Business Builders


Are You a Micromanager?

Are you a micromanager?

Image courtesy of Pinterest

The term micromanager is one that is perceived negatively by managers – as it should be!  The behaviors associated with being a micromanager include detailed inquiries into the activities of both the employee and projects they are engaged in.  Micromanagers not only want to control the outcome of their employees projects, they also want to direct the process of how those outcomes are achieved.  These managers feel it is their job to give detailed directions to their employee in order to maintain control of the project.  If you were to ask the manager how they felt about the way they interacted with their employees, they might admit to wanting to maintain control, but it is doubtful they would classify themselves as micromanagers.

 

Their employees however would offer a different perspective.  They would likely describe themselves as frustrated and their work environment as constrained.  Micromanagement can reduce an employee’s productivity because it inhibits their creativity and erodes their confidence in solving problems.  Over time, this can cause the relationship between the employee and their manager to become strained and can result in low morale and high turnover.  Micromanagement typically drives away the good people, leaving in place the less capable.

 

Why does a manager micromanage?  Typically, these managers fear losing control, and the only way they know how to maintain it is to involve themselves in every aspect of their employees activity.  They might fear losing control because they are a new manager, and don’t know how else to practice their managerial duties. An all too often scenario is that an individual who is highly skilled and has a great deal of expertise is promoted into management.  Now they find themselves in a situation where they have responsibility over individuals they see as being much less skilled, so they feel the need to exert control in order to achieve outcomes that look like the ones they have produced in the past.  Perhaps you are an entrepreneur who went into business for yourself in order to be your own boss.  Now your business has grown, and you have people working for you who have high levels of competence.  This might make you feel diminished or out of control, so you react by involving yourself deeper into the daily activities of your employees.  This likely will result in outcomes you don’t expect and don’t want.

 

Employees who are being micromanaged will likely react one of two ways.  On the one hand, they may develop a total dependence on the manager because they don’t feel like they can make a decision on their own.  That reduces productivity because employees feel that the best way to accomplish what the boss is asking for is to run everything by them before taking action on anything.  If the boss is busy, which is typically the case, waiting on decisions extends the timeline of the project.  It may also lead the employee to stop caring, which causes their talent to be underutilized because it is no longer offered.  On the other hand, employees who pride themselves on their own capabilities and expertise will feel building frustration and resentment toward the manager.  This resentment can lead toward conflict with the manager, and the resulting frustration can cause the employee to leave the organization.  If the employee was truly talented, their loss should be chalked up to poor management.  The best thing an employee can do with a micromanaging supervisor is to give them all the information they need.  Knowing their boss thrives on details, they should provide them with detailed reports.  They should also ask clarifying questions in order to make sure they know what their bosses are looking for, and repeat the answers they are given to make sure they have heard correctly.  For managers, the most important realization they can come to is that micromanagement does not offer any benefit as far as workplace productivity and employee development are concerned.  Managers need to be clear about what needs to be accomplished and by when, then give general directions as far as how the end result should be accomplished.  They should make it clear to their employees that if they want direction they should not be afraid to ask for it.  If the employee then does ask for guidance, they should not be berated for doing so.  By letting your employees make decisions about how they accomplish outcomes related to their responsibilities, you will be helping them learn how to become managers in their own right while freeing yourself for higher-level activities.


A Crisis of Trust

Source: supportforstepdads.com

The Annual Edelman Trust Barometer shows an overall reduction of trust in the four institutions it measures; the government, media, business and nongovernmental institutions.  In addition, the credibility of  “a person like yourself” – often a source of news and information on social media, has dipped to an all-time low in the studies history.  The survey shows trust falling more steeply in the United States than in any of the 28 countries surveyed, despite the robust economy and booming stock market.  The survey also showed that Americans’ trust in their own companies fell more steeply than in any other country.  Richard Edelman, head of the communications marketing firm that commissioned the research, said “The United States is enduring an unprecedented crisis of trust.”  Why is that, and could it be happening in your business?

