Appliance Care Business Planning Basics

I love the appliance care business and significantly larger industrial firms focusing on equipment maintenance. In such organizations, continuous business planning is necessary and instructive for those who keep technicians busy and effective. Notice I used the term continuous business planning, not budgeting. There is a significant difference.

As with any other business, we should never budget. Budgeting is an old-school concept introduced to us by the founder of McKinsey (his book is available as a reprint) during an era of big business with fat middle management, where command and control were the norm for achieving bottom-line results.

Budgets are worthless in small businesses. As a young controller, I only needed a few days to determine why Aldi never budgeted for its ultra-large organization and army of stores. They held the secret to getting better. Maintaining a line-item budget was not the solution.

Instead, the innovative solution for any business of any size, regardless of industry, is to model the throughput, OE (operating expenses), and the necessary investment to run the lean machine. The model is then updated monthly as actuals are integrated into the system. The goal is not to hit an arbitrary budgeted number. The goal is to get better. Great CEOs get that. Pretenders never will.

Some financial modelers call this approach continuous business planning (my friend Rand Heer, the creator of Pillar and Alight software, was the first to coin this term). I like to pair continuous business planning with HLP, which is short for high-level planning.

HLP Is the Starting Point

When I’m building a simple model for a results-oriented CEO for the first time, we start with HLP. There are several approaches to HLP, and one is not better than the other.

One approach is to start with demand (as in customer demand). The other approach is to start with supply (in this case, the number of techs working in the business) and then make assumptions about capacity, utilization, and pricing.

I’m taking the hybrid approach because the business in this example is a going concern. We also know the typical customer demand throughout the year. Accordingly, the video below will incorporate demand and supply into this HLP process.

To recap the starting point for appliance care HLP:

• know how many weeks of the year your techs work on average – we used 48 in our example
• know the overall utilization tech rate (I prefer using job slots, but older CEOs prefer billable vs. paid hours, and that’s fine, too)
• we need to know the average slot rate per job (an overall average for the past year)

We’re still not done with part one of our HLP for techs. We’ll finish up by examining tech profit. As revealed in the first video, we can do this on a tech-by-tech basis. Smaller firms under $5 million in revenue will probably not do this. Accordingly, I’m keeping this discussion at a macro level.

Adding The Final HLP Pieces

HLP is easy to explain and implement. More importantly, it leads to healthy dialogue throughout the entire organization. My favorite and best clients include every person from top to bottom in this simple planning process (that excludes addressing pay rates).

In the video below, we’ll wrap up by adding suggestions for overhead compensation, facilities, general and administrative costs, and marketing. I do not go too deep on each topic because I don’t want to get you bogged down in the details. This is a simple business exercise, not an abstract accounting or engineering project.

Final Insights

HLP is a fascinating exercise in educating appliance care owners on the simplicities of corporate financial performance in their businesses. I’m going to repeat some of the comments I made in each of the three videos above:

1. Start simple, and think plan, not budget. Budgeting is an illusion of control, leading only to monthly variance discussions. I know that because I’ve endured these conversations for over thirty years in front of incompetent decision-makers. On the other hand, business planners focused on improvement use HLP to help quantify what their new initiatives will yield.
2. Once the HLP is completed, start breaking it down by month and rolling it forward every month. My firm calls this process PRA™, which stands for Planning, Reporting, and Analysis. When we own the PRA™ process for VIP clients, G3CFO integrates the planning numbers with the actual results.
3. Are you even ready for HLP yet? In the videos, I mentioned that COGs and gross margin numbers should be easy to obtain. Smaller firms that generally use QuickBooks as a checkbook system commingle service and parts revenue. They also never count inventory weekly or monthly. HLP only works if the accounting is clean. If the accounting is not clean, it’s not because you have a terrible accountant. It’s because leadership does not take accounting seriously. Once that behavior changes, accounting will improve dramatically. When accounting is radically improved, HLP efforts can be started.
4. Maybe you picked up on this, but there is a grey line between HLP modeling and scorecarding. Scorecard data includes tech performance by day and week in terms of first-call and total completes. Firms that take accounting seriously can also integrate weekly financials into the scorecards, whereby actuals and targets can be monitored to track if our improvement initiatives are working. I once had a CEO ask about the difference between the business model and the scorecard we set up. This CEO was paying attention. In short, the HLP and the scorecard can eventually be merged.
5. Don’t forget to democratize the process. Show me a company that does not share the HLP process with techs, the warehouse staff, and the front office, and I’ll show you an ownership team that leads in fear and frustration. HLP is far more effective when everyone is involved in the planning process. Include every single person in the HLP process.

On a scale of 1 to 5, with the more significant number being positive, how is the HLP process in your organization, even if you run a business outside the appliance care industry? If you are not pleased, what will you do about it?

Bonus Points for VIP Clients Only

1. Move from monthly to weekly reporting (for scorecards and financials)
2. Use the weekly four-square in team huddles
3. Pipeline visibility and bending the marketing curve are critical
4. Accelerated ‘L’
5. Improvement sometimes starts with subtraction