Making money is all about maximizing performance — using your tools, people and materials as efficiently as is practical. This month we look at annualized sales per field employee, office employee, sales employee and total employees. Are we being more efficient in garnering sales or producing projects with our present staff than last year, or last summer? Or perhaps with the lead carpenter system versus our previous foreman system, or with in-house design versus outside services? We can also track when staff might be overworked, or where increased productivity leads to poorer quality and mistakes, resulting in warranty costs.
Produced volume per field employee
Definition: Total annual produced volume divided by total number of field employees.
Since we started seriously tracking such things in 1992, we've had figures as high as $650,000 per field employee and as low as $295,000. The high year had one very large, mostly sub-contracted job that required about 1,200 hours of our time, but included about 2,800 total carpentry hours. Our average has been $350,000 per field employee, adjusted for today's dollars. Knowing this number is a great help, as it allows us to legitimately predict production — and therefore sales revenue — for budgeting.
Knowing your produced volume per field employee also can help you determine what additional gross profit another person in the field would create. Multiply the average produced volume by the average produced (not planned) gross profit margin, then subtract the sales costs associated with obtaining that additional volume. For my company, $350,000 × .4 = $154,0000 additional gross profit — if we hire for a carpenter or lead carpenter position. Obviously, we could not do this by adding a laborer. New field hires often reduce efficiency as the lead tries to train them, keep them busy and correct rookie errors. Yet a new hire can also enhance efficiency, making sure the lead no longer has to run for materials, set up equipment or make jigs to work alone.
Knowing your historical sales per field employee helps predict when you need to hire more staff for rising sales, what volume you then need to quickly maximize your crew's efficiency, and what size staff is most efficient for your business model. A good benchmark would be $250,000 to $300,000 per employee, depending on whether you use crews with foremen or lead carpenters. If you mostly use subcontracted labor, even if you have production managers who do some work in the field, strive for $500,000 per employee and even higher if your average job size is over $75,000.
Definition: Total annual sales divided by full-time-equivalent sales employees (convert part-timers or seasonal employees to decimal equivalents of full time responsibility).
There is no good, simple benchmark. A single salesperson spending 150 hours to pull in three remodeling jobs at $500,000 each seems overpaid compared to one that sells 150 jobs of $10,000 each, taking 10 hours per sale. One is employed 150 hours per year in sales, the other 1,500 hours. One has seemingly a lifetime to design and estimate the project, meet with clients and collect checks, the other only a few spare hours a week. Yet, each brings in $1.5 million in volume — although I suspect the smaller jobs are sold at greater margins than the larger jobs. This metric is unique to your business depending on average job size, business model and estimating technique.
My firm needs about 900 hours per year to sell 90 jobs totaling $1.5 million in volume. Those hours include estimating, designing, typing contracts, figuring and signing change orders, and collecting final checks. We consider full-time employment to be 2,000 hours per year, so the sales function is the equivalent of .45 of a full-time employee. Dividing total sales by the full-time equivalent, I find that a full-time salesperson would need to sell $3.33 million annually. In my opinion, a suitable benchmark would be $3 million for a full-time salesperson selling large jobs, and $1.5 million for those selling jobs under $10,000.
Definition: Total annualized sales divided by total office personnel, including the owner.
Office staff do not make you money: They are overhead. You can reduce overhead by cross-training employees, having part-time positions, and/or paying staff commensurate with their value (as opposed to time spent on the job). Do you have a full-time receptionist but only receive five leads a week? Pay me $100 per call and I would be greatly pleased to fill in. Because voice mail and call forwarding can be handled with cell phones, you probably don't need a full-time employee to handle inquiries.
Don't hire anyone without fully considering the effect on net profit. To figure out how much more work you must sell to justify adding an employee, divide the overhead expense by produced margin. A company with 30 percent margin seeking to hire a receptionist with a $30,000 salary, plus $10,000 in labor burden, would require $133,333 ($40,000 divided by .3) of extra sales just to break even. And that assumes that the additional sales have zero other overhead costs attached to them. That, by the way, is unlikely. Thus, hiring full-time help for the sanity of the owner may prove to be financial insanity.
Definition: Total volume divided by total number of full-time-equivalent staff. Include part-time and summer help.
This is the truest measure of labor efficiency: putting together the entire production, sales and administration package using the least number of hours to produce the desired profit while maintaining client retention. The benchmark for this metric should be around $270,000 both for companies that sub out most labor and small companies where the owner (and often the owner's spouse) do multiple jobs, sometimes without pay. Larger firms with more staff and good systems that need tending by employees should strive for $200,000.
Use historical information on average volume per employee to double-check your assumptions on what kind of volume and margin your company can produce. Let's say you have four office employees and six field employees going into 2005, with an average performance of $175,000 per employee and a produced margin of 30 percent. Next year, your company is likely to produce a volume of $1.75 million (10 × $175,000) and a margin of $525,000 ($1,750,000 × .3).
If your budget calls for $2 million volume, however, and the company has never produced either $200,000 per employee or margin greater than 30 percent, you had better reassess your plans. Start by taking a look at field labor. If you historically have produced $350,000 per field employee, than the company is capable of handling $2.1 million volume in remodeling, but will have trouble handling the administration or sales portion of the business because of the "total employee" metric failure. In that case, you need to find ways to make the office staff more efficient. Ideas for improving office efficiency include purchasing portable fax machines to bring to the job site so the lead carpenter can order supplies and handle change orders himself; doing payroll biweekly instead of weekly; requiring salespeople to do their own typing, estimating and designing; and sharing a bookkeeper with another small local business.
These performance metrics looked at over time or against benchmarks can tell us if we are overstaffed or overworked, when we probably should hire or reduce staff, if we are cash strapped or can we safely grow our business. I hope that you can increase your performance without expensive pills, because you now know the prescription for success.