 

The survey sites a number of reasons for this discord.  The past year has been one of exceptional public opinion volatility, and concerns about issues ranging from stagnant wage growth to mass shootings along with a number of others are juxtaposed against the buoyancy of a strong economy.  According to the survey, the result is an unsettled and unnerved public at large.  Particularly for business leaders, the survey suggests that this is not the time for inaction or staying silent.  Getting employees and customers to trust you can be complicated, but it is imperative to your success.  If lost, it may be impossible to recover.

 

According to Chelsea Berler of the Entrepreneurial Network, the following seven concrete actions build trust in a business environment.

  1. Demonstrate That You Trust Others. One way to do this is to be generous and forgiving when someone else makes a mistake or disappoints you in some way.
  2. Create Relationships That Are Mutually Beneficial. Customers and employees all want to believe they are making the right decision to work with you, and trust is about showing people you care about them.
  3. Directly Address Issues. How you deal with concerns and problems is what instills trust and loyalty.
  4. Tell the Truth. If you get caught in a lie, no one will trust you.
  5. Be Flexible and Patient. Trust is built over time, especially when you are dealing with someone who isn’t fortunate enough to have experienced trust in their own life.
  6. Respect Others Time. To earn others trust, raise your awareness of their time, personal schedule and needs.
  7. Deliver the Unexpected. The best way to deliver trust is to delight clients and customers.

 

Click Here, For more information on this topic from this article.

 

Sources: The Edelman Trust Barometer; Chelsea Berler, Entrepreneurial Network


The Amazon Effect

Howard Schultz, Starbucks’ longtime CEO and current Chairman, says the retail industry is facing critical challenges.  “For every consumer brand that exists today, especially a brick-and-mortar retailer like Starbucks, there are very unique challenges because there is such a seismic change in consumer behavior – the Amazon effect,” he said.  That’s not really news, anyone who has been paying attention knows that Amazon is reshaping the retail landscape.  But beyond vague awareness, what are the numbers?  What is really happening?

 

Amazon started with books, then went to selling virtually… Everything.  Sales of electronics and general merchandise have have increased in the range of 2-3% year-over-year since 2007, while e-commerce sales of these items have increased in the range of 14-17% during this time.  That means more and more sales in this category are happening online than in a brick and mortar store.  Sales at Amazon however in this category have increased 28-74% year-over-year during this timeframe, which means an increasing number of these online sales are happening through Amazon.  According to a 2017 Forbes article, “Amazon’s entry into a market segment reshapes shopping dynamics, upsets the supply chain and exerts tremendous pricing and margin pressure.  Store closings are followed by bankruptcies and once proud and dominant retailers are teetering on the brink.”  Amazon now accounts for approximately 43% of all e-commerce sales.  Can this go on forever?  Maybe, and while the Amazon Effect may be good for consumers today, there may be a reckoning in the long-term.  According to Forbes, Amazon isn’t required by its investors to make any real money.  Amazon shareholders provide huge subsidies to its delivery operation, and according to one analysis, Amazon lost $7.2 billion on shipping costs last year alone.  That’s billion, with a B.

 

Source: Marketingsherpa

Source: Marketingsherpa

 

What does that mean for the HVAC industry?  Certainly, the industry is not immune from this phenomena.  A recent ACHR article cited research by an HVAC manufacturer that showed 43 websites selling HVAC equipment direct to consumers, and these websites collected more than 40 million hits.  The article points out that as ominous as these figures might seem, the closing rate for these Internet resellers was only around 3%.  That suggests that consumers were using these websites more for education than for purchasing.  Part of their education however includes obtaining better information about the price of equipment.  That has implications for every contractor, because today’s consumers want to know what things are going to cost before they buy.  They (read millennial’s) are much less likely to be okay with time and material estimates or convoluted explanations of what things cost.

 

When big-box retailers first came on the scene, there were predictions of the demise of traditional contractors that didn’t come true.  Do not confuse the Internet phenomena however with the advent of big-box retailers.  Internet information and sales are here to stay.  The above-mentioned news article asks contractors what they will do if they are approached by consumers asking them to install equipment purchased online.  Predictably, many contractors will stiffen their back and say they will never bow to such transactions.  The question is however, is that the smart move?  When your labor is fully productive and you have more sales than you can handle, perhaps that is the smart move.  But that is not always the case, is it?  Does it make sense to ignore ways of productively engaging your labor when you are otherwise keeping people employed by having them clean the shop or the trucks?  So what should you do?

