When you first got into business you probably thought there was a direct relationship between growth and profit.
    The thinking was, “If I do more work I will make more money. Therefore, if I do a lot more work I will make a lot more money.” Well, if you have been around for a number of years you have learned that the above principle doesn’t always hold true. With that in mind, have you ever wondered what would happen to the overall profitability of your service department if you hired an additional service technician? Keep in mind there are a lot more costs to consider than just salary. The company must also pay matching taxes for Social Security, Medicare, Federal Unemployment Tax and State Unemployment. Lots of overhead costs will also go up, from the cost of training and cell phones to gasoline and workers’ compensation insurance. And the tech is going to need a vehicle to get to the job. All sorts of costs increase when you hire that additional tech. So the basic question is whether adding an additional service tech will increase or decrease your service department’s overall profit.
    I am going to take you through the same exercise we give during our three-day “Basic Business Boot Camp.” The beginning basic assumption is that the company currently has enough work to hire a third service technician (with two already employed). The company is now charging the customer $91.29 per hour which is generating a 15 percent pre-tax net profit or about $45,000 pre-tax profit per year. I then ask the class the following questions concerning the cost of adding the third tech:

Q: How much do you want to pay the new service tech, per hour?
A: $18.50/hour

Q: Are you going to provide holidays, vacation and paid sick days the first year?
A: We will provide one week of vacation, holidays and no sick days.

Q: How many non-billable hours will the tech have per week?
A: Most service techs average 50 percent non-billable time. That means the average tech will have about 15 hours a week (shop time, travel time, callbacks, etc.) they cannot charge the customer. When you add in the normal holidays, vacation and sick hours the total will be about 50 percent non-billable for the year.

Q: A new tech will need a vehicle. How much will it cost to purchase a new van including shelving, inventory, tools and painting/decals?
A: About $45,000.

Q: How long do you expect the van to last before it needs to be replaced?
A: 6 years.

Q: What is the cost of parts a service tech sells per year?
A: The other techs sell about $20,000 worth of parts a year at 100 percent markup. A new tech is projected to do the same.

Q: What “fixed” costs of overhead will increase because you added a third service tech?
A:  The following costs will increase for the new tech:
    Vehicle Insurance - $900 per year
    Medical Insurance - Company pays 50 percent of cost or about $5,000 per year
    W/C Insurance - $1,800 per year
    Office Supplies - $300 per year
    Loan on the new vehicle - $600/month or $7,200 per year
    Communication (cell phones, pager, telephone bill) - $100 per month or $1,200 per year
    Uniforms - $300 per year
    Training - $500

Q:  What “variable” costs of overhead will increase?
A:  The following costs will increase for the new tech:
    Gasoline - $6,000 per year
    Vehicle Maintenance - $ 1,000 per year
    Credit Card expense - Assume the tech produces $150,000 in gross sales, with half paid via credit card
    at a cost of 2 percent. The annual cost would be $1,500.

You now know the additional costs that will be incurred when you hire a new service tech. To summarize, the total company overhead will increase, in round numbers, by the following amount:

    Fixed Overhead $17,200
    Variable Overhead 8,500
    Vehicle Replacement ($45,000/6yrs) 7,500
    Cost of non-billable time (Tech is paid about $38,000 per year, 50 percent of which  is non-billable)            19,000
    Company matching taxes on tech 3,000
    Total “added” overhead =    $55,200

Before the third tech was hired, the service department with two techs looked like this:

    Produced 2,365 billable hours
    Price to the customer was $91.29/hour
    Gross Sales = $296,419
    Net profit before taxes = $44,472 (15%)

Once the third tech is hired, the overall company overhead is increased by about $55,000 for the year. The question is, factoring in the additional overhead costs, will the company generate a total profit above or below the previously earned $44,472?
    When this question is asked of the students in the class their input is usually mixed.  About 60 percent of the class thinks the overall profit the first year will drop by $10,000 to $15,000. That means they expect the overall service department’s net pre-tax profit to drop to about $30,000 to $35,000 for the year. A few think it will not change; they expect total net profit to hold at about $44,000 for the year. The remaining 40 percent of the class usually expects the company’s total income to increase to around $60,000. What do YOU think will happen?
    In class we enter the information into our software program to see what the “real impact” on profits will be. Below are the results:

    Produced 3,490 billable hours
    Price to the customer was $91.29/hour
    Gross Sales = $439,120
    Net profit before taxes = $91,251 (20.78%)

Surprise--net pre-tax profit didn’t decrease, it more than doubled! What is not obvious is that three things are taking place, all at the same time: 

    1.) The new tech sold $20,000 worth of parts at a 100 percent markup. That means parts sales alone absorbed $20,000 worth of overhead.
    2.) The first two techs generated 2,365 billed hours. Adding the third tech increased the billed hours to 3,490. That means the existing overhead is now spread over nearly 50 percent more hours. That lowers the overhead cost on all currently billed hours, making current work more profitable.
    3.) The additional tech is billing out an additional 1,125 hours at $91.29/hour, creating an additional $102,701 in gross income.

    The combination of these three things results in doubling the company’s overall net profit. The basic principle is this: Adding an additional service tech (if you have the work) will always, always make the company more money until the increase in gross sales requires the company to add additional office staff to support the field.
    So, what is your company’s current maximum profitability? Your maximum profitability will be achieved by adding as many additional technicians as you can, without having to add additional office staff to support them. Sure, you can grow past that point but when you add the additional office staff, overall profits will fall for a while until gross sales significantly increase.