First, will you help me?
I am looking for referrals to CPAs and bookkeepers who care about more than doing your taxes each year. If you are working with a CPA or bookkeeper you like working with, I would appreciate an introduction. Email me (rking@ontheribbon.com). Thanks!
Now, onto Contractor Cents
Over the past three weeks I’ve written about, in my opinion, the most critical numbers to track: net profit per hour, overhead cost per hour, current ratio, and productivity ratio. This week I’ll write about the last critical ratio to track: maintenance plan enrollments/renewals (this is probably two ratios).
Maintenance plans are essential to build your business wealth. The price you receive when you sell or transfer your company to new owners is greatly dependent on the number of maintenance plans and renewal rate of those plans. (low maintenance bases generally receive a multiple of 3 or less on profits; higher maintenance bases could receive a multiple of 4 to 5).
So, it’s not only the number of plans, it’s their renewal rate.
Why? Two reasons:
1. Your renewal rate tells you how well you explain the value/benefits of the plans and communicate with your plan customers.
- It makes no sense to enroll an additional 200 maintenance plans a year and lose 200 maintenance plans a year. Better to enroll 200 and lose 10.
The questions I always get asked are:
1. How many plans should I have?
- What should my renewal rate be?
Residentially: One third of the number of customers you have – both active and inactive (i.e. an inactive customer has done business with your company in the past 5 years but not within the last 18 months). Your renewal rate should be at least 80% (60% for maintenance plans given with new equipment installations).
Commercially: Enroll one new maintenance plan per week. Each year you should enroll 50 new ones and renew 45 of your existing plans.
One more thing – I define the number of maintenance plans by the number of customers. Residentially a customer could have two, three, four, or more systems in her home. It is still one customer who pays the bill for all the maintenance done at her home.
Commercially – I also define the number of maintenance plans by the number of customers. A customer could have 10 package units on the roof, or equipment in different locations. It is still one customer who pays the bill for all of the maintenance done at the various locations.
If your net profit per hour is where you want it, your overhead cost per hour is under control, your current ratio is increasing (except when you purchase assets or pay taxes), your productivity ratio is steady or decreasing, and you have a growing maintenance base, then all of the other ratios that you might track should be in line too.
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Want a financial statement review?
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And, pass along this offer to your business friends and colleagues who could benefit from this review too!
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.
