[Cover Story] By The Numbers

Running a successful pest control business certainly isn’t easy, but you can make your job a little easier by tracking a few key business numbers. With the right analysis, the critical numbers in your business can tell you if you’re on track to succeed, where you might work harder, and what areas might be trouble spots in the making.

What we’re referring to is the use of specific business figures that track specific business areas over time to alert you to successes or brewing problems.

Most managers already look at a few numbers regularly: two key ones that come to mind are sales and expenses. However, looking at specific comparisons and breakdowns of these figures over time often can be especially revealing.

But which numbers are particularly important to PCOs? We talked to a number of pest control professionals to find out what critical numbers they are tracking, and more specifically, what these numbers can potentially tell them.

1) GROSS MARGIN. One of the most basic and most critical numbers for PCOs, and just about every business owner, is the gross margin, i.e., sales less the direct costs of performing the pest control service.

And what’s been especially helpful for many PCOs is establishing specific target levels for their gross margin. Rick Rogers, vice president of Myers Pest & Termite Services, based in Euless, Texas, is one such PCO. In addition to running the Myers operation, which serves the greater Dallas-Fort Worth area, Rogers also runs his own consulting business, Rogers Service Advisors, in Bedford, Texas.

To produce the desired gross margin for Myers, Rogers aims to maintain service costs at a certain level. "We expect that to be no more than 43 percent of the total cost of doing the job," he said. Doing this allows Myers to hit its targeted gross margin of about 57 percent. While that actual margin does vary from job to job and by service type, Rogers notes, what’s important is the average.

For Myers, the gross margin figure includes the cost of technician labor, materials and equipment costs, and vehicle expenses. Not included are overhead costs such as sales and administration expenses or rent.

Furthermore, the company’s profit and loss reports are broken out into three categories: residential pest control, commercial pest control and termite work. This way, each line of business can be tracked. "If you don’t do that, you don’t know what to fix," Rogers explained.

Of course, different PCOs have different targets for their gross margins, based on how their businesses are run. Russ Ives, president of Rose Pest Solutions, based in Troy, Mich., aims for direct expenses of no more than 50 percent of sales. "If you can keep that in line," he says, "you stand an awfully good chance of operating on a profitable basis." Furthermore, Ives said, if you’re looking to deliver between 5 percent and 10 percent profit to the bottom line, you probably won’t achieve it without holding direct expenses at 50 percent or less. Rose Pest Solutions operates 13 service offices that cover Michigan, Ohio and northern Indiana.

2) SALES AND EXPENSE BREAKDOWNS. Along with monitoring gross margin on a regular basis is detailed monitoring of its two components, sales and expenses. Rogers says company owners need to know, on a monthly basis, the sales figures necessary to turn a profit for that month. "We go into the month knowing what we have to do," he said. Besides monitoring sales and expenses on a monthly basis, the figures also are tracked quarterly. "The monthly review shows us day by day but the quarterly shows us a trend," Rogers explained.

A related key number, says Rogers, is route production. "That is what drives everything," he said. "We know where our technicians need to be to make a profit," he said. "We make sure all those routes are at the production level we need them to be to become profitable." Rogers said his company’s goal is to have routes of at least $10,000 per month.

Along with that, the company also conducts both weekly and monthly forecasts that are then compared against actual revenue numbers. If it looks like numbers are not up to par for a particular month, says Rogers, the company may opt to do a sales blitz or contest to help increase revenues. "Whatever we need to try to do to help them get those numbers back up," he said. "And we try to identify it as early in the month as we can." Forecasting, he adds, helps them to do that.

Ives also analyzes direct expenses regularly, but he notes they will vary from month to month. "We look at it every month but we also know that there can be some jobs which might be a little unusual," he said. "I look at that more as a longer-term target."

Ives says each company should consider setting up its own benchmarks for such things as service material costs. Doing this, he notes, will help managers evaluate each employee’s usage of materials. "When you see variations from route to route, it’s important to make sure you have a sense of why that’s occurring," Ives said. Along these lines, says Ives, route-by-route expense comparisons can be very helpful.

In view of recent fuel cost increases, managers may also want to review fuel costs on a vehicle-by-vehicle basis, says Ives. Long-term discrepancies here may indicate undesirable driving habits or patterns that may need to be addressed. "Fuel usage can be a clue to driving habits," says Ives. For instance, if someone is getting 15 miles per gallon and someone else is getting 20 per gallon, notes Ives, it may indicate riskier driving habits such as quick stops and starts. "If you can put two and two together on that, then you have a chance to save money on fuel usage and you also likely stand a chance of improving your accident record," he said.

What’s more, Ives says, as fuel costs go up, the likelihood for misuse of company vehicles may tend to increase, so it becomes even more relevant to track. "The more expensive fuel is, then the greater some of the negative expenses," he said. More people might be tempted to use the company vehicle for personal use, or to use the company credit card to fill up a personal car, he noted.

Ives said while fuel is still a relatively small expense overall, his analysis of recent fuel costs has indicated that through the first 10 months of 2005, his vehicle fuel expense is a half a percent more of sales than last year. "A half a percent of revenue can be a significant dollar amount," he said.

3) OVERHEAD EXPENSES. Other expenses that also should be tracked are those that don’t directly correlate with providing service, but that also affect the bottom line. Two typical categories include sales and marketing expenses, and general and administrative costs.

