Last post I gave you Ruth’s Rule #2 – break even revenues needed for any overhead expense. I assume that you would like to be profitable, so here is Ruth’s Rule #3:
#9 – Ruth’s Rule #3
Sales = Overhead Expense/(GM – Profit %)Gross margin is a percentage and the profit you desire is a percentage.
Here’s how to use Ruth’s Rule #3:
You are considering a postcard campaign for the spring. You will send out 1600 postcards at a cost of $800. Your gross margin is 45% and you want a 15% profit. What are the sales revenues that you have to generate to pay for the postcards?
Sales = 800/(45% – 15%) = 800/30% = $2,666.67
Now that you know the revenues that have to be generated, would you send the postcards?
It depends. What is the offer on the postcards? Who are you sending them to?
If the offer is for a cooling maintenance and your cooling maintenance is $100, then you have to generate 27 cooling maintenances from the postcard mailing.
Is this possible? Maybe.
It depends on who you are sending the postcard to. If it is to a list of people who don’t know your company and have never used your company, then getting 27 responses from 1600 postcards is unlikely. If it is to a list of customers who have used your company before, and you have continued to mail to them, then you might get 27 responses.
Or if you are offering a discount on a system replacement and that replacement is $10,000, you need less than one replacement for the postcard to pay for itself.
Whether you can get the response you want is dependent on the offer on the postcard and the list of people you are sending it to.
Here’s another way to use Ruth’s Rule #3:
You are hiring a new dispatcher. Her salary is $20/hr plus 30% benefits. Your service department gross margin is 48% and you want a 10% net profit. What are the sales revenues that the company has to generate to pay her wages?
Total salary including benefits: $20 X 2080 X 1.3 = $54,080
Sales = $54,080/ (48% – 10%) = $54,080/38% = $142,315.79
Can you increase revenues by $142, 315.79? Can the dispatcher route effectively, keep the technicians moving so they can do an additional call a day or week?
If you have 5 technicians, then the increase in revenues is $28,463.16 per technician per year or $569.26 per week (assuming 50 weeks).
Next post: Ruth’s Rules #1.
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Ruth King is well known as “The Profitability Master.” She is passionate about helping small business owners become profitable and stay profitable. For over 40 years she has coached, trained, and helped contractors and others achieve the business growth and goals they wanted to achieve.
Contact Ruth by emailing ruthking@hvacchannel.tv.