 

The first thing you should consider is to go to flat rate pricing if you are not on it already.  This allows you to be upfront with consumers about what things will cost without going into mumbo-jumbo.  It also allows you the opportunity to properly price your payable hours as billable hours.  Secondly, you have an advantage over a retailer who is selling widgets over the Internet.  You have an applied product, not something that is plug-and-play.  The Internet can’t (at least yet) replace your technical skills and your ability to diagnose all of the thermal characteristics that have impact on a consumers energy consumption and comfort.  With that in mind, you can create a complete menu of flat rate priced services for the consumer who wants you to install equipment purchased on the Internet.  For example, you can have a fee for examining the structure to make sure it is properly matched to the purchased equipment.  The examination of the home required for that transaction allows you to examine the condition of the thermal envelope, ductwork and commensurate leakage.  It also allows you to investigate the presence of other items of potential interest to the consumer, such as areas of insufficient comfort, smart thermostats and IAQ options.

 

The point is, you can either treat Internet buyers and inquiries as hostile to your business or as leads for your business.  As the ACHR news article says, “What is your strategy?”


Will You Be among the 65,000?

If it exists in the HVACR industry, you’ll find it here!

If it exists in the HVACR industry, you’ll find it here!

Will you be among the 65,000 attendees that are expected to attend the upcoming AHR Expo in Chicago?  The world’s largest HVACR marketplace got its start 86 years ago as a heating and ventilation show, but it has grown over the years into the event of the year for the industry.  Attending industry professionals will come from every state in the union and 165 countries worldwide.  They will be joined by more than 2000 exhibitors, who will come together to share new products, technologies and ideas.  What kinds of new technologies?  Take a look at the end of this article for just a sampling.

 

This year’s event will once again be held at McCormick Place in Chicago, from January 22-24.  Most people in the industry are familiar with this Expo, commonly called “The ASHRAE Show,” but if you have never been it is hard to imagine the sheer size of this event.  When we mentioned 2000 exhibitors above, we didn’t mean 2000 people.  We meant 2000 different organizations, each coming to exhibit their company’s product offerings!  That is why this international show, held only once every four years, exhibits at the nation’s largest convention center which has over 2,600,000 ft.² of exhibition space.  Fortunately for the attendee, only about 500,000 ft.² of exhibition space will be needed for the HVACR show!  If you are looking for new product lines to boost your company’s sales, or if you’re looking to change product suppliers, or just want to do some first-hand competitive and new product research, there simply is no other opportunity like this show.  This is the granddaddy of them all.

 

Many people do not realize there is much more to this show than just the exposition.  The AHR Expo is also a major educational symposium as well.  There are over 50 free seminars offered on a wide range of topics, most lasting only 1 to 2 hours.  In addition, The ASHRAE Learning Institute will offer continuing education courses where you can choose from half day to full day professional development seminars that offer professional development hour and continuing education unit credits.

 

Finally, if you have never been to Chicago this provides a great excuse to visit a truly world-class city.  Take a stroll along the Magnificent Mile, one of the great avenues of the world, a 13 block stretch of North Michigan Ave. that runs from the Chicago River north to Oak St.  Along the way you will see the famous Chicago Water Tower, one of the few structures to survive the great Chicago fire of 1871.  From world-class museums (i.e. The Museum of Science and Industry, Shedd Aquarium, The Art Institute of Chicago, The Field Museum Of Natural History) to iconic sports stadiums (Wrigley Field) to taking in unprecedented views from atop the tallest building in the Western Hemisphere, (Willis Tower) the “City of Big Shoulders” will quickly become your kind of town.

 

Giordano’s Deep Dish Pizza

Did we mention that you can find nearly every type of food there is in Chicago, ranging from affordable to world-class cuisine?  If you are not familiar with Chicago however, we will pass on a contractor’s tip which you will only find here.  If you are looking for genuine deep dish Chicago pizza, there is only one place to go –Giordanos Pizzeria!  Fortunately, you are not limited to just one location, as there are 18 scattered around the city and even more in the suburbs.  The secret is for you, but just remember, you heard it here first!

