Building Wealth

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Building Wealth in Your PMP Business 1
“We Give Pest Management Professionals
A Wealth of Business Building Ideas”
Daniel S Gordon, CPA
Building Wealth in Your PMP
Business
Daniel S.Gordon, CPA

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Agenda
 How is a PMP Firm Valued
 Taking your PMP Firm to the Next Level
 Marketing Math for the PMP
 Routing the Silent Killer
 Pricing for Profit
 Putting it all Together
 Your Next Step

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How is Pest Management Firm Valued?

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Consider this: The selling price of many service firms can
be equaled to about one year’s gross revenue. If you grew your
firm’s sales by $250,000 last year you have increased your net
worth (or Wealth) by a quarter of a million dollars.
But Hold On! The Gross Revenue Need to be Profitable
Recurring Work. One Shot Work is helpful in meeting current
expenses but adds very little value to the PMP Firm
How A PMP Firm is Valued

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Take Your PMP Firm to
Next Level

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What is the Next Level?
 Growth – How Much? Over What Period of Time?
 How Much Money Do I need to Achieve this Growth?

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Money Requirements
Several Options Exist:
 Through Daily Operations & Cash Flow
 Through Financing (i.e Bank, Finance Companies, etc.)
 By Giving Up Equity (i.e. Silent Partner, Not so Silent
Partner, Joint Venture)
If more People or Equipment is Required For Expansion,
How does it get Paid For?

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 Assume 100% retention
 Expansion Goals: Double Revenues over 4 Yrs (20% per Yr)
 Cost To Acquire 1 New Customer (average): $250.00
 Target Annual Revenue Per Customer: $500.00
Future Customer Acquisition Requirements
Year Revenue
#
Customers
Current
New
Customers
Cash
Projection Needed # Customers Required Requirement
Current Yr $500,000 1000 1000 0 $0
1 $600,000 1200 1000 200 $50,000
2 $720,000 1440 1200 240 $60,000
3 $864,000 1728 1440 288 $72,000
4 $1,036,800 2073.6 1728 345.6 $86,400

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Marketing Math for the PMP

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 One of the most important
things that you need to do
in business is to decide:
 What it is you are going to do?
 With whom you are going to do it ?
 How much you are going to charge?
 How you will get the word out to potential
customers?

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─ Example 1:-
Bird work is very highly specialized area of pest control, that can be
extremely profitable. However, if you don’t have the skills to do that type
of work, don’t do it.
Since it will probably lead to substandard work, bad feelings with the
customer, and take time away from developing the type of service work
that you want to develop.
A common error among PMPs is trying to be everything to everyone.

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 - Example 2:-
Traveling far outside your service area in order to service a client. In
our discussion of route management we will illustrate why an account
that has high travel time is a loosing proposition. You would need to
charge the customer a great deal of money in order to make it
profitable.

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.
In defining your Overall Strategy
the Service Contract Concept is
Extremely Useful

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 This discussion may sound somewhat theoretical, however from a
standpoint of practicality, it makes sense. You see, as we grow
our business we need to be uniform in our Service Plans.
 As our customer list grows it will become extremely difficult to
manage a business where every customer’s service is different.
Thus, in defining our services, we should try to design a core
group of services that have consistent service obligations and
service warranties.
 In this manner all of our technicians can be trained to work using
standardized methods. In addition our office staff is not faced with
differing problems with each customer.

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STANDARDIZATION OF SERVICES IS KEY!!

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New Customer
The New Customer Acquisition is Expensive
The Yellow Pages estimates
that Cost per Lead can vary
from $80.00 - $500 per Lead

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More Business From Existing Customers
 Your Customers Already Know You
 The Cost associated with expanding your
relationship is significantly less than
New Customer Acquisition.

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Routing the Silent Killer

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 Increase Sales
 Lower Expenses
Effective Routing
HOW TO…

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Profitability
High Revenues Low Revenues
High Expenses
Average Profitability
Poor
Profitability
Low Expenses
Excellent Profitability Average Profitability
 Revenue
It is affected by two factors:
 Expenses

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Routing will affect both
Revenue and Expenses.

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 Technicians are paid an hourly rate.
 Technicians are compensated as a percentage of their route
The Single Largest Expense for a Pest Control Company is
The Single Largest Expense
Pest control companies for the most part compensate their technicians
one of two ways or a combination of both:
LABOR

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 Technicians are paid an hourly rate.
This rate climbs by 50% (overtime) after the technician
works 40 hours in any given week. and or;
As a percentage of the dollar value of the jobs that they
complete
 Technicians are compensated as a percentage
of their route

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To Increase Profitability We Need to Increase Efficiency
(Fit More Work into Less Time)
This Increases Profitability by Increasing Total Dollars of Profit.

