Most technicians have no idea of the extra sales that are required to cover the cost of a lost or damaged part. The thinking goes something like this. “While installing the new system I damaged (or lost) a $50.00 part. I didn’t mean to but hey, it’s a $12,000 installation job so $50 bucks isn’t really all that big a deal, right? After all, the company is probably making several thousand dollars on the job so damaging a $50.00 part isn’t really all that important. I’ll be more careful next time.”
Well to begin with the company isn’t making several thousand dollars profit on that $12,000 job. The national profit margin for the industry is 3%. That means the real profit is about $360. When the company is evaluated from a cash flow perspective (instead of an accounting perspective) where equipment replacement costs and paying off debt are considered the real profit margin is often less than 3%.
However, let’s assume the company really does make a 3% net profit. How many additional sales dollars must be generated to recover the $50.00 loss? The answer is eye-opening, but the math is really pretty simple. Take the lost amount, in this case $50.00, and divide it by the company’s net profit.
$50.00 / .03 = $1,666.66
Tom, are you telling me the company needs to sell $1,666.66 in additional sales to cover the cost of that measly $50.00 lost or damaged part? Yes, that is exactly what I am saying. Just to confirm, do the math the other direction. The company just performed a major repair for $1,666.66. If the net company profit is 3% let’s check out the profit below. Bingo, $50.00.
$1,666.66 x 3% profit = $50.00
Ouch! That hurts. Oh, by the way, there is zero profit on the $1,666.66 job because all the profit was absorbed by the $50.00 part loss.
Now take it a step farther. Let’s say that last installation job was either improperly priced or the job ran over. No matter the reason, the company lost $600 on the job. How many additional sales (again at no profit) will be needed to cover the loss?
$600 / .03 = $20,000
That’s right. The company is going to have to generate additional sales of $20,000 in installation or service work to cover the loss, and again at zero profit!
What are some other ways a company loses money? Damaged inventory, unexpected vehicle maintenance, nonbillable time, under bidding installation jobs, etc. are all losses that were not planned for the company budget.
It’s important that technicians be fully aware of the effects of their actions. That also includes salespeople when pricing jobs, office employees that create billing, the stock room damaging parts or even the extra 10 minutes the tech spends in the office drinking coffee rather than being on the road to the first job of the day.
Do you need some help explaining this whole concept to your techs? If so, Grandy & Associates can help. Below you will find a link and/or a QR Code that will take you to an 8-minute video on YouTube that will explain in a simple and easy to understand way the effects of under billing, parts damage or lost parts. Check it out. It might make a great addition to your next service meeting or company get together.
Go to the following link or scan the QR code:
Written By
Tom Grandy
Company Founder
Tom Grandy
Company Founder
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