The Offseason Book: Chapter 3: Lockdown Mode (Cure 1)

Chapter 3 lockdown mode our first cure for seasonitis is lockdown mode. It's a good fit for people who like the freedom of having an off season. Basically, you shut down during your typical Q4 collapse. This cure might also be a particularly good fit for people who work other jobs with a seasonal component. Teachers are busy for nine months each year, but in summer they have time to run a home service business. Business owners with other careers may also enjoy Tier one. Finally, if you have most or all of your trucks and equipment paid off, if your business has low levels of debt and loans, Cure one could serve you well. If you have massive debt payments, those won't stop when you close down the business for the off season, you'll have negative cash flow even without payroll expenses and jobs getting completed. This may prevent you from closing down and going on an extended vacation or hiatus from the business. Lockdown mode works best for certain business situations. Consider this approach if you have another seasonal job, like teaching or firefighting. Workers in the oil fields may also enjoy Tier one. You might have a few months off, making it a good fit. Your business should be debt free with all equipments and equipment paid in full. If you check all those boxes, lockdown mode will likely serve you well. Otherwise, this might not be the perfect solution for your business. For Cure one to work, we need to identify your fixed expenses. Fixed expenses are the enemy of the lockdown approach. If you have too many fixed costs, you will not be able to use Cure one to solve seasonitis. Fixed expenses include rent, lease payments, software, subscriptions, and auto and liability insurance. These costs don't fluctuate with your revenue. If your revenue drops by 50% next month, your lease payments stay the same. Insurance bills still come in your shop space. Rent doesn't change. Your debt. Payments are still due. These fixed costs continue to drain your resources and even when you're closed for the season, think of fixed expenses as costs that aren't tied to your revenue. They will be the same every single month no matter how much money your business brings in. Find your total monthly fixed expenses. This is the amount you would pay next month if you didn't work. Include loan payments, licensing fees, insurance, rent or mortgage, and staff who receive salaries. List all these expenses in your worksheet and then add them up to find your total monthly fixed expenses. This number matters. Lockdown mode gets tougher as your fixed expenses rise. Lockdown mode won't work if your fixed costs in Q4 are higher than your profits from Q1, Q2, and Q3 combined. Let's say from April to December, you make $100,000 in profit. Your monthly fixed expenses are $40,000. You have significant debt, expensive leases, office salaries, and costly facility rent. Your off season is January, February, and March. In this case, Q4 collapse is the first calendar quarter of the year. In this case, lockdown mode will will not work. The math is simple. Your fixed monthly expenses $40,000 multiplied by the three months you shut down equals $120,000 in cost. But the profit you make during the other three quarters is only 100,000. You would lose $20,000 for the year by implementing lockdown mode. If you aren't sure what to do about your fixed expenses, consider enlisting help. Write down all your outgoing cash sources. Give that list to someone else, like another business owner, spouse, or your general manager. Ask them how they would cut your expenses in half. Don't let pride get in the way. Get curious about their perspective. This is an exercise. You're not committing to anything yet. Like exercising in the gym. There are times you lift heavy weights. It is not a practical movement or weight for functioning in normal life, but it makes you stronger. This exercise is the same. Imagine if you had to cut your fixed expenses in half. Where would you start? Could you downsize your shop rent? Could you negotiate better lease terms? Could you get more savings on your insurance premiums? This can help you gain clarity in your thoughts about lockdown mode. It's also generally a good mindset for managing business expenses. You can start in small steps. Select one expense category and assess the feasible amount for reduction. Is it 20%? 30%? Even 50%? Often, I find the most effective approach is paying off debt. If you have taken on a lot of debt from truck payments, equipment loans, bank loans, and credit cards, paying it off can lower your fixed costs a lot of Once you pay off the debt, those monthly payments disappear completely. Not only will this help you prepare for lockdown mode, but it will also improve your margins throughout the rest of the year. Variable costs change based on your business activity. Unlike fixed costs, if you sell more work and revenue increases, variable costs go up. In home services, we refer to your main variable costs as cost of goods sold, or cogs. These include three key materials, direct labor, and subcontractors. If you sell more jobs next month, you will need to hire more people. That is why wages are a variable expense. If you sell more jobs next month, your office rent will not change. This is why people