Calculating Rate of Return

Calculating Required Rate of Return for Your Field Service Business

Calculating Required Rate of Return for Your Field Service Business

As 2017 is drawing to a close, we have been writing and putting together many different blog posts that contain business advice and links to articles, small books, and worksheets that can help you better manage your field service business’s finances in 2018. For example, at the bottom of this blog post, you can download a worksheet that shows you the ins and outs of calculating required rate of return for your company, and how you can save your business money by utilizing field service management software.

However, before you download the worksheet below, take a few minutes to read through this brief post on the basics of calculating required rate of return for your field service business. We want to provide you with a short introduction to the concept, and make sure that someone within your company is aware of how it works, and how to use it to save your business money and in turn, boost revenue.

What exactly is a required rate of return? In the accounting and financial world, the required rate of return is defined as, “The minimum return an investor will accept for a particular investment.” The easiest way to think about this concept in relation to field service businesses would be this example:

Your field service business buys something—e.g. a piece of shop equipment, a vehicle, or a new warehouse building.

You figure out how much money your company needs to make from this item or building in order for it to be a good investment.

*You can also think about hiring—amongst other aspects of your business—that will have an impact on your cash flow for field service.

As you read through this post, keep in mind that calculating required rate of return is different for each field service business, and is truly a subjective number. Think of it in terms of betting on a coin toss, where the odds of winning the flip are 50/50. You must ask yourself the following questions:

What would my business need in return to bet on that coin flip?

How much is my business willing to risk on this bet?

Just as everyone’s risk tolerance is different, so is every field service business’s required rate of return.

However, when it comes to calculating required rate of return for field service businesses, there are some items that are safe bets. For example, having your company invest in field service software is a sure bet when it comes to effective, worthwhile purchases that save your business money in the long run. In fact, we believe that the risk is so minimal when it comes to purchasing field service software that it is more accurate to classify the computer program as a competitive advantage that allows you to boost revenue and save money.

Although investing in field service software seems like a simple option when calculating required rate of return for your business, we understand that companies tend to hesitate before spending money where there is not a precise dollar figure that will be poured back into your business’s bank account. This is where the risk element comes into play because no field service business’s required rate of return will be the same when it comes to purchasing field service software.

Here is a quick, three-stage tutorial on calculating required rate of return when you are deciding whether or not to purchase field service management software for your business:

 

Stage 1: Calculating CAPM

The first thing you need do when calculating required rate of return for your field service business is create a capital asset pricing model (CAPM) to determine the equity cost. Here’s the formula:

 

CAPM = Risk-free rate + Beta (Market return – risk-free rate)

 

(For more about finding risk-free rate and beta, click here.)

 

CAPM is based on the assumption that buying a riskier asset like larger-than-required trucks or warehouse properties will yield a higher return, which is not always the case. This model is based on how much of a financial risk you are willing to take, as the final calculation is merely an estimate. Therefore, if you are hesitant when it comes to investing, overstate the CAPM value and compare the potential desired investment to a higher rate of return. Once, you calculate the CAPM of an asset purchase, you are halfway toward calculating required rate of return.

Stage 2: Calculating the Cost of Debt

This step is fairly easy when it comes to asset purchases. It’s simply the interest rate on the company’s debt obligations. If your field service business has two or more debt obligations, calculate the weighted average of those obligations.

 

Stage 3: WACC

The weighted average cost of capital (WACC) may be considered the same as calculating required rate of return. That being said, “How do you get WACC?”

 

Simply take the equity cost from stage one and the cost of debt from stage two, and combine them to find a weighted average. That number is the fiscal value that your project must exceed for it to qualify as a viable investment. For example, if your company invests in field service management software today, your company will be receiving benefits not only today or this year, but for years to come.  If your business calculates a WACC—which is also the rate of return—of 20%, and you spend $100.00 on the software today, your company must make $20.00 of present value money by the end of the investment for it to be worth it.

On the same note, the money you spend buying field service management software has more value today than it ever will in the future. Why? Because money in your pocket or that your business is spending today has the power to create more money in the future. Therefore, future money is not worth as much as today’s money. Today’s money needs to create value in the future at the rate of WACC for it to be a solid investment.

