I sat down with Dan Gordon to find out why and how it’s vital for pest management firms to build financial discipline and transparency into their companies.
What’s the No. 1 problem around financial discipline and transparency you see when you take on a new client?
DG: “Typically, when we get new clients they fall into two buckets. The first are those with a good culture already. They’re diggers and drivers and they want to make sure they’re doing things the best way they can. Also, they want to outsource work to us because it’s better, cheaper and faster than keeping it in-house. The second bucket is the client who is a bit of a mess and has no financial discipline, no processes and procedures, no separation of functions and no way to reconcile things.
With the first bucket, many times what we’ll see is somebody built a process around Excel. And Excel is a really good program, except you can’t scale it.
It’s not an accounting program or routing software, so they need to update their procedures so that they can scale further. Anyone can keep an Excel spreadsheet, but if I have 10 people entering things in Excel, we erase things and we screw it up. Whereas with an accounting system like QuickBooks or RealGreen or PestPac, you record one transaction at a time, it hits the audit trail in the program and you can’t really screw up another transaction because each transaction stands on its own.
Once the information is in QuickBooks, you can manipulate it and create reports and subreports in a thousand different ways, whereas with Excel, if you really wanted to do that you’d have to be a programmer.”
Tell me about clients that fall into the second bucket. When you start working together, what steps do you typically have to take with them?
DG: “The first thing that we do is set up a standard chart of accounts. We have a chart of accounts that we’ve developed over the years that it’s very similar to the large pest companies. It uses the gross margin method.
Next, we map their original chart of accounts to our chart of accounts, which gives us a profit and loss statement that looks like all the rest of our clients’. Once we do that we have to give the client the discipline to maintain it. We’ll meet to show them exactly how to enter and code things in QuickBooks and understand their routing software better from an accounting perspective, as opposed to an operations perspective.
We have a whole onboarding process with a checklist of 20 different things we show them, teach them and instill in them in order for them to become a client.”
What are some other financial best practices you recommend?
DG: “We show clients what an accounts payable process looks like. For example, somebody approves the expenditure before it’s spent, then they take delivery on the product and get an invoice. Then that invoice has to be signed off on by a manager or the owner – whoever is approving it. Once that happens, the invoice gets scanned and sent up to us. You send us the invoice, we code it and put it into a dashboard, and then clients go into the dashboard and pay it and the money goes electronically to the vendors using a program called Bill.com.
We don’t handle accounts receivable for clients because we’re not on the ground. In order to handle accounts receivable, you need to be going to the mailbox, getting checks and charging credit cards. What we do is reconcile the accounts receivable with QuickBooks through our closing process, so QuickBooks and the routing software are in sync as of the time of the closeout. In other words, we take last month’s accounts receivable balance, we add the sales for the month, we subtract out any payments we received and that becomes the ending balance of accounts receivable.
We also journalize the payroll. Clients enter it using a payroll company and then we take the reports and put it into QuickBooks by division, so it breaks out technician labor, sales labor, office labor owner labor and so on.
We prepare the sales tax every month for the states that have sales tax. The routing software, if it’s set up properly, charges the sales tax and we go to each state’s website and enter the sales and the sales tax.
Once all of that’s done, we have a deliverable each month, which is a financial statement or an operational statement. It’s totally different than what most other accountants issue because we have a lot of industry intel. A lot of clients will schedule a meeting with us where we go over the numbers.”
Prior to working with PCO Bookkeepers, how are pest management companies getting all this done?
DG: “Sometimes it’s not getting done very well, which is problematic. The real issue is when an owner has built the company up and then hires a bookkeeper who may know how to use QuickBooks but doesn’t understand all of the reporting. So the owner thinks because QuickBooks is spitting out checks that everything is working, but their financial statements and their profit and loss is just a mess and they can’t really figure out how they’re doing. We see a lot of that. And then what’ll happen is they’ll take it to their CPA at the end of the year and he’ll have to make heads or tails of it. And usually that guy’s or gal’s view of accounting is to get a tax return done. A tax return is a small part of accounting.