consider rent a fixed expense. Variable cost vary depending on your revenue. If I double my landscaping revenue next month, I would likely need more materials. I would also need more direct labor hours or subcontractor help. We cannot consider these fixed costs because they increase as revenue increases. Think of it like making a chocolate bar. The ingredients include cocoa, sugar, milk, a wrapper, and cardboard boxes. These are the materials used to make the product. You also need direct labor. This includes people who mix ingredients, run the factory and package the product. You may subcontract the transportation of the bars to a trucking company. Materials, subcontractors and direct labor costs increase when you produce more chocolate bars. If you are unsure about your cost of goods sold, you'll find a helpful worksheet on page six of the workbook. For most home service businesses, the gross profit margin falls between 40 and 70%. We usually spend 30 to 50% of our revenue on COGS. This mainly covers the direct labor of our field workers. Now that we have figured out our monthly fixed expenses and cogs, we can see if lockdown mode works for your business. To find your monthly break even revenue which covers your fixed costs, use this formula. Monthly fixed expenses divided by your gross profit margin equals monthly break even revenue. This formula is a rough guideline. It shows how much revenue you need each month to break even and cover your fixed expenses. You must pay them no matter how much money you make. Why is this important? Calculating your breakeven revenue stops seasonitis from hurting cash flow and profits. Reaching this monthly break even amount will protect you from facing seasonitis. You may see changes in revenue, but you won't lose money. As long as you can earn more than your break even amount each month, you'll stay profitable. If they're months with lower revenue than we calculated, you will lose money. This could lead to seasonitis affecting the business. To improve the accuracy of this calculation, subtract your material markup from your monthly break even revenue. If you spent $100,000 on materials and charged $150,000 to customers, you made an extra $50,000 from markup. Subtract other fees too. This includes estimate fees, dump fees, or revenue from sources beyond actual labor. We want to find out your break even labor revenue. This is the amount of labor revenue you need each month to cover your costs. The workbook on page seven walks you through this calculation step by step. Now, do not get hung up on the exact numbers. If you don't track them, estimating is fine. Go over this part a few times. The math can be a bit dense. To find your break even labor revenue, divide it by your average man hour rate. This rate is how much you charge customers per hour for each employee. This gives you the number of monthly labor hours you need to sell to break even. For efficiency calculations, I use an average of 120 hours each month for every employee. This represents about 30 billable hours per week in a 40 hour work week. A 75% efficiency score. This efficiency score accounts for travel time setup and other non billable activities. Bill in other words, employees spend 75% of their day generating revenue. They complete billable or budgeted hours during that time. Equation Number of monthly budget hours to break even divided by 120 equals number of full time employees needed to break even. This calculation shows how many full time employees you need to break even in your off season. The result will likely be a decimal number like 2.4 or 3.6 employees, giving you a clear target for smallest staffing. The goal is to know how many employees and how many labor hours you will need to hit to break even. The lower this number, the easier it is to use Q1 and close down the business for the off season. Seasonal Work Demands Seasonal labor this presents the primary challenge with lockdown mode. What happens to your team when you close operations? Consider these Advertise for short term positions with clear details. Many people look for temporary work. This includes students on break, people moving soon, or anyone facing big life changes. As business owners, we often forget that not everyone wants year round employment. Second, consider geographic flexibility. The H2B program allows businesses to hire foreign workers on short term visas. Taking this concept further, could you hire from areas outside your immediate region? A town over the next county? In areas where living costs are lower, workers may accept $25 an hour with enthusiasm. Meanwhile, your local market may demand $35 an hour to get a decent worker. Can you run recruitment ads to these lower cost areas? Could you relocate workers for your busy season? Could you pay for their housing? Could you offer company provided transportation? This approach lets you match your seasonal demand with your labor supply. The goal is to adjust your staffing to match your break even number of employees. For lockdown mode, we assume we will close down and have zero workers. This forces us to look for temporary and seasonal labor. This means laying off our team at the end of the busy season. But what if no one wants to return after the company lays them off? This is a serious concern. Experienced team