 

Sample of Innovations To Be Seen at the AHR Expo

 

  • A digitally controlled mixing valve that provides precise temperature control for domestic hot water applications
  • A self contained HVAC system for hazardous locations, designed to prevent an explosion
  • New bionic impeller technology with a special blade designed to ensure optimized airflow angles and reduced flow separation
  • An oscilloscope for testing motor shaft voltages, allowing contractors to determine if motors are at risk of premature bearing failure

 

For more information, see September 14, 2017 ACHR news article.


Making Your Business Better

Have you ever driven home at the end of a long day or week, feeling the need for a personal recharge?  Have you ever felt that there must be a better way to run your business?  Have you ever wondered if there are others feeling and experiencing the same things as you?  Of course you have, we all have.  Ernesto Bertarelli, an Italian born Swiss entrepreneur once said, “You can’t change who you are, but you can change what you have in your head.  You can refresh what you’re thinking about, you can put some fresh air in your brain.”  If you want to change what you have in your head and refresh what you are thinking about, you should definitely consider attending Service World Expo in September!  What is that, you ask?

 

Service World Expo (SWE) 2017 is a veritable learning event and tradeshow fiesta, and it is being held at the Mandalay Bay, in Las Vegas on September 7-8.  SWE 2017 provides learning events for residential contractors on business, management, hiring, and product development.  The tradeshow side of the event showcases cutting-edge products and services in plumbing, HVAC and the electrical home service industries.  What makes the show so special?  Well consider what you will have access to.  (Only a partial list)

 

 Don’t Forget about The Industry’s Best Tradeshow With the Newest Products and Latest Trends


Don’t Forget about The Industry’s Best Tradeshow With the Newest Products and Latest Trends

 

Keynotes

Ryan Estis is one of America’s leading business performance experts, and he will talk about the importance of promoting your brand as well as understanding the impact of social connections and technology on your brand.

 

Traci Brown is a body language and persuasion expert, speaker, author and three-time US collegiate cycling champion.  In this fast-paced keynote, you will learn how to use her system to separate lies from the truth in today’s headlines as well as your own life.  She will tell you how to instantly tell if someone is lying, decipher the important lies and quickly uncover the truth.

 

J.R. Martinez, American Actor, author, motivational speaker, and retired U.S. Army soldier.  Martinez received burns to over 34% of his body when his Humvee hit a roadside bomb in Iraq.  He will talk about how true potential can only be realized by believing, trusting and not quitting.

General Business Information

– How to avoid theft in your business, by Ruth King.

– Getting reviews your business deserves, by Daniel Lemin.

– Where to spend most of your time, by Adam Thompson.

– Recruiting and leading millennials, by Kenny Chapman.

– Getting a 10 X return on your time, by Allan Ferguson.

– Industry forecast panel, with Vicki Laplant, Jen Anesi, Mike Murphy & Steve Miles.

 

Service Department Information

– The five blockers of service management success, by Tab Hunter.

– Understanding the minds of technicians, by Nathan Broughton.

 

Sales and Marketing

– Making more sales in a fair, honest, and dignified manner, by Charlie Greer.

– Selling in the replacement market, by Bill Ligon.

– Web marketing, what works and what doesn’t, by David Squires.

– Making another million dollars by adding more trade lines, by MikeAgugliaro.

– The five step system to generating more qualified leads, by Matt Jones and Will Wang.

 

This does not include of course opportunities to rub shoulders with industry leaders and top performers.  The value of networking and making new connections for your business often exceeds the cost of attendance just by itself!  This is a Las Vegas bet you will be sure to win, so don’t miss this opportunity to participate in the service industry’s most impactful event of 2017!  Follow the link below for more details.

