Setting the Standard - Service
In this series of articles we want to take a look at the RTC Standard Chart of Accounts for the Home Inspection Industry. This structure is a foundational building block of our Accounting Service. We will discuss why we set up the chart of accounts the way we did and what we do with it.
Part 3 - Service
Service expenses, the bread and butter of the business. Marketing and administration certainly fill vital roles, but the revenue is generated by the service, and the service expenses are the largest share of cost.
When we look at the service costs, we see a mix of fixed and variable costs. Understanding the difference is vital to forecasting and engineering a profitable business model.
Some line items that tend to be fixed costs in service are Development & Training, Dues & Subscriptions, Tools and Equipment, and Uniforms. They are what they are, and should be fairly consistent. These costs as a percentage of revenue will fluctuate as revenue rises and falls, so they should be thought more in absolute terms, or as a percentage of income over a longer period than a month. A dollar saved in fixed cost is a dollar added to profit.
Lab Services/Testing and Outside Services (contracted inspections and ancillaries) are mostly variable costs, or blended costs. The key thing about variable costs in terms of profitability is they are multiplied. These costs are a percentage of each dollar, going against the margin on every dollar of revenue. So every dollar saved in a variable cost should be many dollars added to profit. This makes analysis more critical when looking, for instance, whether to farm out an ancillary or perform it in-house. We are always glad to help look at these analyses and the way we structure our chart of accounts enables us to do that efficiently.
Service payroll is almost always the largest cost to the business and is vital to understand thoroughly. Payroll can be fixed, variable, and often blended. Pay structure can really impact profitability. Salaried inspectors are a fixed cost. Hourly inspectors should be variable, as long as hours are tracked to jobs correctly. Pure commission is a variable cost and commissions added to a salary or base pay create a blended cost. There are pros and cons to each pay structure, and while comparison to like-size companies is useful, the critical part to get right is to thoroughly understand the financial implications to weigh the choices your business faces to be able to make the right decisions.
Vehicle expenses round out the service category. We find that this can be an overlooked expense on the P&L, and a lot of different ways inspection companies choose to operate, from all fleet vehicles, to mileage or fuel reimbursement, to a flat allowance. Each has different implications in understanding the fixed/variable cost structure and the impact on bottom line profitability.
With service expenses, an important consideration is the consistency and accuracy. Ensuring that all the expenses that hit service relate to service. Meals for example, we usually need to work with clients to ensure the service meals and marketing meals are categorized correctly. Payroll should be periodically reviewed carefully with the RTC Accounting team to ensure proper allocation, that managers and owners are broken out proportional to the time spent on inspections vs. marketing or admin.
The chart of accounts is organized in a way to facilitate deeper analysis of company financials. With an understanding of the categories, we aim to work with clients to dive deep into the numbers to correlate the operational levers with the financial results, to achieve your business goals.