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Business Terminology

Good communication demands a clear meaning of words. The English language allows for a lot of ambiguity. If you have a word or term you would like clarity for our industry please submit it and we will reply and post it here for others to better understand.


"Profit Center"


Investopedia explains 'Profit Center'

A branch or division of a company that is accounted for on a standalone basis for the purposes of operational or gross profit calculation. A profit center is responsible for generating its own results and earnings, and as such, its managers generally have decision-making authority related to product pricing and operating expenses. Profit centers are crucial in determining which units are the most and least profitable within an organization. Some people call this "Departmentalization".

Investopedia Say:

The concept of profit centers enables a company's executives and management to determine how best to focus its resources to maximize profitability. In order to optimize profits, management may decide to allocate more resources to highly profitable areas, while reducing allocations to less profitable or loss-making units.

Not all units within an organization can be tracked as profit centers. This is especially applicable to departments that provide an essential service within an organization, but do not generate their own revenues. Some examples of these include the research department within a broker-dealer, the administration arm of a company, and a unit that provides after-sales support in an organization.

My definition for the home services industry is close to this definition. Since the Demand curve for services is typically feast and famine we are always looking for ways to use our existing resources that generate revenue be utilized to the maximum to prevent layoffs or supporting the operational costs from profits when no revenue is generated. As such we will shift resources. Therefore by employee we will measure the seasonal profit center even when we have overlaps to be sure we are always getting the most out of the resource regardless of the season.

"Productivity"

This could have different meanings within an industry, company and even job descriptions.

Generically speaking productivity is related to time it takes to produce a product or service. The faster the more productive. That said evaluating tools with expectation of saving time becomes "more productive". That said understanding a norm for new employees to hit in a certain amount of time that makes the company money at a normal rate is a fair and equitable means to manage.

For me and my overhead, I knew that my tech's were breakeven productive in plumbing with 8 technicians, 48% time in front of the customer with an average ticket of $475 and no overtime. 

If you do not measure "Time in Front of the customer" then you can not hold your dispatcher accountable. To find your breakeven and 20% Profitable "Productivity Rate" by month, look at the P&L for the same time period. Now you will know your dispatcher is doing a good job for you. The dispatcher KPI (Key Performance Indicator) is average technician time with the customer based on your Ticket Average that is reflected on the P&L.

"Gross Margin Per Hour" - (MPH)

The way a Profit and Loss statement works in the Service Industries is unique. We include Technician PAyroll, Vehicle Fuel, Vehicle Repairs Materials Equipment, Permits, commissions, etc. As Cost Of Goods. The definition of COG's is any costs associated to Revenue. All of these are also the responsibility of the Operations Manager. So really we can say that Gross Margin is a reflection of operations. Since Productivity is measured by the hour we divide the Gross Margin per tech by the techs hours to get MPH. Gross margin is "What's left for the company in Profit AND Expenses. These are in the control of the General Manager/Owner.