The Takeaway

More than likely, your field service business has been crunching different accounting and financial figures for years, and have good understanding of how monetary processes work. However, the landscape is changing, and software purchases and mobile apps are factors that must be factored into overhead costs. Field service management software is one of the most effective ways to integrate your company’s data. The worksheet below is helpful in calculating required rate of return and cost savings when it comes to purchasing field service software for your company.

Any other fiscal questions? Give us a call today—we would be glad to help.

Worksheet Savings


Optimize Cashflow

Optimize Cash Flow with Field Service Software in HVAC

Optimize Cash Flow with Field Service Software in HVAC

Let’s start with a quick, basic definition of cash flow: generally this is the amount of money being transferred into and out of a business, especially with regard to liquidity. It’s important to remember that “cash flow” statements conceptually are different from P&L, or profit and loss, statements. Accounting best practices determine P&L statements, which don’t necessarily monitor the amount of cash moving through your business.

Cash flow tends to be affected by these factors, especially in small business HVAC operations:

Accounts receivable
Inventory
Accounts payable
Capital expenditures
Borrowings and debt services
Timing differences

Here’s a quick example, from that Inc Magazine article linked above. It relates directly to field service. The author worked for a small business field service manager, who didn’t understand why he made money in a quarter — but lacked the cash to pay his bills. The explanation:

In this case, the difference between his net income and his cash flow was primarily a result of the purchase of a truck for cash, sales made during the period that were not collected (accounts receivable), estimated tax payments made in an amount different than tax expense for the period, increased inventory levels in preparation for the coming selling season, distributions to the owner, and principal payments on a bank loan.

Overall, this is the takeaway: You want to have positive cash flow in a business because it helps make everything else run smoother. Some of the most successful companies in the world — Google (Alphabet) and Apple — are thought of that way in large part because of their positive cash flow status. Now, if you run a small business HVAC shop in your primary geographic area, let’s be realistic: You will not have as much cash on hand as Google does. But there are ways you can improve your cash flow!

Most of positive cash flow in small businesses comes from effective tracking/monitoring of different aspects of your business, and that usually comes from integrated systems. In the case of an HVAC company, FSM software is usually the best bet. FSM software helps you integrate:

Inventory
Customer information
Scheduling and dispatch
Sales and marketing
Anything else you want to integrate (document storage, email, etc.)

Typically, the primary benefit of FSM software is that it allows for better communication and more transparency so that different silos within your business all can arrive at the same page. This usually makes your decision-making and data analysis more effective.

But in a cash flow context, FSM software tends to shorten the cash flow cycle for businesses — which is really useful in an SMB context. Better invoicing and billing (which happens with FSM software) leads to shortened billing cycles and more accrual of revenue; you can also use a metric within your FSM software, such as “Completed Jobs vs. Invoiced Jobs,” to showcase how your cash flow is moving relative to jobs you’ve billed out for.

Positive cash flow is all a part of getting the most out of your FSM software. How do you do that? And how can FSM software lead to increased profitability? We prepared a guide for you, which you can easily download now.

 

Cash flow tends to be affected by these factors, especially in small business HVAC operations:

 

  • Accounts receivable
  • Inventory
  • Accounts payable
  • Capital expenditures
  • Borrowings and debt services
  • Timing differences

 

Here’s a quick example, from that Inc Magazine article linked above. It relates directly to field service. The author worked for a small business field service manager, who didn’t understand why he made money in a quarter — but lacked the cash to pay his bills. The explanation:

 

In this case, the difference between his net income and his cash flow was primarily a result of the purchase of a truck for cash, sales made during the period that were not collected (accounts receivable), estimated tax payments made in an amount different than tax expense for the period, increased inventory levels in preparation for the coming selling season, distributions to the owner, and principal payments on a bank loan.

 

  1. Overall, this is the takeaway: You want to have positive cash flow in a business because it helps make everything else run smoother. Some of the most successful companies in the world — Google (Alphabet) and Apple — are thought of that way in large part because of their positive cash flow status. Now, if you run a small business HVAC shop in your primary geographic area, let’s be realistic: You will not have as much cash on hand as Google does. But there are ways you can improve your cash flow!

 

Most of positive cash flow in small businesses comes from effective tracking/monitoring of different aspects of your business, and that usually comes from integrated systems. In the case of an HVAC company, FSM software is usually the best bet. FSM software helps you integrate:

 

  • Inventory
  • Customer information
  • Scheduling and dispatch
  • Sales and marketing
  • Anything else you want to integrate (document storage, email, etc.)