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Let’s say we have a technician that earns $15.00 per hour.
Further, let’s say that he can complete one job in an hour that produces
$50.00.
In this case our labor percentage is 30% (15/50 = .3).
This means for every $100.00 of revenue we have a profit of $70.00 (ignoring
all other costs)
Using Our Technician Who is Paid Hourly
 Example 1

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Let’s say we have a technician that earns $15.00 per hour.
Further, let’s say that he can complete two jobs in an hour that produces $50.00 each
or $100 total.
In this case our labor percentage is 15% (15/100 = .15).
 Example 2

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This means for every $100.00 of revenue we have a profit of $85.00
(ignoring all other costs).
By fitting more work into one hour we have been able to increase our profit
by $50.00 per hour.
Here we have increased our revenue in dollars and decreased our
labor expense as a percentage of revenue.

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Let’s say we have a technician that earns 25% of dollars produced.
Further, let’s say that he can complete one job in an hour that produces $50.00.
In this case our profit is $37.50
($50.00 – (25% x $50.00) =$37.50) (ignoring all other costs).
Using Our Technician Who is Paid A Percentage Of His
Route
 Example 1

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Let’s say we have a technician that earns 25% of dollars produced.
Further, let’s say that he can complete two jobs in an hour that produces $50.00.
In this case our profit is $75.00
(($50.00x2) – (25% x $100.00)) =$25.00) (ignoring all other costs).
 Example 2
Using Our Technician Who is Paid A Percentage Of His
Route

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Using Our Technician Who is Paid A Percentage Of
His Route
By fitting more work into one hour we have been able to increase our profit by $37.50
per hour from $37.50 to $75.00 dollars.
In this case we increased the revenue by $50.00 per hour while holding our
labor expense constant as a percentage of revenue at 25%.

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Utilization
One of the most important benchmarks in judging how efficient your
routing is called Utilization.
Utilization is a calculation that CPA firms and law firms use to see how productive
their accountants and lawyers are at billing their time.
However this calculation fits our industry perfectly. Quite simply, utilization is the
following fraction:

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Total Technician Hours Spent at All Stops During
the Time Period
_________________________________________________
Total Technician Hours Clocked in (Paid Hours) During
the Time Period
Utilization

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Let’s say that your technician spent 30 hours at various jobs doing actual work for a
one week period.
Let’s also assume that according to his time card he was punched in and paid for 50
hours.
His utilization would be 60% (30hrs worked / 50 Hours Clocked in).
This means that he was producing revenue 60% of the time he was clocked in.
 Example
Utilization

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Let’s say your average dollar per hour on your accounts for the day is $75.00. With
a 60% utilization you’re actually taking in $45.00 per hour.
If your technician clocks in 8 hours for the day, he will produce $360.00 for the day
($75.00 x 60% x 8hrs).
If his utilization is 75% he will bring in $450 ($75.00 x 75% x 8hrs).
If he is 40% utilized he will bring in $240 ($75 x 40% x 8hrs).
These numbers are using the same $75.00 per hour but varying the utilization
percentage.
 Example Continued…….
Utilization

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This point illustrates the fact that there are two ways of increasing
daily revenue:
Utilization
Raising your prices (dollars per hour). This is not always feasible.
Increasing your utilization by making your routing more efficient.

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The PMP Pricing Model

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The Pest Management Pricing Model
 Money
This is an hourly charge for our service that covers our
costs and allows us to make a reasonable profit.
How do we know what that hourly rate should be?
Accountants calculate this number using a technique
called BREAKEVEN ANALYSIS.
 It is based on two variables:
Time
The service time that it takes to fulfill the obligation of
eliminating the customer’s Pests under the service
program. This includes treatment time and call back
time

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Break-Even Analysis
Break-Even point
=
Fixed Costs
Gross Profit per Hour.in units (service hours)

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Definition
Fixed Costs
Any cost that remains constant at any volume of business
(i.e. Rent, Advertising, Utilities, etc.)

