Understanding Labor Costs


One of the most important performance metrics you can track is your company’s profitability. After all if you’re not profitable, you won’t be in business long. Despite the importance of this valuable figure many companies don’t track their profitability nearly as often as they should. Many companies wait until the end of the month to see if they were profitable. At that point adjustments are made, if necessary, and another month goes by before progress is checked again.

Just think about what would happen if a baseball team tried to go a month without checking the score. From the bench, things look good. The team is getting a lot of hits, the fielders are working well together and the pitchers are striking out a lot of their opponents. Now imagine the horror that occurs when the monthly scorecard comes in and shows that out of 22 games the team only won a dismal 5.

So changes are made. The batting order is rearranged, extra practices are scheduled and a promising rookie pitcher is promoted. More games are played and things seem to be going better. The scorecard comes in a month later and, sure enough, progress was made. This time around the team won 9 out of its 29 games. It is an improvement, but too little, too late.

At this point the season is in serious jeopardy. In order to have a winning season (more wins than losses) the team would have to win 61% of its remaining games. This does not seem likely to happen given their 27% win record so far.

So what does all this tell us about business and profitability? First, don’t bet on the Nationals (sorry Washington fans). Second, if you want your business to succeed profitability is something that should be checked daily, not monthly.

Traditionally this is difficult to do because one of the biggest costs a company accrues - labor - won't hit the financial reports until payroll is run. On a typical biweekly schedule this only gives you a chance to check your profitability 2 times a month (3 tops). Thankfully, by using ESC, you can check your profitability daily with just a little setup.

To do this you must enter your technician’s labor rates into ESC. Do this one simple thing and you can run reports directly from within ESC that will show you a very close estimate of your profit per invoice, day, job, agreement, customer, etc.

To get started, you will first want to setup some security in ESC. Head to Company → Setup Users and edit any user that should not be seeing employee pay rates.  Under the Security Options screen for each of these users, remove the Enter Technicians option.  

Once you have your security setup it is time to enter your pay rates. This can be accomplished by going to the Dispatch pull-down menu and selecting Enter Technicians. Double click an employee to edit their record and go to the Overhead Reporting tab. Here you can enter your technician’s hourly pay rate as well as an overhead percentage or fixed dollar amount.

If you haven’t figured out what your overhead is yet, now is the best time to do so. The Internet contains countless articles on this subject but here is one that is easy to follow and explains the importance of calculating this correctly.

After you have entered the pay rate for all your technicians, ESC will automatically add labor cost to each invoice based on the amount of time associated with the dispatch being invoiced. If you are not tracking your dispatches in real time, or need to edit the amount of time a technician actually worked, you can do so by clicking the Technician hyperlink on the Sales Invoicing screen. At this point, if you are logged into an account that can see pay rates, you will see the Labor Cost appear in the bottom left-hand corner of the invoice.

The beauty of this arrangement is that once it is setup you don’t really need to do anything to track this data. The cost is calculated automatically as you create your invoices so all you have to do is look at this data on a regular basis. I highly recommend running the Sales Departmental report (Sales → Reports → Sales Reports → Sales Departmental) and the Sales by Technician report (Sales → Reports → Sales Reports → Sales by Technician) on a daily basis to identify trends and deal with them immediately. These reports not only show the overall profitability percentage and dollars of each department/technician but also the profitability of each invoice as well.

One thing to keep in mind at this point is that the labor costs shown in ESC are just very accurate estimates. True labor cost can only come from payroll as there are many things that can change it slightly from week to week, such as tool payments, advances, etc. Because of this the labor costs shown in ESC are not sent to QuickBooks or Peachtree to prevent the costs from being duplicated.

So there you have it. Although tracking your labor costs and profitability in ESC will not guarantee you a winning season or a profitable company, it will at least give you the information you need to see if there is a problem or opportunity immediately. Focus on making each day profitable and you’ll find the months will take care of themselves.

Written by Eric Rausin
Featured in September 2009 Newsletter

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