 

Typically, the primary benefit of FSM software is that it allows for better communication and more transparency so that different silos within your business all can arrive at the same page. This usually makes your decision-making and data analysis more effective.

 

But in a cash flow context, FSM software tends to shorten the cash flow cycle for businesses — which is really useful in an SMB context. Better invoicing and billing (which happens with FSM software) leads to shortened billing cycles and more accrual of revenue; you can also use a metric within your FSM software, such as “Completed Jobs vs. Invoiced Jobs,” to showcase how your cash flow is moving relative to jobs you’ve billed out for.

 

Positive cash flow is all a part of getting the most out of your FSM software. How do you do that? And how can FSM software lead to increased profitability? We prepared a guide for you, which you can easily download now.

FSM Software


FSM Software

How Field Service Software Pays for Itself

How Field Service Software Pays for Itself

If you’re a small business field service operation, let’s be honest: Many decisions are made on cost, and money, plus the opportunity for profit, is important. You want to deliver great service and get referrals and positive customer feedback but, at the end of the day, you need to make money. A part of making money, obviously, is keeping costs down.

There’s research saying that about 37 percent of small business service businesses — so about 3 in 8 — are still operating according to paper-based models around scheduling, inventory, finances, and more. Even if that number is close to 25-30 percent, that still means about 1 in 4 small service businesses have not moved over to field service management software, also known as FSM software, programs.

FSM programs basically allow you to integrate different areas of your business, so that they “talk” to one another. That way, if a technician needs to go across town for a specific customer, inventory will know he or she needs to pick up something for his or her truck — and all of this happens within the software, without the necessity of human prompt (usually). It’s a big timesaver.

So if field service software saves time and makes your technicians more effective, why don’t more small businesses use it?

The answer seems pretty logical: cost. People are afraid of the cost, or — probably more specifically — people are afraid that the cost won’t lead to a justifiable return.

Let’s keep this fairly simple: field service software does pay for itself. There are dozens of reasons. We can start with four:

Cuts operating costs: This is a huge advantage of FSM software. You drastically cut the costs of operating job management functions and other logistical tasks.
Enhances productivity: In the most general sense, enhanced productivity usually leads to increased profitability. With FSM software, you create better lines of communication between front office, management, and technicians. This creates less clutter and confusion around tasks and necessity, which leads to more effective priority management at all levels.
Eliminates ‘dead time:’ Dead time is when technicians have to return to the main office between two jobs to grab something (a part, customer information, etc.) If you have a FSM with mobile integration and connection to customer data/inventory, these dead-time trips are no longer necessary. Time is money, after all.
Grows revenue on-site: With less time necessary for logistical tasks, technicians have more time on client work. More time on client work means more customer billing, and sooner as opposed to later.

If you’d like to understand more ways that field service management software both (a) pays for itself and (b) sets you on the path to profitability, download our eBook now. There are more reasons within it, including some tied to data and metrics — which is becoming increasingly important for small service businesses.

FSM Profitable


Simplify Business

Simplify Business Processes and Optimize Costs in Field Service

Simplify Business Processes and Optimize Costs in Field Service

If you’ve been in business for over 10 years, think about business “then” vs. business “now.” A lot of aspects are different — and most involve technology, in all likelihood. This idea has been held up by research from Bain and Company. In their research, 20 years ago — so yes, more than 10 — the majority of business challenges were external. That means a challenge like “We don’t have the technology to pursue this idea.” Today, though? 94% of business challenges are internal.

Most of these internal challenges are around processes and people. The people side is hard for many — rather than treating your employees as interchangeable, as some companies will do, you need to treat them as valued members of your business plan. This reduces churn and turnover and keeps knowledge in your organization. That’s good in the short and long term.

This article is going to be more about processes, though. A lot of times, as field service organizations get bigger or take on more SLAs and contracts, they tend to add more layers of process to everything they do day to day. This is logical because process implies control of situations, and being in control is a good thing when dozens of urgent client needs are flying into your office every day.

