Annual planning: 'we want to grow 20%' is a wish with a number attached

Overhead, and the number it forces

The second step is listing what the company spends regardless of how much work it does. Rent, insurance, vehicle payments and insurance, software, phones, the office salary, marketing, accounting, licenses, and the owner's salary — which belongs in overhead and is left out of far too many small-company budgets, producing a plan where the owner is the only unpaid position.

Add it up for the year. Then divide by the billable hours from step one. That single figure — overhead per billable hour — is the most useful number a service business can own, because it converts a pile of fixed costs into a per-hour amount that any pricing decision can be checked against.

A company with $384,000 of annual overhead and three crews producing 1,426 hours each has 4,278 billable hours and $89.76 of overhead per billable hour. Every hour sold below the direct cost plus $89.76 loses money, no matter how busy the schedule looks.

Working back to price

With capacity and overhead in hand, price stops being a guess. The chain is: direct cost per hour, plus overhead per hour, plus the profit the business needs, equals the rate.

Continue the example. Direct labor at a fully burdened cost of $41 per hour — wage plus payroll taxes, workers compensation, benefits and paid time off, which typically adds 25% to 45% on top of wage. Add overhead of $89.76. That is $130.76 before a dollar of profit. A 15% net margin on the sale requires a rate of about $154 per hour, and a 20% margin requires about $163.

This is the moment when many owners discover their published rate is below their break-even and that the busy year they just finished produced nothing. It is also the moment the budget becomes useful, because now the options are visible and specific: raise the rate, cut overhead, improve billable hours per week, or change the job mix toward higher-margin work.

Spreading the year across twelve months

An annual total hides the two problems that actually threaten a service business: seasonality and cash timing.

Take the annual revenue figure and distribute it across the months according to last year's actual pattern, not evenly. Most trades have a shape — a slow first quarter, a summer peak, a fall rush before the weather turns — and that shape determines when money is tight. Then lay the costs on top. Overhead is mostly flat, which means the slow months consume cash that the busy months have to generate in advance.

Two additions make this genuinely predictive. Put payroll on the actual pay dates rather than as a monthly average, because a month with three pay periods is a real event. And offset receivables: revenue billed in June that gets collected in August should appear in August on the cash line. A company can be profitable on paper for the year and still be unable to make payroll in March, and this is the exercise that shows it in advance.

Costing growth honestly

Adding a crew is the most common growth decision and the most commonly underestimated. The visible cost is the wage. The real cost includes the burden on that wage, a vehicle with insurance and fuel, tools and stock, the training period during which the person produces below capacity, and the additional dispatch and administrative load that a fourth crew places on an office built for three.

It also includes a ramp. A new technician does not reach full billable hours on day one; three to six months is normal. A budget that books the new crew at full production from month one is off by tens of thousands of dollars in the exact months when the cash is tightest.

The honest test is straightforward: at the planned rate and utilization, how many months until the new crew covers its own fully loaded cost, and does the company have the cash to fund those months? If the answer to the second question is no, the decision is not "hire and hope" — it is raise price first, improve utilization first, or wait a quarter.

The plan is a document you argue with monthly

A budget built in December and opened next December was a waste of an afternoon. Its value comes from the monthly comparison — actual against plan, line by line, with an explanation for each variance over a threshold.

The review takes twenty minutes and asks three questions. Where were we different from plan, and was it volume, price or cost? Is the variance a one-month event or the start of a trend? And does anything about the rest of the year need to change as a result?

That last question is the whole point. A plan that never changes is being ignored; a plan revised twice a year based on real results is being used. Owners who run this review consistently report the same thing after a year — not that the forecasting got more accurate, but that decisions got faster, because the question "can we afford this" finally had a place to be answered.

Job mix is the lever nobody pulls

Two companies with identical crews, identical overhead and identical rates can end the year in completely different places because of what they said yes to. Job mix is the most powerful lever in a service business and the one most owners never consciously touch, because work is accepted in the order it arrives rather than chosen.

Making it visible takes one exercise. Sort last year's jobs into four or five categories — by service type, by customer type, or by size. For each category, calculate revenue, direct cost, gross margin in dollars, and hours consumed. Then divide margin by hours. What comes out is gross margin per hour by category, and it is almost never what the owner expected.

The usual findings repeat across trades. Small emergency jobs often carry the best margin per hour despite the modest ticket, because the price tolerance is high and the time on site is short. Large projects frequently look impressive and produce mediocre margin per hour once the coordination, the change orders and the punch list are counted. And there is usually one category — a service kept out of habit, or a customer type nobody wants to turn away — that is genuinely losing money.

