Benchmarking for Success

Posted by Richard Harshaw on July 28th, 2008

I have several hobbies: astronomy, the American Civil War, music, and geo-caching, to name a few. As you can tell, I have set up categories for some of these interests and will be posting thoughts and ideas to them as the Muse stirs me. Today, however, I want to use my experiences in geo-caching to express some thoughts about managing an HVAC business.

Typical USGS Benchmark

Typical USGS Benchmark

I am technically not a pure geo-cacher. I don’t locate the caches hidden by other geo-cacher’s. But I do enjoy locating the benchmarks placed all across America by the US Geodetic Survey. I go to my geo-caching webpage (http://www.geocaching.com/mark/) and select benchmarks in an area to locate. I then use my portable GPS unit to find and photograph the benchmarks. It is a lot of fun and great exercise as well. And occasionally I get to report back to the USGS that a benchmark is destroyed or damaged.

But what does this have to do with running an HVAC business? On the surface, nothing. But if we dig a little deeper, some wonderful parallels to business emerge. Benchmarks were established by the US Geodetic Survey to help determine the exact size and shape of the United States. They are also used by surveyors to establish boundaries for new roads, shopping centers, schools, residential developments, and any other activity which involves the land.

In business, benchmarks help us determine whether or not a particular business is where it should be in terms of its performance. There are five benchmarks in particular that are helpful to an HVAC business owner. These are the cat Productivity Ratio, the Installation Volume per Installer, the Service Revenue per Truck, Service Sales as a Percentage of AOR, and the Staffing Balance.

The Productivity Ratio. Found by taking the annual sales and dividing it by the total number of employees, this ratio is a good overall indicator of how efficient a business is. The higher the number, the better. Currently, the average in the United States is $137,000, but this can vary quite a lot from county to county. If you would like the adjustment factor for your particular county, use the Contact-Us Form, and I’ll e-mail it to you.

The Installation Volume Per Installer. This benchmark is similar to the Productivity Ratio, except you divide the total installation sales by the number of installers that installed the work. This benchmark can vary quite a lot based on your county as well, but the current US average is $243,000.

The Service Revenues Per Truck. Divide the total service sales by the number of trucks used that year. The current US average is under $110,000, but you should strive for $175,000 or more.

Service Sales as a Percentage of AOR. “AOR” stands for ad-on and replacement. If you are not in this market, you should ignore this benchmark. But if you are in the AOR market, divide your total service sales by your total AOR sales. To be healthy, your benchmark should be between 25% and 50%. If you are under 25%, you’re not running enough service to get enough replacement leads to drive your replacement operation. (You’ll have to advertise a lot to make up for it.) If you’re over 50%, your field people are doing small ticket work when they could be doing large ticket work.

The Staffing Balance. Divide all of your direct employees (installers, service technicians, and helpers) by the number of office employees (managers, comfort consultants, receptionist, bookkeeper, and others). This benchmark indicates how many pairs of hands bring in revenue compared to how many pairs of hands consume revenue. Generally speaking, the higher this number the better. But there are qualifiers. If you do repetitive work (like residential new construction), your benchmark should be between 5.0 and 7.0. If you are more into the AOR market, a value of 2.5 to 4.5 is more reasonable. And if you are focused on service, a value of 2.0 to 3.0 is healthy.

For more details on these benchmarks (and others), click here for the article titled “Strategic Performance Measures (in Word or PDF).” You might also find the form “Benchmarking for Success” (in Word or PDF) helpful as well.

Enjoy finding your benchmarks! And if you have questions or comments, please post them in this post or send your question to me using the Contact-Us Form.

Biz Stuff: Financial and Managerial, Geocaching

joe said,

August 13, 2008 @ 2:10 pm

Interesting article. Nice to learn about something I didn’t know much about (geocaching). I found the comparison to business interesting. And am always up to learning more on business techniques. Keep it comin.

Tom said,

September 22, 2008 @ 8:52 am

Just curious, if the blend of your company is AOR & service and you are a 2 man crew, do the benchmarks change much or are just easier to determine? Also was wondering if “in truck computerization” utilizing communicative software with the office is benificial in a small business to reduce staffing benchmarks?

Richard Harshaw said,

September 22, 2008 @ 10:25 am

Excellent question, Tom. By “2 man crew”, do you mean your company has two employees? Or do you mean that your company uses two men to a crew? Either way, the benchmarks do not change, but may be easier to determine. For instance, if you were just a two-man company, the benchmarks would still apply, but obviously the staff ratio would be meaningless to you at this time. As your business grew and acquired people, there would come a time when the staff ratio should be considered (say, 8 employees or so).

Using communicating equipment and software for the trucks can be a good thing if it is used properly. A large service or installation company may find that it could reduce the inside headcount by one person (or more if it is a really BIG company) if a computerized tracking system using GPS was being used. But the cost of such a system would be more than what a small company might be able to justify.

However, a communicating system (which could operate without GPS tracking capability) could definitely expedite invoicing on service calls and the like and thus reduce some of the in-office tasks normally assigned to a person, so in that light, a computerized communication system could pay dividends even for a small company by reducing internal work loads and thus the need for extra staff.

The bottom line is this: if the internal paperwork is being done on time– and by that I mean if invoicing is done daily, collections are on top of things (average age of accounts receivable is under 30 days), payroll is on time and accurate, accounts payable is current with all vendors– then you have adequate internal staff and/or procedures. If not, you may need to add internal staff. But before you add staff, check your PROCEDURES to make sure that something you are doing is not causing a loss of efficiency. I have seen many cases where an internal procedure was so inefficient that it took two people to do a task that one should have been able to handle with a better procedural design.

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