|
As=
an experienced hvacr contractor, more than likely you've performed thousan=
ds of service calls, replaced hundreds of furnaces and installed countless =
hvac systems into new homes and businesses. However, if you took a few step=
s backward and reviewed all the work you've done these many years you would=
see a pattern. Yes, you have performed thousands of service calls but I wo=
uld be willing to bet you've done only a few dozen "types" of rep=
airs thousands of times. After more than 16 years of putting on one-day s=
eminars, about three years ago I asked myself, "Of all the information=
we teach, what does the average contractor really need to know to run a pr=
ofitable business?" The list was actually a lot shorter than you might=
expect. After answering that question, our business plan changed. While we still conduct one-day seminars, the rea=
l thrust is now intense three-day business training programs called the Bas=
ic Business Boot Camp. Contractors are taught all the basics needed to run =
a profitable company. This month I am going to summarize these basic buildi=
ng blocks so you too can begin to concentrate on what's really important. In order of importance they are: 1. Labor pr=
icing. T=
he basic building block for any profitable company is understanding how muc=
h to charge per hour to cover the "real" costs of doing business =
while generating a profit. How do most contractors set their hourly rates? =
Well, more times than not it's based on what everyone else charges or, even=
worse, charging what you think each individual customer will be willing to=
pay in any specific situation. These are both terrible (not to mention unprofit=
able) ways of setting pricing. This might work pretty well the first few ye=
ars, while your overhead costs are low, but watch out for years six, seven,=
eight and beyond. &nbs=
p; If you don't truly understand what you must charge pe=
r hour, a strange situation will begin to take place. Sales will continue t=
o go up, while profits fall. If that sounds familiar, it's probably time to=
find out what you need to charge per hour to cover your costs of doing bus=
iness. Setting hourly rates based on what others are charging will not work=
, at least not for long. &nbs=
p; 2. Cash flow/cash-flow budgeting. T=
here are two things that put most trades companies out of business. The fir=
st I just went over: improper labor pricing. Assuming your rates are determ=
ined correctly, the next major stumbling block is cash flow. A company can be priced perfectly and still go o=
ut of business because of cash-flow problems. Believe it or not, most compa=
nies that go out of business go out of business in their highest-volume, mo=
st-profitable year. It's not because of improper pricing, but because of ca=
sh flow. Since companies change from year to year, it's n=
ecessary for contractors to create month-by-month, department-by-department=
cash-flow budgets. Cash flow problems don't usually occur at the same time=
each year because things change. Last year's spring cash-flow problems may=
occur in the fall or summer of next year. Annual budgeting will project wh=
en your cash-flow problems are likely to occur. 3. Creating=
a budget for each department is critically important. A=
company can have an acceptable bottom line profit while internally one dep=
artment is subsidizing another. To be successful you need to create budgets=
, by department, to project both profitability and monthly cash-flow needs.=
4. Collecti=
ons. O=
K, you are priced right and you have projected your monthly cash-flow needs=
. What's next? If the money is not collected in a timely manner, you still =
run the risk of going out of business. To be profitable, you need to do thr=
ee things. They are: ●Create an internal collections po=
licy that spells out when invoicing will take place and what steps will be =
taken if the money is not collected in a timely manner. ●Se= rvice work. When the service customer is told the tech will be arriving at = an appointed time ask the customer these questions: "How will you be p= aying for your service? Will you be paying by check, cash or credit card?&q= uot; All service work should be payment on demand - no exceptions. ●In= stallation. Ask for a deposit up front. |
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BY TOM GRANDY |
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Wholesale Distributors + Refrigeration + =
Air Conditioning + =
Heating + =
Industrial Specialties |
|
Mo=
st customers expect you to ask for a deposit, but the majority of contracto=
rs don't ask so they don't get one. Ask for at least 25 percent upon signin=
g of the contract with the balance due the day you complete the job. 5. What to =
track and how to track it. Yo=
ur rates are now set, your budgets are created and your cash flow is good. =
Now what? It is time to find out how you did each month, in a timely manner=
. If you projected a $7,000 profit for the month b=
ut only make $5,000, what happened? Anything could have happened. Sales mig=
ht have been off or labor costs could have been too high. Perhaps you paid =
more than expected for materials or equipment or maybe your overhead was hi=
gher than expected. If you don't track what's happening, you will ha=
ve no idea what needs to change or what you need to control. In addition to=
tracking your budget each month, you need to track payables and receivable=
s while costing each job to ensure you are estimating your fees correctly. =
Monthly tracking tells you if you are on target or not and, if not, why not=
. 6. Flat-rat=
e pricing. F=
lat-rate pricing for your service department is a must. Once you have figur=
ed out what you "really" need to charge for service you will most=
likely find out your rate needs to be at least $75 per hour or more. Guess what? When your service rates reach the $7=
5 per-hour-plus figure, the rate is hard to justify to your homeowner. And =
when there is a shortage of anything, the laws of supply and demand kick in=
. When there is a shortage of quality techs, the cost per tech in base sala=
ry and benefits goes up fast. Flat-rate pricing is the only system there is to=
basically "hide" your hourly rate from the homeowner. Flat-rate =
pricing will become the standard in the industry. The question is not, &quo=
t;Will you switch to flat-rate pricing?" The question is, "When w=
ill you switch to flat-rate pricing?" Be a leader, not a follower. 7. Service =
agreements. A=
fter you are priced properly, created cash-flow budgets, collected your mon=
ey in a timely manner and switched to flat-rate pricing, you will also crea=
te a well-managed service agreement program. Service agreements are literal=
ly the foundation for profitable growth in the 21st Century. Service agreements are the feeder system for eve=
rything else you do. It creat=
es cash flow, service work and the eventual replacement of equipment. By the way, flat-rate pricing is t=
he ideal system to sell service agreements because the customer can see the=
savings they will receive in black and white. <=
![endif]> Tom Grandy is p=
resident of Grandy and Associates. Reprinted with permission from R=
SES Journal September 2004. |
|
Winter 2004 |