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 Variable Costs
Costs associated with producing one unit of our
service. For our purposes, one unit of a service
will be one hour of service. Thus, variable costs
are those costs that rise and fall based upon the
number of hours that we provide service.
 Examples
Hourly pay for your employees, Workers Compensation Insurance,
Material Costs, etc.
Definition

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Gross Profit
The difference between the price charged per
Unit (Hour of Service) and the Variable Costs.
Example
If we bill our service at $100 per hour and a technicians gets $20 per hour and
all other variable costs associated with providing that hour of service are
$35, our gross profit would be $45. (figured: $100 billed less ($20+$35) variable
costs).
Definition
Gross Profit
Gross Profit
%ofGrossRevenue
Gross Revenue Cost of Goods Gross Profit

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What Is My Breakeven Point?
=
Fixed Costs
Gross Profit per hour.
Breakeven Point
in Units (Service Hours)
Break-Even Analysis
Fixed Cost
GrossProfit/Hr
Fixed Cost Gross Profit/Hr

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If rent, utilities and all other fixed costs are $10,000 and we use our $45.00 gross
profit per hr example than our breakeven point is 222.2 hours of service at a
$100 per hour selling price.
After 222.2 hours of service we will start making a profit of $45 per hour. You see
the gross profit contributes to paying the fixed costs. Once the fixed costs are paid,
the gross profit contributes to bottom line profit. This is the reason some accountants
call gross profit the contribution margin.
Example

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$10,000 Fixed Costs
$45.00 Per Hr Variable Costs
222.22 Hrs to Break Even=
GrossMargin
Break-Even Point

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However, at various sales levels certain fixed costs rise (i.e. after a certain
sales level, a new piece of equipment might have to be added, thus the cost
of using that piece of equipment must be added to fixed costs).
Therefore, figuring your breakeven point can sometimes be confusing.
Is it Really That Simple?
 YES!!!!

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Our Gross Margins Shrinks
Thereby Increasing our Breakeven Point
What Happens if We Lower Our Price?

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Lets Calculate Our Variable Costs:
Pricing – A Real Live Example
Break Even Point (Service Hrs) = Fixed Cost Divided by Gross Profit Per hour
1st Lets Calculate Technician Salary:
Salary Cost Technician $12.00Per Hr X 2080 Hrs Per Yr = $(a) 24,960.00
Plus:
Normal OT Technician $12.00Per Hour X 1.5 X (Ave #
of OT Hrs Per Week 7 Hrs) = OT Dollars Per Year $(b) 6552.00
Equals:
Total Wages Paid Per Year for this Technician $ (c) 31,512.00
Continued…

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FICA (c) Above $31,512.00 X .0765 (FICA Amount) $ (d) 2,411.00
SUTA (c) Above$ 31,512.00 X $.03 (Your
SUTA Rate) $ (e) 945.36
FUTA $7,700 X .008 (Base Amount) $ (f) 62.00
Workers Comp (c) above X Your WC Rate per
Technician Class per 100 of payroll (5.5%) $ (g) 1,733.16
Family Medical Benefits (That you provide) $ (h) 4,800.00
Other Benefits (401K, etc) $ (i) 500.00
Equals:
Total Salary Cost of One Tech for one Yr.
( (c)+(d)+(e)+(f)+(g)+(h)+(i) above) $ 41,963.52
Add Payroll Costs:
Continued…

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Lets Calculate Our Technician (Direct Labor) Costs:
Annual Cost Of One Truck:
Your Vehicle Lease Expense or Truck Payment per
Month X 12 Months - $ 475 X 12 Months $ 5,700.00
Your Monthly Fuel Cost Per Truck X 12 Months $ 3,600.00
Your Monthly Repair Expense X 12 Months $ 1,800.00
Your Monthly Truck Insurance Costs X 12 Months $ 1,800.00
Your Annual Cost of Truck Registration Fees $ 150.00
Your Cost of Other Misc. Vehicle Expenses per
Month X 12 Months $ 1,000.00
Annual Cost of Materials (Average used by one truck $ 6,000.00
Annual Cost of Uniforms Worn by one Technician $ 300.00
Total Annual Cost To Put a Truck on the Road
(Add all the above) $ 20,350.00
NOW:

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SO: Our Annual Variable Cost to Put a Truck on the Road Equals:
Total Salary Cost of One Tech for one Yr.
(From the prior Page) $ 41,963.52
Plus:
(From all the above) $ 20,350.00
Equals:
Annual Variable Cost to Put a Truck on the road $ 62,313.52
At this point we need to estimate our Annual Productive Hours. This is probably the most
important aspect of running a PMP business. Maximizing this number will determine how
successful or unsuccessful you are in this business. What will determine how successful
you are in this regard comes down to one word:

