Blog

How overtime can make you more money

November 6, 2013 -  By

There’s a myth circulating around our industry that overtime (OT) is bad. Owners and managers believe this is true because their employees are inefficient; therefore OT is a waste. But inefficiency is a separate issue. Jeffrey Scott

Owners are also worried about time-and-a-half pay because they’re running on razor thin margins, yet that too is another distinct problem that should be addressed separately.

Contrary to popular belief, I have found that a certain percent of OT is very helpful to your bottom line, and I have proven this out with data. The high-profit companies I mentor in my peer groups (those earning profits in the 12- to 16-percent range) have 40 percent to 75 percent more OT than the average-profit contractors (those with margins around 4 percent).

It makes sense if you look at the big picture and control waste and inefficiencies.

The nut
Your company has many fixed costs (also known as “nut”) that you need to cover before you can make a profit at the end of the month, quarter or year. Your fixed costs consist of equipment, overhead, salaries, marketing and other expenses. Once you have covered “nut,” you can make significantly more profit with each dollar of work produced, even if the work is performed at time-and-a-half pay rates. As your direct labor costs go up 50 percent, this extra cost is more than covered when your fixed costs are down to zero. In other words, productive OT can produce excess profits, if you’re running an efficient operation, especially when you’re reducing return trips, mobilization and drive time.  Do you see an opportunity to do this?

Added benefits
There are other benefits to this strategy. You can limit or reduce the number of people you manage and the amount of equipment you buy and manage. Plus you don’t need to overly distract yourself about OT; rather, you can stay focused on job costs, through-put and meeting schedules.

Better paid and better retained/trained employees also mean you become more efficient and have higher morale. It is a win-win situation.

In addition, if you’re known as a company that’s not stingy with the weekly pay, you will have a bit more room to negotiate affordable hourly wages with your employees.

Caveat
This strategy only works if you’re meeting and beating your hours. Otherwise, it backfires and sucks up profits. You must be able to maintain efficiency and crew productivity while reducing drive time and non-charge time.

Another issue is employee burnout. You don’t want to burn out your employees or managers: They won’t be productive when they are overworked. Therefore, there is a fine line in how you implement this OT strategy. Don’t overdo it.

You have many strategies to increase your profits when you learn how to manage your business by the numbers.

Editor’s note: To learn how to better manage your business by the numbers, join Jeffrey Scott in his 3-part webinar series, “Managing By The Numbers,” brought to you in part by Landscape Management.

Related:
When is overtime OK?

 

 

This article is tagged with , , and posted in Blog

About the Author:

Jeffrey Scott, MBA, author, specializes in growth and profit maximization in the Green Industry. His expertise is rooted in his personal success, growing his own company into a $10 million enterprise. Now, he facilitates the Leader’s Edge peer group for landscape business owners—members achieve a 27 percent profit increase in their first year. To learn more visit www.GetTheLeadersEdge.com.

Comments are currently closed.