Why estimating your realistic capacity is critical in any trades industry business
Why estimating your realistic capacity is critical in any Trades Industry business... and how to control and manage it as you grow.
In every Trades Industry business in the world there are two main ‘products’ that are being sold: labour and materials. However, these two deceptively simple components can be extremely challenging to plan for, manage and control, particularly when trying to forecast, plan and budget for growth.
Why is estimating your realistic capacity so challenging and critical?
1 The majority of trades businesses rarely sell materials on their own, labour is usually required to install them. Therefore, despite the fact you may be selling both materials and labour, materials are rarely a stand-alone product, they are a bi-product of labour, so to speak.
2 Therefore, with this realisation in mind, you are really only selling one thing, which is labour. You are selling a time for money service, no different from a lawyer or accountant or any professional who sells their time for money.
3 When any business is reliant on delivering a service by selling time for money, there will always be a realistic capacity which is tied to those people due to the fact that each individual has a set number of hours available to sell per week, per month or per annum. The margin between total value of hours sold and total cost of hours paid (plus any direct on costs) is where your money is made. When these numbers are not budgeted for in advance and regularly managed, it will be very difficult to know if you are on target or not. Each tradesman must have targets and outcomes in place for total billable hours and dollars that they must achieve to ensure your business is profitable.
How to calculate, control and manage your capacity while budgeting for growth?
1 In order to calculate your capacity, start with 52 weeks, then subtract the number of weeks for annual holidays, public holidays and potential sick days. In Australia, you’ll probably be left with 44 weeks (4 weeks annual leave, 2 weeks public holidays [yes there are ten of them] and potentially 2 weeks in paid sick days). This is a conservative forecast for the number of weeks your tradesman can be on the tools.
2 Next, estimate a realistic number of hours per week that can be billable or sellable hours, in most trades businesses a realistic number is about 30 hours in a 38 hour work week, However, this is challenging for most businesses to consistently achieve across the board as an average per tradesman per year.
3 What you now have is a simple formula of 44 weeks x 30 billable hours which equals 1,320 billable or sellable hours per annum. Now, multiply this total by your average per hour ‘sell rate’ or charge out rate. If we use an example of $80 per hour, your final total annual income for labour for your average tradesman would be $105,600 ($80 x 1,320 billable hours).
4 Next, estimate the dollar amount of materials that would be sold as part of the total work the tradesman delivered in those 1,320 annual hours. For example, based on the type of work the tradesman carries out, you may estimate that materials represents 30% of the total invoiced amount, so in this example, $105,600 in labour would represent 70% of all invoices and the balance in materials would be $45,257 which would represent 30% of all invoices.
5 With these numbers in hand, you can now work out an annual Gross Profit per Tradesman that your business can achieve. You can do this by subtracting all wages and on costs for the tradesman from your total annual labour sales and you’ll have the Gross Profit for labour per annum per tradesman. For materials, apply your Gross Margin % to the total materials sold to get your gross profit on materials. Then add the two together and you’ll end up with your total Gross Profit for the average tradesman in your business.
6 Repeat steps 1 through for 5 for each tradesman you currently employ. If each tradesman does similar work, you can simply multiply the final numbers for total sales and gross profit respectively by the number of tradesman you employ. If you have varying styles of work across tradesman, calculate the numbers for each individual tradesman separately and then simply add them altogether to work out your total capacity for sales and gross profit for your business.
7 Finally, the more tradesmen you employ, the more work you’ll need to be able to handle in other key areas of your business such as Marketing, Sales, Delivery (specifically off the tools activities like scheduling and managing etc…), Finance and Administrative tasks. Trying to achieve the right balance between non-billable team members who are needed in all of the above areas (along with additional running costs and fixed expenses) with the right amount of tradesman needs very, very careful planning. Additionally, a good mix of employed and subcontracted labour should be considered in case work slows down to ensure you’re not left with a large payroll for tradesman and not enough work to keep them busy.
If, for example, you work out that you have a total sales capacity of $1 million dollars with total gross profit of $500,000 (50% gross margin), after doing the above exercise, your ongoing and constant challenge is to have the ability to do handle the work that will be associated with your total sales of $1 million dollars. You must be able to generate that volume of work in Marketing and Sales, manage tit in Delivery, control the financial components of it in Finance and provide support in Admin. The moment any of these areas can’t handle that work, you’ll have bottlenecks and constraints which must be alleviated and fixed to allow your potential capacity to become a reality. This is the constant challenge to master.
The moral of the story, as you begin to scale your business, is that your growth will not be exponential, it is always tied to labour and is finite
For the vast majorities of trade industry businesses, the true ‘product’ they are selling is each individual tradesman and the hours they have available.
Regardless of whether you focus on Project style quoted work or service and maintenance style do and change work, getting clear on the above numbers will give you a very solid platform to start from.
We are in an age where social media and technology is reported as a ‘must-do’ priority. However, the reality for trades businesses is ironic: in addition to providing advice to clients and finding new customers through technology, your business needs to physically be on site to carry out the work!
At the end of the day, how you make money (when you really look at the essence of it) is directly tied to the industrial age by providing a hands-on set of skills that cannot be delivered online… so getting as many billable hours out the door as humanly possible without sacrificing quality and customer service is the name of the game and high quality tradesman who know their craft very well is what it’s all about. Your business will grow when you provide a platform and infrastructure that allows your tradesmen to what they do best while your business manages the rest.
Last time I checked, no matter how sophisticated technology becomes in this new information age, I‘m pretty sure a chippy can’t hammer in nails and a sparky can’t install power points using their mobile phone.
Eric J. Gregory is the Author of ‘Would you like Profits with that?’ and the founder of
Gregory Business & Trades Coaching which specialises in working with SME Business Owners
and Entrepreneurs. For more information about Eric and his company
Please see http://www.gregorybusinesscoaching.com