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Routing
You must minimize drive time and keep your technicians on the job
not on the road or in the office.
Let’s do the Productive Hour Calculation:
Total Workable Hours per Yr = ( 40 Straight
Time Hrs per week + 7 Total OT Hrs per
Week X 52 Weeks) 2,444 Hrs
Less:
Annual Vacation hours per Tech (80 Hrs)
Annual Holiday Hrs per Tech (80 Hrs)
Annual Sick Time Hrs Per Tech (32 Hrs)
Equals:
Total Available Hours to Work Per Year 2,252 Hrs
Multiplied by: Utilization (ratio #of hours on the Job/
Total # of Hours Available to Work) 60.00%
(This number is usually about 60% for a well run
company)
Equals:
Total Available Hrs that are Chargeable per Yr 1,351 Hrs

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Now the Exciting Part!!
What is Our Variable Cost per Hour?
Variable Cost per Hour Calculation:
(From Prior Calculation) $ 62,313.52
Divided By:
Total Hrs Available
Total Available Hrs that are chargeable per Yr
(From Prior Calculation) 1,351 Hrs
Equals:
Variable Cost per Hour $ 46.12
Total Variable Cost:

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Remember that we need this calculation
in order to calculate break even.
Let’s take a look at the list of possible
fixed costs.
Particulars Amount
Advertising $5,000.00
Office Wages $6,000.00
Office Wages – Payroll Taxes $3,654.00
Office Wages – Benefits $4,800.00
Office Rent $2,000.00
Office Vehicle Expense $7,200.00
Computer Costs $4,500.00
Office Supplies $480.00
Office Equipment Lease Exp $1,800.00
Telephone $9,600.00
Printing $3,600.00
Office Maintenance $1,800.00
Postage $2,400.00
Accounting Fees $6,000.00
Dues & Subscriptions $2,000.00
Travel & Entertainment $3,600.00
Utilities $2,400.00
Misc. Office Expense $6,000.00
Total Fixed Expenses $217,634.00
Fixed Cost
Now: Its time to figure out our
Fixed Costs.
Annual Fixed Costs.

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Let’s figure out how many Hours it takes to break even. In this exercise we need to
assume various selling prices per hour.
From that we subtract our variable cost per hour to get our gross profit per hour. Once
we know our gross profit per hour, we can calculate our breakeven point in number of
service hours.
After we hit breakeven we start making profit in an amount equal to Gross Profit per hour
multiplied by the number of hours that we sell over breakeven!!!
Break Even:

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Scenario 1 Scenario 2 Scenario 3 Scenario 4
Selling Price Per Hour $50.00 $60.00 $75.00 $95.00
Less:
Variable Costs Per Hour $46.12 $46.12 $46.12 $46.12
Equals:
Gross Profit Per Hour $ 3.88 $13.88 $28.88 $48.88
Annual Fixed Costs $217,634 $217,634 $217,634 $217,634
Divided By:
Gross Profit Per Hour- Above $3.88 $13.88 $28.88 $48.88
Equals:
Breakeven In Hours 56,091 Hrs 15,680 Hrs 7,536 Hrs 4,452 Hrs
Net Profit per Hour after
Breakeven
$3.88 $13.88 $28.88 $48.88
Break Even:

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[Never Be a Low Baller –
Beat the competition with Quality Service!!]
Draw Your Own Conclusions about the pricing.
Let me leave you with this thought using the numbers in the assumptions.
At $50.00 per Hour - You would need well over 20 Trucks to breakeven
At $95.00 per hour – You would need 2 Trucks to breakeven
Use your own Numbers but;

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 Owner
 Increase the Value of your Firm
 Employees – Create Opportunities for:
 Better Pay
 Better Benefits
 A Better Retirement
 A Great Place to Work
Putting it all together
Building Wealth (Increasing the Value of your Firm)

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 Create a Plan for Growth
 Determine how you will fund the Growth
 Create Standardized Services
 Maximize Route Efficiency
 Price your Services for Profit
 Live the Dream
Putting it all together
How to Build Wealth in the PMP Industry

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Daniel S Gordon, CPAYour Next Step
 PestPac & QuickBooks Consulting, Integration & Reporting
 Monthly Conference Call to Help Improve Your Results
 Year End Financial Reporting
 Year End Tax Services
Services Provided
If your CPA doesn’t know Your Industry, You Don’t Need Him!
Contact Info:
Email: dan@pmpwealthbuilders.com
Phone 973-300-0288

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 Best Coaching in the PMP Industry
 The McDonald’s Franchise System For Building a PMP
Firm without Paying 1 MILLION DOLLARS!!
 Manuals & CD’s Covering
 Operations, Accounting
 Marketing & Management
 Monthly Newsletters & Conference Calls
Your Next Step
$100 off PMP WealthBuilders Membership Kit for all
PCT Family Business Summit Conference Attendees if
ordered by 12/15/07
PMP WealthBuilders, LLC
www.pmpwealthbuilders.com

Building Wealth

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