#10 – Ruth’s Rule #1
Over the past two posts I have given you Ruth’s Rules #2 and #3. Both of these rules determine revenues needed based on overhead expenses.
This week is Ruth’s Rule #1: determining revenue based on direct expenses or cost of goods sold (COGS) expenses.
Ruth’s Rule #1:
Sales = Direct Expense
1 – GM
1 is 100% and gross margin (GM) is a percentage.
Here’s how to use Ruth’s Rule #1:
You are considering hiring a new service technician who has great experience and wants $40 and hour. The gross margin of the service department is 52%. Benefits are 30% of wages and his truck cost is $10 an hour. Assume 2080 hours a year.
Wages = $40 (2080) (1.3) = $108,160
Truck cost = $10 (2080) = $20,800
Total cost = $128,960
Revenues needed = $128,960/.48 = $268,666.70
Can he generate $268,667 a year? If the answer is yes, then his $40 an hour is justified.
Do this calculation for any direct cost employee. If a person wants $30 an hour, calculate how much that truck has to generate to pay the $30 an hour. And, this calculation should be done for installation crews as well as technicians.
Each field employee should know how much revenue he has to generate to pay his hourly wages. Consider a bonus for exceeding those revenues (it doesn’t have to be big…just a recognition that the revenues were exceeded).
Next post: More ways to increase profitability.
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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.
