you set this article down pick up your calendar and select a date for your annual company meeting to discuss at least some of the above items. Make it fun. Select a really nice restaurant so you not only review progress but provide a big thank you to those that helped the company grow and prosper. Everyone wants and needs to be appreciated.
Wednesday, February 28, 2018
by Dave Ramsey
Have you noticed there are some business owners who just seem to get it right every time? It seems like anything they touch turns to gold. How do they do it? What’s that magic formula that finds them so blessed, while many other entrepreneurs continue to struggle?
For most successful people, it’s as simple as this: They have a plan. They write down their goals, and stick to them. Goals force practical steps into your life that help make your dreams come true.
If you haven’t tackled your business goals for the new year, here are some ideas to help you get started. Remember, they’re only suggestions. For your goals to truly work, they must be yours.
1. Get your finances in order
Want to know the number-one reason small businesses fail? Poor accounting. If you don’t keep up with it, you’ll sink like the Titanic.
But that’s just the start. You can’t rely solely on a profit-and-loss statement to see what’s happening with your business. You need a realistic budget that forces you to address the present while planning for the future.
2. Commit to a better hiring process
The main reason small business owners hire the wrong people is they move too quickly. They’re afraid the work won’t get done until the position is filled. While there’s some truth to this, you should also know it takes more time to quickly hire three people who don’t work out than it does to find that one good person who’s perfect for the job.
Commit to slowing down your hiring process. Invest more time and thought in the interview process, and don’t make an offer until you find the right person — no matter how long it takes. At my company, each new hire has gone through five or six interviews.
Remember, you don’t want someone who is just looking for a J-O-B. You want someone who is passionate about the position and your mission.
3. Find a mentor or coach
What’s the one trait that almost all successful entrepreneurs have in common? They have a wise and experienced mentor who shows them the ropes and holds them accountable.
Find good people who are doing things with excellence, who are having the kind of success you envision having one day, and learn from them. You don’t have to stick to just one. You can have a different mentor for every area of your life.
4. Get healthy
Have you ever noticed you don’t have a lot of fight or enthusiasm in you when you’re tired? In business, there’s always going to be a battle, so take care of yourself! Get in shape, eat healthy foods, and get plenty of rest. Give your mind and body what they need, so you can fight another day.
So, what are you waiting for? Write down those goals and get started. Goodbye, stress. Hello, prosperity!
Tuesday, January 23, 2018
by Tom Grandy
The vast majority of workers in the United States live from paycheck to paycheck. If they lost their job it would have serious consequences in terms of meeting their monthly obligations. Many of us remember 2008 when the economic world came to a screeching halt. Seemingly overnight the economy took a nose dive and many businesses went bankrupt within months. I believe it was AT&T but the situation was not limited to their company. Credit was tight and the statement came out something like this: “How are we going to make payroll since we can’t borrow money?” I was shocked! I was reading about one of the top companies in the country that was going to be in a financial mess because they could not borrow money to make payroll. Some of the greatest minds in the business world worked for this company, and many others like it, and yet they did not have the common sense to build up cash for a rainy day fund …just in case! Amazing.
Poor financial management, which includes preparing for the future, is not limited to the big companies. Small businesses everywhere are very similar to the majority of US workers…they live from week to week when it comes to paying their bills. Most reading this article are in the trades industry. Our industry is notorious for it seasonality. Weather dramatically affects sales for most of the industry. It’s been that way forever and it’s not likely to change. However, what can and should change is how we prepare for the slow seasons.
Many reading this article are Dave Ramsey fans. If you have listened to Dave for very long you will remember his mentioning (as the initial step towards financial freedom) the creation of an Emergency Fund. The long term objective is to have an Emergency Fund that will cover 3-6 months of income…just in case. Guess what? The same principle applies to our businesses. We need an Emergency Fund as well.
How Much Is Enough?
To answer that question let’s use an example. Let’s assume our small business grosses $600,000 per year or an average of $50,000/month. The monthly fixed overhead (overhead dollars that must go out each month to stay afloat) is let’s say $12,000. Adding in salaries of the “key” overhead people (ones that you really want to keep on the payroll at all costs) will increase the number to perhaps $22,000/month.
Utilizing Dave Ramsey’s parameters of wanting a 3-6 month Emergency Fund would mean the company needs to have savings of $66,000 to $132,000 to be on the safe side. “Wow, Tom that is a lot of money!” It sure is. It is unlikely the company will go 3-6 months with NO income so perhaps a more realistic range would be $40,000 to $80,000 in the bank as an Emergency Fund. Now some of you may be thinking, like AT&T, I will simply draw from my line of credit should the need arise. In 2008 that “assumed resource” disappeared. Better to be safe than sorry.
How Do We Generate Cash for the Emergency Fund?
The principle is pretty straightforward. If your rent, insurance, or wages go up, how do they get covered? You increase you pricing to the customer. If you want to create an Emergency Fund of $60,000 then the $60,000 needs to become part of your budget, therefore, part of your pricing. If you were a service company with three techs that means you would produce roughly 3,000 billed hours per year. The hourly rate needs to increase by $20/hour ($60,000 / 3,000 billed hours = $20.00/hour). If your objective were to create the fund over two years then the rate will only need to go up $10/hour. This happens AFTER the Emergency Fund is fully funded. At this point DO NOT CHANGE YOUR HOURLY RATE. The money that was being used to create the fund just became additional profit!
Wouldn’t you sleep better at night knowing you had a fully funded Emergency Fund sitting in the bank, just in case?