 

Service World Expo (SWE) 2017


The Case for Disability Insurance

A major disability is something that happens to someone else… until it doesn’t!  The sad fact is most Americans are better prepared to die than they are to deal with disabilities.  If you are in your twenties, the chances are you rarely think about this.  But you should.  Just over one in 4 of today’s 20-year-olds will become disabled before they retire.In fact, over 37 million Americans or about 12% of the total population are classified as disabledMore than 50% of those disabled Americans are between the ages of 18-64.  At the end of 2012, 8.8 million wage earners representing more than 5% of the entire workforce were receiving Social Security disability insurance, (SSDI) 2.5 million of these were in their twenties, thirties or forties.  But I’m careful, I eat healthy and work out you say.  As it turns out, accidents are NOT usually the culprit.  Statistically, about 90% of disabilities are caused by illness.  Cancer, heart disease and other illnesses cause the majority of long-term absences.  Consider the following statistic for a 35-year-old male.

These costs are immediate, expensive and often not covered by insurance!

These costs are immediate, expensive and often not covered by insurance!

A non-smoking male, 5’10”, 170 pounds, who works an office job with some outdoor physical responsibilities and who leads a healthy lifestyle has the following risks:

  • A 21% chance of becoming disabled for 3 months or longer during his working career
    • Of these, 38% run the chance that the disability will last 5 years or longer
    • the average disability length for this person is 82 months

 

Similarly, a 35-year-old female weighing 125 pounds has a 24% chance of becoming disabled for 3 months or more during her working career.  As you can see, the chances are simply too great to ignore for the average working person.  Furthermore, most people think that Workers Comp or Social Security Disability insurance will cover their needs if they become disabled.  According to the Council for Disability Awareness, less than 5% of disabling accidents and illnesses are work-related.  The other 95% are not, meaning Workers Compensation does not cover them.  In addition, according to the Social Security Administration, 65% of initial SSDI claim applications were denied in 2012.  The average SSDI monthly benefit payment for males was $1256 and for females was $993, with 93% of all recipients receiving less than $2000 per month.

 

Given these numbers, how well prepared are American workers for disability?  Not very.  Forty-eight percent of US families do not save any of their annual income, and one third of working families have no retirement savings.  Consider the following chilling statistics.

  • 68% of adult Americans have no savings earmarked for emergencies
  • 65% of working Americans say they could not cover normal living expenses even for one year if their employment income was lost.
  • 38% could not pay their bills for more than 3 months.

So what does the average family do when confronted with a disability?  They begin running up expenses on their credit cards, get a 2nd mortgage, cash in their 401(k) or take out a home equity line of credit and ask family and friends for assistance through sites like go fund me.  As you might guess from the above numbers however, these solutions are inadequate.  According to a Harvard study, 62% of all personal bankruptcies and over 50% of mortgage foreclosures are a consequence of disability, and many end up on Medicaid for insurance.  Keep in mind that while Medicaid rules vary from state to state, the general requirements for income are less than $931 per month and countable assets of $2000 per person, not including your primary residence (with limitations based on your home equity), personal property and household belongings and up to one motor vehicle.  ($3000 per couple living in the same household)

 

What is the answer then?  Disability insurance!  How common is it?  Consider:

  • 65-70 % of workers in the private sector have no long-term disability insurance
  • That equates to about 75-80 million private-sector workers who are without long-term disability income insurance
  • Worse yet, only 46% of workers have even discussed disability planning

 

Next Blog: Access To And Cost of Disability Insurance

 

Sources

American Journal of Medicine

US Social Security Administration

Counsel for Disability Awareness

US Federal Reserve Board

American Payroll Association

Get Sick, Get out: The Medical Causes of Home Mortgage Foreclosures


Start off the Year with a Vow to Improve Customer Service Skills

Start off the Year with a Vow to Improve Customer Service SkillsWhenever there is a discussion about customer service, your first thought likely gravitates to an interaction between your service technician and the customer.  While that is not the only interaction, it is the obvious one.

 

Don’t forget about the exterior of your building.  If a customer who is in the market for your products and services were to drive past your business, would they be more, much more, less or much less inclined to call you because of that interaction?  The same can be said for a customer who comes across one of your company’s service trucks, as well as one who calls your office or visits your website.  All of these have the power to bring potential customers closer…or push them away.

