Water Well Journal

even more money, paying us to be quick and efficient. I shoot for 20% margins because I want to be able to invest in equipment and also earn a return as a busi- ness owner. I want my investment in the business to pay back and I want to be able to move the business forward by updating equipment, etc. The only way to do that is with enough profit and budgeting to allow for the business to support it. There are multiple ways to do the above calcula- tions to take other factors into account. Tracking the data is paramount to doing this correctly. For example, we track every warranty invoice as if it were a regular job and write it off into separate catego- ries depending on what got warrantied—the motor was bad, or the fittings failed, or it was installation error, etc. We've figured out after a few years that costs us roughly 6% to 8% of our revenue, which is a lot! It's not really an out-of-pocket cost of that amount, but if you interpret that number as lost revenue and lost time, it is really a drain on your company. So, we factor in about 6% to our flat-rate pricing system for 'warranty' and if we can work that number lower, it's gravy in the bank." When Unsure How to Price a Job, Kiltoff Often Switches to Hourly to Simplify "If you take all your annual expenses, divided by the number of total payroll hours, you'll get a cost per payroll hour. Now, the reality is that you have to figure out how to pay that rate in less hours because you're going to be lucky if your billing hours are at best 60% of this number. Assuming someone uses QuickBooks and they are accurate: Open QuickBooks, open a profit and loss for the last fiscal year to date, get your Total Expenses from the bottom of that report. Open a Sales by Item summary report and find the labor items, add up total labor hours sold, go to the cash flow report and get Net Cash Provided by Investing Activities (convert to positive number), then divide total expenses and investments by the labor-hours number (expenses + investments ÷ hours), you get operating costs per billable hour. Multiply this number by 120% or whatever your desired profit margin is." Kiltoff says the trick is making sure the above data reflects reality. "If your drilling numbers get mixed in, it can skew things," he says. "We use classes in QuickBooks to track the different divisions of the business. If you're a pump company and not billing out the above calculated rate per hour per employee on a jobsite, you're losing money, I guarantee it. "When we did the above math, we came up with a number three times the market rate for labor. That's not sustainable when you charge T and M. But when you can look at the job, figure out how many operating hours it'll likely take, includ- ing driving, shop time, etc. "Add that up and multiply it by your above rate, then tell the customer that the installation will cost $X dollars plus parts, you'll be surprised at how little pushback you get, and how much better your bottom line looks. "That rate also would include any markup you have on parts. It's your total profit margin and overhead over your labor rate." Kiltoff acknowledges that it's easy to come off sounding greedy when discussing flat rate, profit, etc. "The flat-rate model of pricing to customers is just a differ- ent way of selling a project to a customer," he says. "If they get the same end result and are happy with the project at the end and the company produces a profit, everyone leaves happy. Ul- timately, the goal of any business is to turn a profit, and metrics have to be used to objectively see how your business is doing." Kiltoff has spent considerable time studying his numbers over the years on such items as how many pumps and wells were sold, man-hours per well, etc. "What I've found after 20 years is the best numbers to look at aren't any different than any other business," he says. "It's profit per period (profit at end of year, year to date, etc.) and profit per job, gross margin, etc. "All the ratios and measures used to analyze big business can be used to analyze the pump and well business just as well. The real trick, like evaluating any business, is to figure out what the numbers mean and how they can be measured and used to improve." facebook.com/WaterWellJournal WWJ November 2022 n 23 Mike Price is senior editor of Water Well Journal. In addition to his WWJ responsibilities, Price also con- tributes to the Association's scientific publications. He can be reached at mprice@ngwa.org, or at (800) 551-7379, ext. 1541. WWJ COTEY'S WELL CLEANING BRUSH + LIQUID DESCALER! TO LEARN MORE, CALL 800.457.2096 4410 MLK Jr. Blvd. • Lubbock, TX 79404 806.747.2096 • coteychemical.com YOUR WEAPONS OF CHOICE FOR IRON BACTERIA! Groundwater Week Booth #910

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