SECTION 5 OF 5
Writing off Bad Debt
Most companies will keep the Accounts Receivable on the books. However, once sent to a collections agency, it’s best to write off the balance to a separate AR account. Many companies call it “Allowance for Bad Debt.”
To avoid writing off larger chunks, contractors will expense a flat budgeted amount on the overhead section and offset a credit to the AR account that will take care of the write-offs. Otherwise, they run the risk of inflating an expense in one month or performing a massive cleanup.
If your collections company gets a check for any uncollected funds, you can credit back to the Asset account or on the overhead expense side.
Departmentalization & Business Units
It is highly recommended that a company departmentalize their financial statements. Even a company that only has one trade, such as air conditioning, should have multiple departments to help them drive revenues.
An AC-only company on ServiceTitan would typically have 4 departments. They are:
If you were to have multiple trades, such as Plumbing and HVAC, you probably would add plumbing install, plumbing Service, etc. to your list of departments. ServiceTitan refers to these departments as business units.
Separating heating calls from cooling calls in the service department typically is not required at the department (business unit) level. You can still get reports showing how many heating calls or cooling calls an HVAC service department ran because ServiceTitan has sub-categories called job types.
When booking a call, a customer service representative may select the HVAC Service business unit and within that, book the job type as “No Cooling.” This allows the company to avoid having too many business units to keep track of.
Also, you can have one job type that fits multiple business units. For instance, you may have a job type that is called warranty but that could be selected under Plumbing Service or HVAC Service or a number of other business units.
Business units and job types must be chosen to book a call, which forces the jobs to be tracked properly. These are critical because they affect more than just reporting. For instance, ServiceTitan tracks the time that a technician spends on a job. Since ServiceTitan knows the business unit of the call, it can attribute that business unit automatically to the time charged for the job.
These business units should line up with your accounting software. In Quickbooks for instance, the business units are called classes. The invoices are typically exported to the corresponding business unit in Quickbooks so you can get accurate departmentalized reporting. This allows a contractor to run a Profit and Loss statement per department.
When a company is losing money, it should be able to open up its financial statements and see which department is underperforming and which ones are not. Then the contractor can focus their efforts on fixing that department and not spend all their resources looking into every part of the company to find the problem.
This also becomes critical when a contractor gets large enough to hire department managers. For instance, if you are a plumbing contractor and you have an install department for water heaters and sewer line replacements, you may have an install manager.
It is highly recommended to incentivize that manager based on what they can control, for the most part. This helps keep them accountable and driven in the correct direction. In the case of a plumbing manager, that would likely be the gross margin of the plumbing department. For a sales department, a sales manager may be incentivized by the close rate and average ticket of the department.
Without departments (Business Units) set up properly, getting these numbers to incentivize your employees is almost impossible. When they are set up properly, getting those numbers is rather simple.
Here are a couple of Knowledge Base articles on how to set up business units in ServiceTitan (for ServiceTitan customers):
Table of Contents
2. Building a Company for Success
3. Setting Your Company Up for Success
4. Driving a Company Culture
5. Setting a Path to Maximum Profitability
6. Billing Structure: Determine Your Pricing
7. Marketing Practices
8. Call Center Practices
9. Call Center + Field Practices
10. Best Practices in the Field
11. Field + Office Best Practices
12. Keys to Success in the Office
13. Management and Office Best Practices
14. Human Resources
15. Preparing Your Company For Sale
16. Commercial Best Practices