 

Let’s go back to that obvious one – your company’s service technicians.  Perhaps like no other, they have the ability to bind your company to the consumer in a way that will bring them back for many years if done correctly.  However, good customer service is a discipline that is regularly practiced and backed up with ongoing training and accountability.

 

Treating the customer equitably and with understanding and empathy is a given.  If your technicians are not going to do that, they should not be working for you.  This is the cornerstone of building trust in a long-term relationship.  Beyond that, they need to look and sound trustworthy.  It goes without saying, but your techs need to have a neat and clean appearance, and providing company issued clothing sends the message that you deem this important.  What about piercings and tattoos?  Feelings about that vary by owner, but remember – the customer is whom it matters to, not the service technician.  Good communication skills should also go without saying, but part of that means training your techs on how you want them to present problems and opportunities to the customer – and how to handle irate customers.  We all like to use technical terms and industry jargon when talking with each other, but the customer likely won’t understand any of it – and may be too embarrassed to let you know it.  By the same token, don’t talk down to your customer either, they may know more about the subject then they let on.  Make sure to pick up on cues for lack of or understanding, and take the time to answer their questions completely.  Rushing through an explanation or looking at your phone will let them know that the schedule is more important than they are.  Finally, treat the customers property with the same respect as you would your own.

 

By re-dedicating your company to these core behaviors, you can create a competitive advantage that customers will pay for!

 

Picture courtesy of SteveDiGioiacom


Why Are We Arguing about The $15 Per Hour Minimum Wage?

There has been a lot of talk in this year of a lot of talking about the $15 per hour minimum wage.  Leading the way are the usual suspects, New York State, California, and Washington state.  Other jurisdictions have legislative proposals for a phase-in to $15 per hour, including the federal government, Oregon, Missouri, and the city of Minneapolis among others.  Employer groups in industries such as banks, tech companies, and healthcare adopted this as policy in 2015 as well.  The reaction has been all across the map, as it is every time this subject comes up.  It ranges from “the government has no business affecting wages in the marketplace” to “the increase should be immediate and across-the-board.”

cr-minwa

The ACH&R news recently published an article about the subject as it applies to the HVAC industry.  As expected, you got a similar range of views as those described above.  In the article, (Debating the Impact of a Minimum Wage Increase by Nicole Krawcke, June 20, 2016) one contractor said “I don’t see how this can be a good thing.  The minimum wage legislation will put pressure on the HVAC industry, as it is a tough business for an entry-level worker.”  Another contractor said the $15 minimum wage legislation will not have a significant impact on his business because many of his employees wages are already at or above the proposed rate hike.  “When hiring more qualified people, they’re already commanding a higher wage, so many of our team members are well beyond this rate or right in line with it.”

 

The contractor making the latter point also outlined an issue that no one is talking about.  “One of the negatives is we now have less of a company wage letter to climb in a new norm of complacency can set in.  The new minimum wage raise is a salary or wage reduction to everyone else in the wage pool and will eventually become a negative to business.  To maintain or retain the top performers, they will also expect that relative increase.”

 

So here’s the thing.  For the past 40 years those of us who have been in the industry that long have heard about the worker shortage in the industry, and how it’s only going to get worse over time.  A recent article in a trade pub said the HVACR industry will need 100,000+ new technicians and installers in the next 7 years just to keep up with demand.  A study by the HVACR Workforce Development Foundation indicated the number of mechanic and installer jobs will increase by 21% through 2022, which is nearly twice the growth of employment in the economy overall.  The bottom line is that we need to attract new blood into our industry, and we need to make it attractive vis-à-vis other career opportunities.  Are we competing with bank teller employees, fast food workers, retail clerks or receptionists for our installers and service technicians?  No!  So why in the world are we arguing about a $15 per hour minimum wage in our industry?

 

One contractor put it best.  “Very few, if any, HVAC workers should be working anywhere close to that minimum wage.  We are going to have to convince the dwindling supply of capable workers that HVAC is where they belong, not in one of the other industries desperate for help.  If you want someone who actually knows something about HVAC and is also competent, $15 an hour is not going to cut it.”  Nuff said!


