Am I Normal?

We’ve all seen them—those little plywood cutouts at theme parks, where a character has his hand held out and says, “You must be this tall to ride this ride.”

I often get a version of that in my contractor workshops during breaks—many times a contractor comes to me and says some variant of, “Am I normal?”  There seems to be so much of this thinking in our trade that I thought I’d devote a blog to it.

Let’s begin by defining a key term in this discussion:  throughput.  Throughput is defined as how fast a company can generate sales per person per year.  The faster it can do this, the higher its throughput. Obviously, high throughput makes large profits possible; low throughput can kill profits.

The first measure of throughput is what I call the Productivity Ratio. It is easy to calculate—just divide your sales for last year by the total number of employees you had.  Count everyone.  Even the person who answers the phone.  Even part-time people (count them as fractions).  Here’s an example:  Bullwinkle Moose Heating had sales last year of $1,500,000 and employed 6.5 people during the year.  His Productivity Ratio is $1,500,000 ÷ 6.5 or $230,769. Is that good or bad?  It is good when you consider that right now, the average in the United States is about $141,000.  If Bullwinkle had a low ratio, he would have to do one of two things:  increase sales or reduce his headcount (or both).

A similar ratio is the Installation Dollars per Installer.  This ratio is calculated by dividing the total installation sales dollars by the number of installers.  In Bullwinkle’s case, the numbers were $1,100,000 of installs divided by 4 installers, for an average of $275,000.  The US average right now is running at about $232,000, so Bullwinkle is above average here too.  Had he been weak, he would have had to either drum up more install sales or use fewer installers, both of which could lead to more profits.

Since Bullwinkle does have a full-time service department (1.5 techs; one does double duty as an installer), he can also compute his Service Sales Per Truck ratio.  With service sales of $400,000 divided by 1.5 trucks, he gets $266,667, well above the US average of $105,060 and the ideal target of $165,000.  (Commercial service trucks should run higher—about $196,000 per year.)

For those contractors who have retail sales people, another useful ratio is the Sales Per Salesperson ratio, defined as sales made by sales people divided by the number of sales people. Bullwinkle does not have a full-time sales person, but if he did, he’d want to compare himself to the US averages of $947,000 for an add-on / replacement oriented sales person, and $1,550,000 for a new construction (residential or commercial) sales person.

Finally, Bullwinkle can compute his Staffing Ratio.  The staffing ratio is defined as the number of people in the field divided by the number of people in the office.  In Bullwinkle’s case, 5.5 people were doing the work last year while 1 person provided oversight.  That makes Bullwinkle’s ratio 5.5 to 1, or simply 5.50.  This is strong and healthy, as the more hands you have “turning wrenches” the more money you can bill out.  The US average is a lowly 2.51, but this number does vary with the type of work you do:  service-focused companies should strive for staff ratios of 1.5 to 2.5; add-on / replacement contractors should aim for 2.75 to 4; and new construction contractors should go for 4.5 to 6.5.  Anything over 7 is dangerous, though, because the office people will be constantly swamped.

Hopefully, you can now answer the question, “Am I normal?” for yourself.  If you find yourself a little short for the ride, the ratios are simple and it should be obvious to you how to bring the numbers into line with where they should be.

High throughput to you!

For an in-depth treatment of this topic, click here.