With those numbers, the plan gains an option that costs nothing: same crews, same overhead, different mix. Shifting even 15% of hours from the worst category to the best can move annual profit more than a price increase, and it does not require asking a single customer to pay more. The decisions that follow are uncomfortable but concrete — stop offering the losing service, raise its price until it earns its hours, or keep it deliberately as a loss leader with the cost written down and accepted rather than absorbed by accident.

Five mistakes in annual planning

• Starting with a growth percentage. It skips the question of whether the company can physically deliver the work.
• Leaving the owner's salary out of overhead. It produces a plan in which the only unpaid position is the person who owns the business.
• Assuming 40 billable hours from a 40-hour week. The real figure is 22 to 34, and the difference rewrites every other number.
• Spreading the year evenly across months. It hides the seasonal cash trough that is the actual risk.
• Booking a new hire at full production immediately. The three-to-six-month ramp lands in the months with the least cash.

The five figures the plan produces

A completed annual plan hands you five numbers that run the year: billable hours of capacity, which is the ceiling on everything; overhead per billable hour, which is the floor under every price; the break-even rate and the target rate that produces the margin you need; the cumulative cash low point and the month it occurs; and the revenue required per month to stay on plan. Those five fit on an index card, and an owner who knows them makes decisions in minutes that otherwise take weeks of uncertainty.

Frequently asked questions

How do you calculate the capacity of a service business?

Start with one technician or crew and 52 weeks. Remove vacation, holidays and expected sick time — about five weeks — leaving 47. Remove training days, shop days and the weeks when weather or seasonality thin the calendar, which in most trades puts the honest figure between 44 and 48 productive weeks. Then correct the week itself: a 40-hour week does not produce 40 billable hours, because drive time, loading, shop time, warranty callbacks and gaps between jobs consume a large share. A well-run residential operation bills 28 to 34 hours out of 40 and a poorly routed one bills 22. Multiplying 46 weeks by 31 hours gives 1,426 billable hours per crew per year, and that number is the ceiling every revenue target has to fit under — or the target requires adding capacity, which costs money months before it produces any.

What is overhead per billable hour and why does it matter?

It is the company's total annual fixed cost divided by its total billable hours, and it converts a pile of expenses into a single figure any pricing decision can be checked against. The overhead list includes rent, insurance, vehicle payments and insurance, software, phones, the office salary, marketing, accounting, licenses and the owner's salary — which belongs there and is left out of far too many small-company budgets, producing a plan where the owner is the only unpaid position. A company with $384,000 of annual overhead and three crews producing 1,426 hours each has 4,278 billable hours and $89.76 of overhead per billable hour. Every hour sold below direct cost plus $89.76 loses money regardless of how busy the schedule looks, and that is the floor under every quote.

How do you work back from cost to the hourly rate you should charge?

The chain is direct cost per hour, plus overhead per hour, plus the profit the business needs. Take fully burdened direct labor — wage plus payroll taxes, workers compensation, benefits and paid time off, which typically adds 25% to 45% on top of wage — at, say, $41 per hour. Add overhead of $89.76 and you are at $130.76 before a dollar of profit. A 15% net margin then requires roughly $154 per hour and a 20% margin roughly $163. This is where many owners discover their published rate sits below break-even and that a busy year produced nothing. It is also where the budget becomes useful, because the options are now specific: raise the rate, cut overhead, improve billable hours per week, or shift the job mix toward higher-margin work.

Why spread the annual budget across months instead of using a total?

Because an annual total hides the two things that actually threaten a service business: seasonality and cash timing. Distribute revenue across the months using last year's real pattern rather than evenly, since most trades have a shape — a slow first quarter, a summer peak, a fall rush — and that shape determines when money is tight. Then lay costs on top, remembering that overhead is mostly flat, so slow months consume cash the busy months have to generate in advance. Two additions make it predictive: put payroll on actual pay dates rather than as a monthly average, because a month with three pay periods is a real event, and offset receivables so revenue billed in June that collects in August lands in August. Then find where the cumulative cash line bottoms out — that is the working capital the year requires.

How should you budget for adding a new crew or technician?

By counting everything the wage hides and by including a ramp. The real cost is the wage plus its burden, a vehicle with insurance and fuel, tools and stock, the training period during which the person produces below capacity, and the additional dispatch and administrative load a fourth crew places on an office built for three. A new technician does not reach full billable hours on day one — three to six months is normal — so a budget that books the hire at full production from month one is off by tens of thousands of dollars in exactly the months when cash is tightest. The honest test has two parts: at the planned rate and utilization, how many months until the crew covers its own fully loaded cost, and does the company have the cash to fund those months? If not, the answer is to raise price, improve utilization, or wait a quarter.