At Myers, the sales expense includes all of the company’s outlays for advertising as well as the costs incurred by the sales force, including their fleet and overhead. "We try to keep that at around 13 to 14 percent range of total sales per month," he said.

He notes that this figure may approach 21 percent during the winter months when sales are slower, however, during the spring and summer months, that number may fall to around 9 percent. To adjust for such variations, this number is analyzed on a year-to-date basis as well as year-to-quarter. "We don’t try to knee-jerk on anything month to month," Rogers notes. "The business is too complex."

Meanwhile, general and administrative expenses, or G&A, is the cost of the entire support group. At Myers, this expense category includes accounting, management, rent and all of the remaining overhead costs. "We try to maintain that at around 21 percent," Rogers said. He notes that while this is technically a fixed number, it can be improved as revenue goes up, making it a smaller percentage of sales. "The more revenue we do, the better that number gets," Rogers explained. "We can’t really reduce it except by revenue."

4) ACCOUNTS RECEIVABLE. Another critical number Rogers follows regularly for each office is accounts receivable. The company aims to keep its receivables at no more than 30 days, or one month of billing.

Analyzing accounts receivable also is critical for Ives, as are regular breakdowns on the aging of receivables. "Your employees expect to be paid every month, your vendors expect to be paid every month, and unless you’ve got a whole potfull of money, you’d better expect to be paid every month," Ives said. What’s most important from studying accounts receivable, notes Ives, is determining how effectively the company is at collecting its money. "Any good business has to have a good process in place to collect the money that’s owed them," Ives explained.

Ives notes that as the number of days accumulate after the day of service, the greater the chance of not being paid at all. "It’s important not to let accounts get too old," he said. The first step to doing this, Ives says, is to study both your average days outstanding, and the aging of your receivables. The first measurement, average days outstanding, tells you how well the company is doing with its collections. The second number, meanwhile, helps you identify which customers are sluggish in paying. The idea, Ives notes, is to make sure bills are being paid and that you organize the time and efforts of your staff to follow up with accounts that get behind. "You need to manage that part," says Ives, "and devote attention to keeping that low, because the more old accounts you have, the more bad debts you’re going to have."

A company that’s identified a problem in its collections could then decide to make any number of changes to correct the problem. One such solution could be to pay technicians based on their collections, as opposed to production, Ives said.

5) PEER COMPARISONS. Comparing offices against each other in a number of criteria can also be an effective way to identify problem areas. Bob Wanzer, president and chief operating officer of HomeTeam Pest Defense, based in Dallas, Texas, uses a sophisticated measurement system in which each of its 46 offices is ranked monthly in a series of areas. "The objective is to have each first-line manager have seven or eight critical criteria they are responsible for managing," Wanzer said.

HomeTeam Pest Defense operates primarily throughout the Southern U.S., with offices located from Washington D.C. to Sacramento.

Each branch is scored in seven composite areas: customer satisfaction, employee satisfaction, service, sales, administration, business projections and actual gross margin vs. plan.

These branch score cards are then ranked, so each office is compared to its peers. "So it’s not a mythical standard," notes Wanzer. "It’s how are you performing against everyone else."

The lowest scores in each area are the ones that are tended to first. Scores in each area are ranked 1 through 46, said Wanzer. "And if you’re in any of the bottom quartile, those are items you need to fix and fix quickly," he said. Reports are color-coded by top-performers and low-performers. "It’s very visual and you can identify very quickly where the branch has issues," Wanzer said.

The company uses separate surveys to help come up with the customer and employee satisfaction scores. The other categories are based on a series of individual measurements. For example, the overall service composite takes into account such things as treatment quality, technician turnover, route completion and customer retention for each branch. The company also analyzes how well managers project their profit and loss and how are they doing compared to budget.

Although all the composites are important, Wanzer says the company pays particular attention to the tenure of its employees. "The tenure of your employees has a tremendous impact on the tenure of your customer base," said Wanzer. "There is a tremendous correlation between turnover in routes and turnover of customers," Wanzer said. "If you have a route in which a technician keeps turning over, that will have a much higher attrition rate."

Industry consultant Norman Cooper notes while comparing branch to branch figures can sometimes be like comparing apples to oranges, it can also be effective in motivating branch growth and fostering healthy competition between branches. "What we’re really trying to do is set a benchmark and give them some attainable standards," Cooper explained.

Customer retention, analyzed on a branch level, can also be informative, says Cooper. "If we see a sudden drop in retention, that very likely could be a red flag that something is amiss at that branch," he said. Similarly, he added, an unusual number of callbacks at a branch also indicates that further investigation is needed. "The fact is," says Cooper, "we have our fingers on their pulse."

MEASURABLE RESULTS. While establishing a critical numbers system is no easy task, those who spend the time to do so likely will learn invaluable information about their business. For instance, Rogers instituted his tracking and budgeting techniques at Myers when he joined the company in 2000. Since then, the company has more than doubled its annual sales to close to $4 million.

And in the seven years Wanzer has been with HomeTeam, the company has grown from 13 branches generating $18 million to 46 branches generating $110 million.

Rogers notes he is a staunch supporter of using budgets to keep costs in line. He also uses the forecasts, budgets and ratios as guidelines to run his business and keep it on track. "People are afraid of numbers," he says. "But once you understand the numbers are nothing but a guideline, then they help you a whole lot."

The author is former managing editor of PCT magazine. She can be reached via e-mail at lmckenna@giemedia.com.