Using Monthly Average Overhead to Calculate Burden per Man Hour

In the last blog we looked at calculating monthly average overhead along with the breakeven point for your business.  In this blog, we will look at calculating the capacity of your business along with calculating your overhead per man day – possibly the most critical number in your business!

cr-iobpm

We can define capacity for your business as the number of units available for sale in a given month, and for a contracting business that capacity is measured in man days.  Now we know that field labor will never be 100% efficient due to lost time for vacations, holidays, sick days and warranty or callbacks.  Given that, you should strive for efficiency levels of at least 85%.  The following calculation defines your firm’s total capacity with this metric in mind.

  • 20 workdays per month X .85 = 17 days per month per man capacity
  • # Field Staff X 17 days = Total Capacity

Your field staff consists of service technicians, billable apprentices, installers and installation helpers.  The number of man days sold becomes another trackable goal for your organization.

Once you have determined this, you can then calculate your overhead burden based on capacity.  The result is the number of gross profit dollars each man has to earn each day to cover the firm’s overhead expenses.  If your firm’s overhead burden is $200 or less, (<$25/hour) it means you have a good balance of field staff as compared to your overhead expenses.  The higher your firm’s overhead burden, the less competitive your firm becomes.  This affects labor intensive work the most, such as ductwork, piping projects or maintenance agreements.

To improve the firm’s overhead burden, you can do one of two things.  First, you can increase capacity.  As you have more man days, you spread the overhead expenses out reducing the overhead burden per man.  Second, you can decrease overhead expenses but this is extremely hard to do.  Remember, most of your firm’s overhead lies in overhead staff, so you have to examine whether you can increase sales or even maintain sales with a smaller overhead.  By understanding your overhead expenses, you will be able to determine each job’s true overhead expense burden, based on how long the job takes.  (Number of man days)

Courtesy of the HVAC business Dr. & Image Caption courtesy of stronglifts.com

Calculating Monthly Average Overhead And Breakeven Point

Calculating Monthly Average Overhead And Breakeven Point

Chart courtesy of Lanzarote Business Club

In this blog we will look at how to calculate your monthly average overhead and breakeven point as measured in gross profit dollars.  There are 2 steps required to calculate your monthly average overhead.  Why is that?  That is because there are 4 overhead expenses that should not be averaged.  These include office/officer/overhead staff payroll, payroll taxes on overhead staff, 401(k)/IRA for overhead staff and health/medical insurance.  Step A therefore is to calculate monthly overhead expenses for these 4 items.

The first element in Step A is to identify all your overhead or nonbillable staff and list their weekly compensation.  Multiply this number by 4.33, as there are 13 weeks  in a quarter.  The resultant number is your monthly overhead payroll expense.

The second element in Step A is to calculate payroll taxes on overhead staff.  There are 3 types of payroll taxes including FICA, FUTA, and SUI.  FICA taxes (Social Security and Medicare) are currently 7.65%.  FUTA taxes (federal unemployment tax) are currently 6%.  SUI taxes (state unemployment insurance) are different for each state so you will need to research this for your area.  Once you have determined that rate, multiply your total overhead staff compensation by the total percentage of payroll taxes to calculate your monthly overhead payroll tax expense.

The third element in Step A is to multiply your total overhead staff compensation by your matching 401(k) or IRA contribution, if applicable.  The final element in Step A is to determine your health/medical expense.  This can be done by researching last months health insurance bill.  Add together the numbers obtained in each of the 4 elements of Step A.  This number will be added to the number determined in Step B below.

Step B involves looking at the overhead chart of accounts, referencing the chart we showed in the last blog.  First, highlight the 4 areas we showed in Step A above.  Then, add the yearly totals of all overhead expenses with the exception of those highlighted and divide by 12.  Add this result to the number determined in Step A to obtain your total average monthly overhead.

This average monthly overhead expense represents the firm’s monthly breakeven point as measured in gross profit dollars.  It is important to periodically review these expenses to see if things have changed in order to have the correct average monthly overhead.  In the next blog, we will show how to use average monthly overhead to calculate your overhead per man day burden.

Courtesy of HVAC Business Dr.