Efficiency will make or break your trade business - how efficient are you?
An efficient electrical business will purr like a Ferrari on a Formula One race-track.
An inefficient business will run like an ‘88 Ford station wagon on an outback dirt-road.
You can bring in more business, and put on more staff, but if your processes are inefficient, it will grumble and stumble and stall, so you won’t be able to rev your growth into fourth or fifth gear.
When you break it down, efficiency is a really simple concept - it’s just about making the best use of your time.
Sounds easy enough, but the reality is, most trade businesses are losing thousands of dollars in potential revenue each month just because they’re inefficient.
Do you know your cost of operation?
Is your hourly rate based on your numbers, or have you just plucked a number out of thin air?
If the answer to either of the above is no, there’s no doubt your tires are getting caught in every ditch, and you’re chugging up every incline.
There is a method, and a science, to becoming more efficient, and measuring it.
That’s why today’s article reveals a couple of Academy secrets to help you calculate your most important metrics, and leverage them to earn more profit, create more free time, and set your business up for a big growth trajectory.
Being efficient is not just about having the right systems in place, but also ironing out the bad habits that leech your profits over time.
Remember - you’re not Amazon.
You don’t want to make the majority of your profit on selling goods – you’re working in a service based industry, so you need to make profit on your labour.
You’ve got to engineer the business from the ground up, so that you’re getting the most out of your labour with efficient business processes.
If you’re inefficient, you’ll lose scalability.
So, where do you start?
The first thing you need to understand are the basic elements of your efficiency.
1. Billable Hours
These are the hours in the day you’re actually being paid for.
Anytime you can bill your full hourly rate for an hour or more, you’ve recorded a billable hour.
2. Non-billable hours
This is the time in your working day you’re NOT being paid for.
Travelling, quoting, taking lunch breaks, call-backs, and time-wasting habits make up your non-billable hours.
3. Cost of Operation
Most electrical contractors don’t know what their cost of operation is, or even how to calculate it.
Your monthly cost of operation is what it costs your business to run before you do any work.
If you don’t know what it costs to run your business, how can you possibly know how profitable you are?
How can you know what you need to charge to cover these costs?
There’s no excuse not to be all over this - we’re going to teach you how to calculate your cost of operation below.
Now It’s time to whip out the calculator - we’re going to calculate your cost of operation, your efficiency, and your REAL hourly rate.
1. Efficiency
Calculating your efficiency is easy.
Just divide the total number of hours you’ve worked during the day (Actual worked hours) by the number of hours you’ve billed your clients (billable hours)
So for example, if you work from 9am till 5pm, your actual worked hours will total 8. If you’ve completed four jobs at a total of 6.25 hours, your billable hours will be 6.25.
6.25/8 = 78%.
So this working day is 78% efficient.
2. Cost of operation
To calculate your monthly cost of operation, you need to know;
Total cost of materials
Cost of sales excluding materials (primarily wages and super)
Operating expenses
Check out our profit and loss article if you’re not sure what each figure should include.
Next, add 1, 2 and 3 together.
Then multiply that figure by your number of billable resources (the number of working resources you have) – If you’re a sole trader, your billable resources is one. If you have ONE additional tradie working for you, your billable resources will be two, and so on.
The billable resource factor gets a little bit more complicated for apprentices - we cover the nitty gritty on calculating this in our Academy programs.
Once you know your monthly cost of operation, you can work out your cost of operation per hour with some basic divisions.
Then you can divide your Cost of Operation per hour by your Efficiency to determine your REAL COST OF OPERATION PER HOUR - this is incredibly important. Why? Once you know your hourly cost of operation, you can adjust your pricing to make sure you’re covering costs and making the profit you want on every job.
Imagine charging $90 an hour when your real cost of operation per hour is $105 - you’ll be losing money on every job, and you wouldn’t be the first tradie to fall into this trap.
In the Academy coaching programs, we go even deeper into these metrics by setting up a spreadsheet with projected costs and profits. This way, you can play around with these values and see what the ripple effect is on your business, and even your future profits.
Once you’ve got this spreadsheet set up, you can plan for the future.
But here’s a spoiler.
Even small increases to your efficiency have a MASSIVE impact on your profitability, because once you’ve covered your operating costs, which you should do in the first six billable hours of the day, you’ll make exponential bumps to your bottom line.
3. Your REAL hourly rate
This one’s easy.
Your real hourly rate is your hourly rate multiplied by your efficiency.
For example, if you’re charging $90 per hour at 78% efficiency, your REAL hourly rate is $70.20 per hour (90 x .78).
Next, we’re going to discuss ways to become more efficient.
This involves anything which increases your billable hours, and decreases your non-billable hours.
Increasing billable hours
1. On-site upsells; Generating more profit from your existing work is the BEST way to increase your efficiency. If you have staff, incentivise them to pitch upgrades. We have systemised and powerful programs for this in the Academy. If you’re not confident with selling, read our article on mastering the sales process.
2. Minimise travel time; Don’t waste time criss-crossing back and forth across town. Arrange your jobs so that they require the least amount of travel. If you’re mapping out your jobs at the start of the day, they should connect like a daisy chain.
3. Call-out fee; Implementing a call-out fee can bump up your efficiency significantly. If you charge a call-out fee of $99, it’ll probably be equal to about 40 minutes of labour. Those 40 minutes can be added directly to your billable hours - without working an extra minute.
4. Have a good kit; good tools get the job done fast. A faster job leaves more time for other work.
5. Icebreaker phone-call; politely and tactfully call the client the day before the job, or two days before the job, to check in. What if they’ve forgotten about your appointment, or they’re not home on the day? There’s no reason to risk it.
Decreasing your “retractors”, which make you less efficient.
1. Call-backs; No bigger enemy to your efficiency. A call-back can cost you up to $500 when you factor in transport, time, and the fact you’re not on your next job.
2. Schedule pressure; You don’t need to cram your day full of shit. Strategically leave time for upgrades and your own mental wellbeing. Read our article on dynamic scheduling if you want to learn more about this.
3. Time-wasting; long-winded conversations, dawdling and a general lack of fire to get things done .This might apply to your staff more than it does to you - how long are they spending at the wholesaler? On each job? You need to manage this, especially as your team grows.
4. Disorganised van; get your shit together - otherwise, this will slow you down during every job.
5. Meetings; make sure they’re purposeful and productive. If you haven’t already, consider going digital.
The bottom line is this;
If you increase your efficiency, you will make more money for every single minute you work.
Once you’ve covered your operating expenses (usually about 6 billable hours a day) all additional work is pure profit. This means there is tremendous value in adding a seventh billable hour to your day.
Here’s another bombshell for you - if you’re a sole trader and thinking about bringing on a tradie.
The seventh hour will comfortably cover the cost of a new staff member.
But you’ll never be able to hit seven billable hours if you’re not efficient.
Make your electrical business the Ferrari gliding along the Circuit De Monaco - not the station wagon stuck in a ditch.