But by breaking all these expenses up, it gives you management intelligence to allow you to better organize your company and better execute on your strategy. So, if you know that my technician labor is 30 percent and we know that it should be 22.5 percent, well, there’s an area to start improving. But if I just keep all my wages together, I would never know that because my technician labor and my sales labor and my office labor is all together. You can’t tell any of that stuff without having the right chart of accounts and the right financial statements. So if your view of accounting is just to prepare a tax return, you’re never going to be able to scale your company. A lot of accountants just are interested in the tax portion of it.”
Why is that?
DG: “It’s because they’re outside CPAs, and the role of an outside CPA is to do verification and to do taxes. They’re not internal accountants looking at the books and records of the client. That’s usually the clients’ responsibility to either have a CFO or a bookkeeper, and that’s where we get involved. We’re that CFO and/or that bookkeeper.”
Let’s talk about transparency. How do you define financial transparency?
DG: “Transparency is giving the correct information to your team members about the line items on the P&L they can affect so they understand what they need to do to be successful and you can improve the business overall. Successful companies have lots of people with their fingers in the pot.
You’re going to provide certain numbers to employees – for example to salespeople on a commission report. The worst thing you can do is have them on an incentive program that’s so complicated they can’t figure it out themselves and they ultimately think you’re cheating them.
Although I know some people believe in open-book management, I have a philosophical difference with this mentality.
What I advocate is if you’re an employee and you can affect a line item on the P&L, then you get access to that information. So, my general manager would have access to my chemical cost, my technician cost, my vehicle cost – all the things he or she can affect. I don’t advocate for giving everyone access to the whole P&L because often they don’t understand the entire context of it and too much information can do more harm than good. But there are people who do.”
What other industries should pest management companies be taking cues from?
DG: “The way I set up my chart of accounts is patterned after manufacturing. The gross margin method I use leads back to a concept called break-even analysis that they teach at business schools. Break-even analysis means if I sell my service for $100 an hour and it costs me $50 an hour in direct costs to produce the service – meaning the technician wages, the vehicle lease, fuel and all the things that happen on the road – I have a gross margin of $50.
Now, if it costs me $100,000 in fixed costs to run my office, that means I need to do $200,000 in revenue to break even because half of it goes to the direct cost and the other half goes to the fixed cost. After that, you start making money at the rate of 50 cents on the dollar. That’s really important because now you can ask, “Well, how many hours of service does it take to break even?”
So, I told you I need $200,000 to break even. If I divide that number by 100, that means that I need 2,000 hours of service to break even. From my perspective, in the pest control industry we manufacture hours. I have a technician who has 40 hours available a week. If I break down all the costs into the hourly cost, I’ve manufactured an hour of time that guy or gal takes to do service.”
Accountability is another important part of financial discipline. How do you recommend pest companies establish accountability?
DG: “Good internal controls. Make sure you know what work is going out and what work is coming back and what work is coming back completed and what work is not completed and the reasons why it’s not completed. Where applicable, make sure you reschedule that work so that you don’t lose out.
At well-run companies, this is not a problem at all. Everybody is accountable. Your technicians are accountable to their supervisors. Your supervisors have to report those numbers to the general manager and/or ownership, so they’re accountable.
And it’s not just on the revenue side. It’s also on the expense side. Is my material percentage where it needs to be? And if it’s not, if it’s too high, is it because of overuse? Is it because of lax inventory control? Do you let your technicians go to the chemical room and take whatever they want? Or is it locked up and do you have a process for giving your technicians what they need when they need it?”
How do you recommend companies communicate all this information?
DG: “We like reports that show actuals to prior results from your company, actuals to industry averages from a cost study and then we like actuals to budgeted amounts. Those three things make a good dashboard. How you present it is up to you.”
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Marisa is Content Editor for PCO Bookkeepers, PCO M&A Specialists and Turfbooks.
Marisa is Content Editor for PCO Bookkeepers, PCO M&A Specialists and Turfbooks.