members are very important. This is especially true when the spring rush begins and you need to train new employees. My labor strategy for lockdown mode is to offer a comeback bonus if you get your best employees to come back to Work after laying them off. Pay them $2,000. You could pay them a few installments throughout the spring rush. You might think, I can't afford $2,000 per returning employee. But consider the cost of replacing them. First, calculate the cost of finding a new employee. Let's run some hypothetical math. A scheduled interview takes 30 minutes. Only half the people show up. Only one third of the interviewees receive job offers. Only half of those accept. This means you might spend six hours finding one new hire. Assume your time is worth $120 an hour. As the CEO of the business, note this is reasonable since we charge customers $80 per hour for fuel workers. It takes six hours of your time to find a new employee. That means it costs $720 of your time to find a new employee. You have a new recruit, but they haven't even started work yet. First, let's figure out the numbers for your business. Then we can calculate the cost of training and onboarding that new employee in your workbook. Note the interview time, for example, half an hour. Then estimate the fraction of candidates who show up, like 5 or 50%. Calculate how many of those who interview Receive job offers 0.33 or 1/3. Finally, determine what percentage of offered candidates accept the job offer. 0.5 or 50%. Run this math and you will discover how many hours you spend hiring one employee. Multiply that by your hourly value to find the actual cost of recruitment. Let's examine the cost of training a new employee and compare it to the cost of paying a comeback bonus. Let's assume that a new hire in a home Service business requires 60 hours of training. Many businesses need much more time. In these 60 hours. The new employee works at about half the efficiency of a trained worker. The trainer's productivity drops to about half when they have to teach. This reduces their earning potential. Finally, consider your retention rate. What percentage of new hires last a full month? Often it's only about 50% for entry level labor positions. Reduced efficiency affects both the trainer and the trainee. Plus, many new hires may leave. So you're spending around 120 hours to ensure each team member is well trained and stays for one month. Assume that you charge $80 per hour of crew time to customers. That means that $9,600 is the cost to train that new employee. That is, in addition to the $720 cost to find and recruit them. I prefer paying employees $2,000 to return instead of spending $10,000 on training, interviews and lost productivity to replace them. Employee churn affects your Finances, but it doesn't appear as a separate line on your profit and loss statement. There's no off season churn expense entry, but it makes your crews less efficient. It also wastes your time during spring hiring and training seasons. This can keep your business smaller than it could be. Let's shift our focus now. We've talked about fixed expenses, variable expenses, and the real cost of replacing employees after the off season. Let's continue discussing cure one Lockdown Mode Revenue targets to maximize profitability is a math problem, not guesswork. This is what we call capacity based growth. There are three capacities to consider. Labor capacity, asset capacity, and personal capacity. Let's start with labor capacity. How much should you grow your business revenue to maximize profitability? It's about how much revenue your employees can generate without going into overtime. They shouldn't work more than 40 hours a week. How much revenue can you generate with your current workforce? You also have asset capacity. Think about how much money your trucks and equipment can make if they operate full time. Finally, consider your personal capacity. How much revenue can you make without feeling overwhelmed? Without physical, family or spiritual breakdown? How big can you build your business before you can no longer maintain your well being? In short, how big a business can you build without losing your marbles? Let's examine labor capacity first. On page nine of your workbook, you can calculate your monthly billable hours per employee. We usually estimate 120 hours. This equals about 30 billable hours in a typical 40 hour workweek. This assumes they spend about 25% of their week driving and doing tasks that don't generate revenue. This could include safety meetings, equipment maintenance or material loading. Multiply these 120 hours by your hourly rate charged to customers. Then multiply that by the number of employees you have. This shows how much labor revenue you can earn each month without going over capacity. Remember, this is labor revenue only. If material costs are a big part of your revenue, you should increase this number to find asset capacity. Multiply the monthly labor revenue per employee by the number of employees in each truck. Then multiply that by your total number of trucks. This tells you our asset capacity. It's the monthly revenue we can make without overworking our trucks. We avoid running them seven days a week and neglecting maintenance like oil changes. This ensures high asset utilization. I don't