The last blog in this series talked about calculating monthly average overhead along with your breakeven point. You may want to go back and review that blog prior to reading this one. In this blog, we will talk about measuring company capacity and calculating your overhead per man day burden.
Capacity is measured as the number of units available for sale in a given month, and in contracting terms that capacity is measured in man days. When you’re talking about labor, you are talking about the number of man days available to perform work in a given month. In this case, men days is calculated only for your field staff, which typically includes service techs, billable apprentices, installers and their helpers. Let’s say for the sake of this discussion you have 20 such individuals. In a perfect world, that means you would have 20 billable days per month or 20 man days. However, we don’t live in a perfect world. We will never be 100% efficient because we lose time to vacations, holidays and sick days. We also lose time to things like late arrivals and warranty callbacks. Unless you have been monitoring this number for your organization, how do you know what to budget for? A good number to use is 85% efficiency, and if you are not monitoring your actual man days versus total available, you should start. Again, for the sake of this discussion let’s use 85% or 17 man days. (20 X .85 = 17)
When you look to spread your overhead across your capacity, the result will be here overhead per man day burden. This is the amount of gross profit dollars each man has to earn each day to cover the firm’s overhead expenses. This is one of the most critical numbers in your business! It effectively measures how competitive your firm is along with your ability to make a profit. Generally speaking, if your firm’s overhead burden per man day is $200 or less, it means you have a good balance of field staff relative to your firm’s overhead expenses. The higher your firm’s overhead burden, the less competitive you become. This affects labor-intensive work the most, like labor-intensive installations, maintenance agreements and diagnostic fees. It is typically very difficult to cut overhead expenses because the vast majority of it is comprised of overhead staff – people. By understanding and controlling overhead expenses, you’ll be able to determine and allocate each job’s true overhead expense burden based on how long the job takes as measured in man days.
Article Courtesy of the HVAC Business Dr.
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