Last year, a revenue goal was set for $1.4 million and the company was on pace right through the third quarter. However, on Oct. 20 the financials arrived and - you guessed it - Black Gold lost $78,000.
Jed's first reaction was disbelief. He was stunned. Then, of course, the questions begin to pour in. How did this happen? How could we lose so much when so much revenue is being generated? Who dropped the ball?
(Note: Whether an owner is hiring his first technician or a vice president of sales for his $15 million company, the issues and solutions are remarkably similar. With that in mind, let's get back to Jed.)
1. Combined service and maintenance labor is 44 percent of service and maintenance revenue. We know that double-digit EBIT (earnings before interest and tax, or net profit) companies have this at 27 percent or less.
2. Equipment was 31 percent and labor was 14 percent of replacement revenue. Again, double-digit companies manage these issues at less than 25 percent and 8 percent, respectively.
With service labor at 44 percent when efficient companies are at 27 percent or less, the obvious question would be, "What happened?" Well, Jed may want to start with, "What probably didn't happen?" Remember, this is the crew that brought us from $750,000 of revenue to $1 million last year.
Here's what didn't happen:
Now, this may have happened:
The bottom line: A healthy sense of accountability has been lost.
Let's take a perspective moment here. What Jed has run into is a phenomenon that is very common in most entrepreneurial industries, and HVAC is no exception. Many companies grow to $1 million in revenue mark and then start to lose money. Most drop back to the $1 million mark and hold the revenue at that level and conclude that this is where the company needs to stay. Growing is too complicated and expensive.
Too many people reporting to Jed caused the real problem. Common wisdom in leadership dictates that no one should have more than 5 to 8 people reporting directly to him or her.
When Jed went over $1 million in revenue, he had 12 people who reported directly to him, and he didn't have the opportunity to lead (provide accountability for) anybody. That is 50 percent more than the best leaders in the world are capable of handling.
To answer the question as to who dropped the ball, it would appear that Jed did by not replacing himself in some areas of the business. During this discovery phase, it becomes easy to figure out what to do.
Obviously, Jed needs to put into place another leader. And it is easy to determine why another leader is needed. A leader is needed to lead, direct, and provide accountability. The big question always revolves around the "how to."
Some of the "how to" questions that Jed begins to ponder include:
Good questions. Very good questions.
Next month: Jed has some friends in HVAC from around the country that have grown companies past the $1 million mark and have a very good life. Next month we will be going over how Jed's friends have solved some of these challenges.
Dennis Mondul is a business coach/member with International Service Leadership (ISL). He can be reached at email@example.com.
Publication date: 03/07/2005