Feature Articles

Pest control business profitability and routing

By Dan Gordon, CPA 

How does a pest control company become more profitable? In this world of information overload, of internet marketing, handheld scanning devices, GPS tracking and hybrid vehicles, cell phone communications and profitability consultants, it would seem that there are many methods that a firm can become more profitable. Actually as a student of business and an observer of innovation, I can report to you that profit increases come down to two factors 1. Increase pricing. 2. Lower costs. That’s it!!  All these other ideas can only work to increase net profit margin if and only if they can achieve 1 and 2 above. So what tool in pest control is more powerful than any other in achieving this objective?

Efficient routing!

How do pest control business owners increase revenues and minimize expenses? Efficient routing will increase revenues and minimize your expenses. Let’s look at quantitative methods for evaluating route optimization. Clearly we know that the single largest expense in pest control or any service business for that matter is labor. In pest control there are two methods of compensating our technicians. Some firms pay hourly (paying time and a half after 40 hours per week) and some firms pay a percentage of production (or a hybrid compensation plan that considers both hourly and percentage of production). At the core of effective route management is fitting more work into less time. This can be done in two ways: first, by being more efficient when performing the job (taking less time), or second, by reducing windshield time. By the way, I am in no way advocating sacrificing quality service by rushing through jobs.

I am advocating better training in treatment techniques, better use of maps and mapping software and better management of what we offer our customers, and that is our great people. You may be convinced that what I am advocating is true as it seems pretty intuitive; however, you may ask, “how do we measure this efficiency, or better still, how do we benchmark it as a key performance indicator and improve upon it?”

Understanding effective routing: Let’s take a look at a couple of examples:

Example 1:

1. We have a technician who earns $15.00 per hour

2. Assume he can complete one job (with travel time) in an hour that produces $50.00

3. In this case our labor percentage is 30%. This means that for every $100.00 of revenue we have a $70.00 profit ignoring all other costs.

4. It also means that we’ve earned $35.00 profit in that hour ignoring all other costs.

Example 2:

1. We have a technician who earns $15.00 per hour

2. Assume he can complete two jobs (with travel time) in an hour that produces $50.00 each or $100.00 total

3. In this case our labor percentage is 15%. This means that for every $100.00 of revenue we have an $85.00 profit ignoring all other costs.

4. By fitting more work into less time we’ve increased our revenue (from $50.00 to $100.00) and decreased our labor cost from 30% to 15%. Remember how to increase profit margins in the opening paragraph above?

Well using this routing example, we’ve achieved both; we’ve increased revenue in total dollars and lowered our cost as a percentage of revenue. So you may say to me, “well, that works where technicians are paid hourly, but our technicians are paid as a percent of production, so it really doesn’t matter how long it takes for a technician to complete his work.” I would say that’s false as the longer that tech is on the road the more wear and tear on your vehicle as well as fuel costs among others, but let’s look at what can be gained from better routing using the same logic as example 1 and 2 above.

Example 3:

1. We have a technician who earns 25% of production

2. Assume he can complete one job (with travel time) in an hour that produces $50.00

3. In this case our profit is $37.50 ($50.00 – (25% x $50.00) =$37.50) (ignoring all other costs).

Example 4:

1. We have a technician who earns 25% of production

2. Assume he can complete two jobs (with travel time) in an hour that produces $50.00 each or $100.00 total

3. In this case our profit is $75.00 (($50.00x2) – (25% x $100.00)) ignoring all other costs. By fitting more work into one hour we have been able to increase our profit by $37.50 per hour from $37.50 to $75.00 dollars. In this case we’ve increased the revenue by $50.00 per hour while holding our labor expense constant as a percentage of revenue at 25%.

In the above examples we illustrated that fitting more work into less time makes a business more profitable. While the conclusion is pretty obvious, we actually put numbers to the calculation and proved it mathematically (an excellent tool for managers of pest control businesses). But from a managerial standpoint it becomes difficult to determine if your attempts to improve your routing is actually working. Without some sort of metric or key performance indicator, quantifying improvements in routing becomes difficult. This is because in reality the dollars per hour on all accounts is rarely the same.

By the same token, the dollars per hour received on a particular account is really not an operational issue (unless the workmanship is not up to snuff), it is really a sales issue. Meaning, the account may not have been sold correctly, leading to lower dollars per hour. The efficiency with which your customers get serviced is an operational issue. By separating the two issues a manager can address issues with the correct department. To determine how efficient we are, we need a method to measure routing efficiency. In my world of accounting, I measure the efficiency of my accountants and bookkeepers using a technique called “UTILIZATION.” Lawyers, accountants and other professionals use this technique as well.

However, it fits the pest control industry just as well or better. Here’s how it works: A utilization fraction or percentage is calculated by taking the following quotient: Total Technician Hours Spent at All Stops During the Time Period Total Technician Hours Clocked in (Paid Hours) During the Time Period Example: Let’s say that your technician spent 30 hours at various jobs doing actual work for a one week period. Let’s also assume that according to his time card he was punched in and paid for 50 hours. His utilization would be 60% (30 hours worked / 50 hours clocked in).

This means that he was producing revenue 60% of the time he was clocked in. Let’s assume your average dollar per hour on your accounts for the day is $75.00. With a 60% utilization you’re actually taking in $45.00 per hour. If your technician clocks in 8 hours for the day, he will produce $360.00 for the day ($75.00 x 60% x 8 hours). Assume his utilization is 75% he will bring in $450 ($75.00 x 75% x 8 hours). If he is 40% utilized he will bring in $240 ($75 x 40% x 8 hours). These numbers are using the same $75.00 per hour but varying the utilization percentage.

Conclusion:

There are only two ways to increase profit margins – price increases or cost savings. Any tools that can be employed to achieve either one may be a good investment. The most powerful tool in our PCO business to achieve both is efficient routing. There are many pieces of software on the market that can help with this. The method to judge the effectiveness of our efforts is by calculating utilization.

For more articles from Dan Gordon, visit PCOBookkeepers.com


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