- September 29, 2021
- Posted by: Marisa Palmieri Shugrue
- Category: Accounting Advice
The need for pest control companies to operate their businesses more efficiently and profitably is constant. One way pest control operators (PCOs) can achieve better results is by benchmarking. Last month, PCO Bookkeepers Managing Member Dan Gordon presented a webinar on this topic hosted by Pest Management Professional magazine and sponsored by Slingshot.
What is benchmarking in the pest control industry? It is simply comparing your company’s results against another set of numbers. You can benchmark against past company results, budgeted numbers or against industry standards.
“If you come right into the family business, the only thing you know is that family business,” Gordon says. “Listening to presentations about how to improve or how to structure certain things in your business helps quite a bit.”
Where can you find pest control industry benchmarking information? The PCO Bookkeepers Pest Management Industry Cost Study is the most comprehensive resource available. This study is the result of research done by our accounting firm, PCO Bookkeepers, using 157 of our pest management clients as subject companies to determine benchmarks. We also summarized the data in the article “Fiscal fitness check” in PMP.
Along with reviewing the Cost Study and article, Gordon recommends considering the following benchmarking tips to leverage others’ success to increase revenue and profitability.
1. Use a standard pest control industry Chart of Accounts.
“In order to derive useful information from the financials, we have to have everybody comparable,” Gordon says. Once using an industry standard format, you can measure benchmarks by using:
- Percentage of sales;
- Actual to budget;
- Actual to prior period; and
- Actual vs. industry comparisons.
2. Look beyond the P&L.
Also known as an income statement, the profit & loss (P&L) statement is just one of the tools you must understand to determine if your company is financially healthy.
“Most people who run pest control companies know how to read a P&L,” Gordon says, recommending that PCOs also look at the balance sheet. “Unless you have a bookkeeping or accounting background, you probably don’t know the nuances of a balance sheet.”
The balance sheet summarizes all of an entity’s assets, liabilities and equity at a given point in time. It’s typically uses by lenders, investors and creditors to estimate business liquidity. Line items on a balance sheet include:
- Assets: cash, accounts receivable, inventory and fixed assets;
- Liabilities: accounts payable, short-term debt and long-term debt; and
- Shareholders’ equity: stock, retained earnings.
Remember, your balance sheet is not the same as your net worth. For example, the customer list is the most valuable thing in most pest control companies. The customer list does not show up on your balance sheet. Sometimes PCOs have to educate banks, lenders and investors about this point.
3. Understand the importance of ratio analysis.
Financial and operational ratios are used widely to evaluate the performance of a business and to identify possible trouble areas that could result in reduced profits or even business failure. They include:
- Liquidity ratios;
- Activity Ratios;
- Leverage Ratios;
- Profitability ratios; and
- Several other important ratios.
These indicators of financial performance are useful to those lending money or to those thinking about investing in a company. They allow the potential lenders or investors to compare the firm to others in the industry. Owners and managers also use this data to evaluate their own situations and performance.
4. Know which indicators make the biggest impact.
According to Gordon, the most vital figure for a pest control company to focus on is gross profit percentage.
“To me, that’s the single most important KPI in a pest control company because that determines your breakeven (point), and that determines how efficiently you’re routing and pricing.”
Best-in-class pest control companies have a gross profit of 50-55 percent, Gordon says.
Taking it a step further, he explains the top three things that will make or break a pest control company:
- Keeping your labor under control (technicians, sales, office);
- Keeping your marketing control (cost per lead, cost per sale); and
- Keeping your materials under control.
“You can run around the office and try to save money on office supplies and paperclips, but if you watch those three things, you’ll have a profitable company,” Gordon says.