The problem is: a ton of processes plus a lot of clients calling in with urgent fix-and-repair needs do not make an effective business. You might make money, yes. That’s good! But everyone will get burned out, staff and technicians will begin to leave, and it will be hard for you to focus on growth and other priorities because you’re spending so much of every week on racing around and putting out fires.

Rather, the antidote to this go-go-go busy-busy-busy business climate we live in is to embrace the opposite: simplicity.

Research from Stanford — it was done jointly by their business school and engineering school — shows a “Goldilocks Effect” around processes. In short:

Companies with too few processes and rules tended to get very little done
Companies with too many processes and rules tended to get more done in terms of providing service — but oftentimes it wasn’t what their clients/customers actually wanted.
Companies with a degree of basic rules (but not too many) tended to be the most effective in terms of growing and developing their businesses.

The basic idea: don’t over-complicate what can already be a complicated industry. Come up with some core business processes, integrate them, and use that integration to drive you forward.

One of the easiest ways to simplify your business processes is to use field service management (FSM) software programs. These integrate the different areas of your business, including:

Scheduling/Dispatch
Mapping and Routing
Work Order Management
Inventory
Customer information
Sales leads

One of the biggest advantages of field service software is information transparency, meaning that everyone in your FSO can be on the same page about what’s going on in the business. This prevents silo-by-silo (scheduling vs. sales, for example) issues that can hurt growth.

Now, the biggest concern people tend to have about field service management software is potential cost. There is the old adage that you need to “spend money to make money,” and that’s true. But if you’re a small business field service operation, can you afford it? And can FSM software help you optimize costs?

To learn more about the cost and purchasing side of FSM software, download our eBook on the topic now. It will walk you through different cost equations to consider when evaluating FSM software.

Cost FSM Software


Quickbooks Integration

As a Service Tech, You Want Quickbooks FSM Integration

As a Service Tech, You Want Quickbooks FSM Integration

Even if your field service operation is a small business, there still might be “silos” within it. One person might focus on scheduling, and another might focus on bills and invoices. Small, family-owned FSOs can have silos – separate departments — just like enterprise-level companies can.

Because of this, sometimes it’s confusing to FSO managers that a program like Quickbooks — which is for financial and accounting management — is important to service technicians.

But it is! And here’s why.

When a service technician goes on a call, he or she has a lot to manage. First and foremost, whatever the problem is needs to be fixed or repaired. That has to be done to keep the customer happy. On top of that, the technician needs to display a high degree of customer service. He or she needs to engage with the clients, listen to them, and even discuss other options with them (maybe up-selling some of your other service offerings). Finally, there’s billing.

The billing stage is sometimes overlooked in the process because billing doesn’t have to occur at the client site. It could occur later, of course.

But many clients like the option of paying their invoices right after the work is done. Everyone is busy, and waiting to pay only adds a tier of responsibility for the client. If the work is done and the problem is fixed, many customers will just want to pay their bills right then.

There are two things that can happen at this stage, typically:

You use an integrated Field Service Management system and it’s relatively easy for the technician to bill the client right there.
You don’t use an integrated system and it’s hard and time-consuming and ultimately the technician leaves without billing the client.

Consider the second bullet point for a second. In this situation, the technician did everything right. He or she fixed the main problem, provided good customer service, and engaged with the customer. And now, through no fault of his or her own, the technician is leaving the site with a slightly unhappy customer. The customer couldn’t pay, so that’s another thing he or she needs to manage down the road.

This is why Quickbooks (or another financial system) integration into your FSM software is crucial. You don’t want your technicians to do everything right on a job and still leave behind unhappy customers. You want the whole process to be seamless. You won’t hit that goal every time out, but it should be the goal every time a technician is dispatched anywhere.

FSM software benefits your business by integrating the different areas of your business, from billing to scheduling to inventory to workflow management. But it does cost money to buy FSM software, yes.

Rather than keep telling you about the ROI of it, let’s show you. We work with a company in California called Leete Generators. They are, somewhat unsurprisingly, a generator company. Maybe you’re an HVAC company, or an electrical FSO. It doesn’t matter. You will still see the ROI of FSM software here.

How? Download our look at what Leete Generators did with FSM and how that helped the company grow. You’ll see specific numbers and features that it utilized. If you have questions about this could apply to your business model, definitely reach out. We love helping small business FSOs achieve similar types of success as Leete did.

ROI FSM