want trucks sitting idle throughout the week. Personal capacity refers to the revenue you can generate while staying sane. This is a subjective personal assessment. It is hard to create an objective measurement or equation for your personal capacity. Only you can answer this. You Might also ask key employees, your spouse, a therapist or others for honest feedback. They can help you see how big you can grow this business. You can boost your personal capacity by learning new skills and increasing efficiency. Reading this book helps you do that. Max profit happens when you earn the most money sustainably. This occurs near full capacity in all three areas. You're getting the most out of your employees, trucks and equipment. You're using your skills and pushing yourself to your full potential. What you do when you hit capacity determines whether you're in growth mode or profit mode. In my experience, it is hard to optimize for revenue growth and become more profitable at the same time. These are different strategies. If you're in growth mode, you're buying trucks and hiring employees. If you're in profit mode, you're not expanding equipment or staff. You're raising prices. You hope to lose some customers. You hope to reduce your close ratio. You do not increase capacity. You cannot serve all the customers coming in. You use price increases to stay under capacity limits. When you hit capacity with the maximum number of customers you can serve, you have two options. You can either grow by adding trucks, people and equipment to boost revenue, or you can raise your prices. This may result in fewer customers accepting your bids, but it can boost your profits without needing to grow capacity. Exceeding your capacity limits leads to short term profits, but long term burnout. In the short term, you can run your truck seven days a week and grind them into the dirt. I miss oil changes. I don't grease the bearings. I forget to rotate the tires. I neglect the squeaky brakes. In the long run, this will come back to bite me. Unexpected repair costs or worse yet on road accidents could occur. With labor. I can force people to work weekends, holidays and 50 to 70 hour weeks in the blazing heat. In the short term, this will increase profits, but in the long term, they'll burn out. Working your employees harder this weekend will boost your numbers. But over time, they will leave. They might not show up to work. They might complain. They might stage a mutiny with other employees. Exceeding your personal capacity will cause your relationships to fall apart. Your physical and mental health will deteriorate. In the short term, exceeding personal capacity will increase profits. In the long term, you will burn out. Burnout. Personal, financial, physical and emotional causes many failures in home service businesses. To be conservative, use the lowest of your three capacity measurements. You've calculated your labor capacity, asset capacity and personal capacity. I recommend growing your business only to the lowest of these three numbers. Exceeding any single capacity can lead to system failure over time. This lowest capacity figure begins becomes an excellent monthly revenue target. You can boost asset capacity by buying more trucks. Increase labor capacity by hiring more employees. Also enhance personal capacity by gaining new skills and knowledge. But the lowest capacity number provides a realistic revenue goal. Subtract your lowest monthly revenue during the off season from that lowest capacity number. This calculation shows your excess capacity in the off season. It's the gap between your current monthly revenue and your max revenue capacity equation. Lowest capacity, revenue, personal asset or labor minus lowest monthly revenue equals excess capacity. Excess capacity will keep you poor. If your trucks and employees are aren't utilized to their maximum capacity every day, you're leaving money on the table. Why? Because you don't need any more fixed expenses or assets to grow to capacity. You already have the trucks. You already have the employees you need to maximize their use. You find all your profits here. When you reach capacity, your net profit nearly equals your gross profit. Why? You don't have to buy more trucks, rent a larger shop or raise insurance coverage. You only need to cover the variable costs, such as wages. You're paying for the fixed expenses of 100,000 per month business, but only generating $40,000 a month in revenue. That extra $60,000 difference is hiding your profit. Grow to capacity, reduce excess capacity, make more money. But during the off season, excess capacity soars. You're still paying for your trucks, equipment and fixed expenses, enough for 100,000 per month business. But now you're only bringing in $15,000 to $20,000 in monthly revenue. Your excess capacity skyrockets in the off season. This is why many home service businesses face financial struggles. So what's the fix for cure one? Lockdown mode. The solution is to reduce labor capacity during your off season. Lay off your employees. Sell off trucks to reduce asset capacity. Only hire seasonal and temporary workers. Let's now look at Q4 collapse through something I call the 4L framework. Liquidity leads, labor and leadership. Every business, whether it has five people or is a Fortune 