Productivity and efficiency is key to business success

This month we’re diving into the numbers. We know measuring sales goals will almost certainly improve them. On the same note, measuring time on jobs will almost certainly improve efficiency. But how can understanding your numbers help you make better decisions to improve your business?

Managing labour costs is critical to profitability in the service industry. Knowing how much your employees are costing you, compared to the sales volume they are producing, is crucial to increasing production and, in turn, profitability. Know who’s producing the highest sales and production numbers, and pay them what they’re worth. Once employees see their wages tied to productivity, they start thinking like owners, not hourly workers. And, at the end of the day, there is benefit for them. It’s motivation to work smarter, more efficiently.

Knowing your numbers allows you to set goals and standards for your crews. Once you know how much your workers actually produce, and how much is actually needed to turn a profit, you know what needs to change. Now you can accurately adjust your production and sales goals. And, by sharing your productivity and labour rates with your employees, it is possible to show, using tangible numbers, which crews are profitable, and which are not.

Finding your numbers
The first question to ask yourself is, “How much work do my crews need to produce?” Having a definite answer to this question is critical for managing your company. Guessing and hoping doesn’t help your company or your people. The first step is to calculate a profitable company and/or division budget. The next step is to find your labour ratio, which is the percent of sales your company spends on field wage costs. Now use your labour ratio to calculate each crew’s sales/production target. Here’s how:

Step 1: Add up the expected annual wages of the crew (wage costs multiplied by hours worked).

Step 2: Divide the crew’s forecasted annual wage by your labour ratio.

Let’s look at an example with some sample numbers. You build a budget for your company or division. Your budget forecasts 10 per cent net profit, and you’re satisfied. In this budget, your forecasted labour ratio is 25 per cent. You want to calculate how much work your crews need to produce. Your crew is made up of the following:

To calculate your crew’s production goal, simply divide your total wages by your labour ratio. In this example it would look like: $73,500 ÷.25 = $294,000.

Your crew’s production goal is $294,000. Therefore, your crew needs sales/production targets of at least $294,000 to fulfil your company’s plan for profit.

Important note: If your company provides several different services, your labour ratio will likely change for each service. It’s very unlikely that a construction crew’s labour ratio will be the same as a maintenance crew’s. If your company is segmented into divisions, you should create a budget for each division to ensure your goals are realistic and profitable.

Everyone’s accountable
Now that you know the sales required to turn a profit, it’s time to direct your attention to how this number applies to paying your crews. Crews, especially foremen, should be evaluated by your company’s most important metric, their productivity. It’s a simple fact: some foremen are much more productive than others. Not all foremen are equal and you certainly want to attract and keep the great ones. So make sure they are paid what they are worth.

How do you calculate a crew’s worth? Let’s say your best foreman is looking for a raise. You know he’s your superstar, and you don’t want to lose him, but you don’t know how much you can afford to pay him. You can easily solve this problem using your numbers:

Step 1: Start once again with your profitable budget and your labour ratio. Use the same ratio as the previous example (25 per cent).

Step 2: Calculate how much billable work the foreman’s crew produced in the previous year. Let’s assume this great foreman’s crew produced $400,000 worth of sales.

Step 3: Multiply the crew’s production ($400,000) by your labour ratio (.25) to find out what you can profitably afford to pay this crew. In this example, its $100,000. That number could be your wage budget for the entire crew. Now, it’s up to you how to divide it between the foreman and the rest, but remember that great foremen are key to your businesses success. They deserve the lion’s share of the reward.

The same goes for crews you feel just aren’t making the grade. Conversations get difficult and/or personal when you challenge someone’s abilities or work ethic. These qualities are subjective and can’t truly be measured. Measure the crew’s productivity, by simply dividing its total production (sales) by its wage costs. For example, using the previous numbers, if you had a crew producing only $250,000 in annual sales, and costing your company $75,000 in wages, that’s a labour ratio of 30 per cent ($75,000 divided by $250,000). With wage costs eating up 30 per cent of sales revenue, this crew is hurting your company’s profitability. Your crews need to be working at 25 per cent to achieve your profit targets. So what’s the solution? Use these numbers to hold people accountable to their results.

Build a winning team
Now here’s the bigger picture: yes, it is beneficial to use this system to determine specific production goals and wages that support your plan for profit. But using this system will also help you build an incentive program for your crews. You want your employees thinking and acting more like owners. Using real numbers, employees learn to see the business like you do.

Let’s look at another hypothetical situation. Assume once again that your labour ratio is 25 per cent and your forecasted profit is 10 per cent. Calculate the production target for each crew. If the crew meets its production target by the end of the year, its wages were accurately calculated. But if the crew exceeds its target, without increasing its labour ratio, its members are worth more. Adjust wages next year for new, higher sales goals. Expectations go up, but so do wages, and you know, because you’re using your labour ratio, that the new wages are profitable and affordable. In the long run, this will lead to continuous, increasing growth, profit, and employee opportunity. The more sales your crews produce, the more wages you will be willing and able to pay them. It’s a tried and true snowball effect that benefits the company, employees and the owner.

With this system in place, foremen think like owners. Their opportunity for pay is limited only by their productivity — which is the same fundamental metric that defines the success or failure of your business. Both of you have the same goal in mind. You, and your workers, have a vested interest in the efficiency, productivity and profitability of your company.

With a system in place, good foremen will maximize productivity in an effort to get the most sales out of every labour dollar. This means more efficient production and less warranty work. They understand that if they have to spend time working for free to fix defects, they are hurting their labour ratio. Good foremen will also improve customer service, because their wages are tied to sales and production.

Managing your company with instinct will only get you so far. Paying employees hourly will only motivate them so much. Instead, use the numbers of your business to create a win-win scenario for your company and your employees by sharing in the benefits of a highly productive staff that gets the job done right, on time and with zero defects.

Mark Bradley is president of The Beach Gardener and the Landscape Management Network (LMN), both based in Ontario.