It’s summertime. You are extremely busy. In fact, you probably can’t get to all of the replacements or service calls that are coming in the door. So why am I writing a blog about profits?
Because many contractors are busy…but not profitably busy. At the end of the summer you use all of your cash that you generated to pay your huge bills and you have nothing left. Then you struggle for a few months and pray for a cold winter so you can generate a lot of cash. If the winter isn’t cold you struggle for many months until it gets hot again. Wouldn’t it be great to get off this hamster wheel?
Let’s start by defining profit. It is simply when revenues (sales) are higher than expenses. Profit has nothing to do with cash. You turn your profit into cash when you collect for the work you did and pay all of the bills, including overhead, associated with the work you did. There may or may not be cash left after you paid your bills. If there is no cash left after you paid your bills, you performed unprofitable work. That is the easiest way to go out of business in the long term.
These five easy actions will help you generate profits and cash.
1. Grow a profitable maintenance program
The best way to decrease the seasonality and dependence on hot or cold weather is to grow a profitable maintenance program. This starts with pricing your maintenance agreements so that you at least break even after taking overhead into consideration. Then, everyone in your company must believe in maintenance and have maintenance performed on their homes and your office. Dispatchers start the program by asking new customers whether they would like to save 15% on their service call. When the customer says yes, your dispatcher will tell them that the service technician will explain more when he comes to their home. If the technician doesn’t bring it up, you can be sure the customer will ask!
The more maintenance agreements you have, the more service work, the more replacement work, and less seasonality you will experience.
2. Grow your customer base without wasting marketing dollars
Many contractors “try marketing” once, get no results, and feel that marketing doesn’t work. You’re right, if you do something just once, it probably won’t give you the results you are looking for. Marketing is a process. It is a drip process. Unlike the annoying drip from your faucet, these drips are ideas and things that can help a customer be more comfortable in her home. They are all branded with your company logo and colors. So, after five to six “drips” spaced out at regular intervals, your company name will probably pop into their heads when they have a heating or cooling problem.
Why should you market when it is busy? This is the time that people are looking for someone to solve their cooling problem. If you send one message when it is 65 degrees and no one needs heating or cooling, people who don’t know you will ignore your message. At this point, marketing doesn’t work.
3. Increase Profitability by using the Net Profit Per Hour Pricing method
If you divide price by 1-GM, you are ignoring one of the most costly parts of pricing, your overhead. In the webinar I will show you two jobs that are at the same gross margin – one which earned $73 per hour and the other that lost $21 per hour. Gross margin pricing can be very deceiving.
The question you need to answer is: for every billable hour, how much profit do you want your company to earn? Then work backwards. Add the net profit per hour to your overhead cost per hour. This gives you the gross profit you need to earn for every billable hour. Then add your direct costs for that hour (or multiply the gross profit per hour times the total number of hours for the job and add your direct cost). This gives you the selling price of the job.
4. You must take credit cards and add credit card costs to your retail prices.
Most people do not use checks very often. They put most of their purchases on debit or credit cards. You must take credit cards and add these costs to your retail pricing. For example, if you are calculating a replacement job, assume that the customer will be paying by credit card. Take the total job price before credit cards and divide it by 0.97, assuming 3% credit card costs. If you don’t you will be absorbing thousands of dollars of credit card expenses. If the customer wants the convenience of credit card usage, they she pays for that convenience.
5. Reporting – get your financial statements on time.
Getting financial statements and reviewing them, even when you are busy, is critical. The financial review, which takes less than 30 minutes per month, can help you spot minor issues before they become major crises. This is especially critical in busy times, when your employees can get sloppy and skip important procedures which cost you money (ie inventory purchases go “through the roof” and eat up your hard earned cash). For more information about how to do your easy financial review, invest $15 in my #1 best-selling book, The Courage to be Profitable (www.TheCouragetobeProfitable.com).
Implementing these five easy actions, even when you are busy, will increase your profitability.
Ruth is a nationally recognized consultant and trainer in the Heating and Air Conditioning Industry. She began training contractors online in 1998 and has successfully started an internet broadcast networks including videocasting, private broadcasting and two company owned channels: http://www.profitabilityrevolution.com/ & http://www.hvacchannel.tv/
Learn more at www.thecouragetobeprofitable.com