500 company, goes through this cycle. Liquidity is money. You take that money and you convert it to leads through Facebook ads, print marketing, Google Ads and other advertising channels. But once you have plenty of leads, you can't do all the work yourself. The next constraint becomes labor finding people to do the actual work. When you grow past 10, 15 employees, leadership becomes your next constraint. You need a crew leader, general manager, or a C suite. But as you add this management layer, your profit margins shrink because of the overhead costs. The constraint becomes liquidity again, and the cycle begins anew. This Is the constant growth cycle in business. One of those four L's constrains you. Fixing the next constraint unlocks growth. This is what business owners mean when they say they are taking the business to the next level. When they buy more trucks, hire employees, find general managers, and open a second location, they are completing the next cycle of the 4L framework. But this creates an exhausting game of whack a mole. When you solve your leads constraint, you may struggle to hire enough employees. You now have a labor constraint. Once you hire enough workers, you realize you need someone to manage them. You now have a leadership constraint. Once you find a great management team, your profit margin drops due to the extra overhead expense. You are facing the liquidity constraint again. As your business grows, the constraints on growth shift, often within the 4L framework. Now apply this 4L framework to a business suffering from seasonitis. This business has a Q4 collapse. During winter, leads disappear. With no leads coming in, you have excess labor capacity. When spring rush comes, you've either let everyone go or they've left. Due to not having enough hours during spring, you find yourself with no experienced laborers. An influx of leads is pouring in. You're forced to turn away business. You don't return customer calls. It takes weeks to provide estimates. Why? Because you have no labors. And you don't have laborers. Because back in winter, you had no leads. To keep them busy, you had to lay them off or fire them. This creates a leadership vacuum. During summer and fall. With no tenured employees, no one is ready to become a leader or manager. Nobody can take responsibilities off your plate. You can't delegate the result. No liquidity. The 4L framework experiences significant disruption due to your off season. Without money, you can't afford to grow the business. Without liquidity, you can't invest in more leads next spring to take your business to the next level. Off seasons will keep you poor. The goal must be to fix the off season, to get steady leads all winter long. By doing that, you'll keep your labors through the winter. When spring comes, they'll be ready, trained and experienced, not newbies. These employees have prepared to handle the busy season. Since you kept your team all year, you can delegate tasks in the summer and fall. As your business grows, you can hand off sales, operations and administrative tasks. You can develop leaders within your organization. You can't grow your business if you run out of cash in the off season, you can't reach the next level in the 4L framework. You need leads during slow months, losing your best employees and leaders during Downtime makes it even harder. This vicious cycle will impose ongoing restrictions on your growth. You won't be able to progress to the next stage of the 4L framework. You will remain stuck. You will remain poor. I didn't write this book to tell you to shut down your business for three to four months. Cure One Lockdown mode for seasonitis is a patch job. It's like wearing a mask during the COVID 19 pandemic. You can still get sick. You can still die. Shutting down the business for three months sounds awful, especially for those like me. If you can keep your fixed expenses low in the off season and shut down, well, that's great. If you can lay off your team and get them to return during the spring rush, you using a comeback bonus, that's fantastic. But my approach is all gas. No breaks. Aggressive by default. Do not accept an off season. Never lose money. Cure one concedes victory to Seasonitis. We bow down and say we can't overcome this challenge. So we'll lay everyone off and lock down. Building anything more than a lifestyle business in lockdown mode will be tough. Letting all your employees go will hurt your business. If your revenue falls to zero for three to four months, your business value will also drop a lot. No one wants to buy a business where revenue drops 100% for any period of the year. Buyers must take on debt to buy the business. This raises their fixed cost. They can't afford to close down for three to four months each year. The off season is the time to go all in in the next four years of seasonitis. Our goal is to step on the gas when your competition is slowing down. We want to hire employees when your competition can't afford to. We want to run ads when they can't afford to. We need to figure out how to buy equipment when your competition can't afford it. They're selling their equipment because of cash flow issues from seasonitis. This means you can buy it for a fraction of the price. When they play defense, we go on the attack, full offense.