You’ll Kick Yourself If You Miss out on This!

cr-cbstNormally, you look to this column for sage advice on matters relating to home service businesses.  This week however were going to take a bit of an end run on such topics.

 

Callahan Roach Business Solutions is an ardent supporter of the Joseph Groh Foundation, as you may have noticed from our website.  Who are they and what do they do you ask?  They are a 501©(3) Texas public charity which provides (among other things) financial assistance to those who are living with a life altering disability AND who have some kind of connection to the construction trades industry.  That makes them the only organization that we are aware of dedicated exclusively to providing financial assistance to those individuals in need who have made their living in the HVAC, electrical, plumbing, roofing etc. business.

 

The foundation was started by one such individual – Joseph Groh.  After spending 35 years in the HVAC industry, Joe had a freak bicycle accident on Father’s Day 2008 – and that accident left Joe a quadriplegic.  In other words, Joe is completely paralyzed below the shoulders.  In 2009 however he started up the foundation to help others in need, and Callahan Roach Business Solutions was an immediate supporter.  Since that time, the foundation has helped dozens of individuals in states all over the country purchase such items as handicapped accessible vans, rehabilitation equipment, complete home and bath remodels and more.  For more information on this unique organization please visit Josephgrohfoundation.org.

 

All of this brings us to a unique opportunity for you – when you will kick yourself for if you miss out on it.  The foundation has 2 tickets to the Dallas Cowboys-Houston Texans football game on Thursday, September 1 at 8 PM, but these aren’t just any tickets.  These tickets are in club level section C108!  If you were going to get any closer to the action you would have to suit up!

 

These seats normally cost $350 each or $700 for the pair, but the foundation will award them to the first caller who contacts them with a bid of $250 or more – for the pair!  If interested, please call Joe Groh at 214-998-9749.  Shoulder pads not included!


The Internet of Things

By now you have undoubtedly heard the term, The Internet of Things, often expressed as IoT. You may have wondered to yourself what exactly that is and more importantly, what does it mean to those of us in the HVAC industry?

The Internet of Things can be described as a network of physical objects – devices, appliances, vehicles, buildings etc. that are all embedded with electronics, software sensors and network connectivity that enables these objects to collect, exchange, analyze and act on this data. Stop and think for just a minute about the breathtaking implications of that definition. A ubiquitous network of data-gathering sensors communicating through the cloud in constant, real time and instantaneous connection. But what does it really mean?

Picture courtesy of iotworm.com

Picture courtesy of iotworm.com

Steve Case, cofounder of AOL in 1985, can be seen making the rounds of talk shows discussing his new book entitled The Third Wave. With the title, Case pays homage to futurist Alvin Toffler, who published a book by the same name in 1980 and was written as a sequel to Future Shock, which was published 10 years earlier. According to Case, we are entering a new paradigm called the 3rd wave of the Internet. The first wave saw AOL and other companies lay the foundation for consumers to connect to the Internet. The 2nd wave saw companies like Google and Facebook create search and social networking capabilities while a variety of apps leveraged the smart phone revolution. The 3rd wave describes a period in which entrepreneurs will vastly transform major sectors like health, education, transportation, energy, construction and food in ways that fundamentally change the way we live our daily lives. These changes, Case explains, will require a different skill set for employees and will require companies to rethink their relationships with customers, competitors – even the government. How will these changes manifest themselves?

Take our nation’s aging infrastructure. How do we possibly prioritize spending given such massive needs? We could for example, embed sensors into “smart cement” to monitor stresses, cracks and warpages. Sensors in smart cement – the same ones used to detect stress – can also detect ice on the bridge and communicate that information to a wireless Internet in your car. Once your car knows there is a hazard ahead, it will instruct the driver to slow down, and if the driver doesn’t, then the car will slow down for him. In the case of HVAC, sensors in the building, ductwork, thermostat etc. will work in harmony to deliver a ratio of comfort to efficiency not possible today. There is not a single job in the industry that won’t be transformed by such technology, and there are predictions that this future is as close as 10 years away – well within the career span of many people working today.

The entrepreneurs in the HVAC industry are those companies and employees who stay on top of current developments, while preparing for how to monetize on those advances. The opportunities are endless, and much more vast than most of us realize!

Sources: Simon and Schuster; Wired.com


Analyzing Your Income Statement

In the last blog we talked about the benefits of departmentalizing your income statement and the commensurate requirement to set up a purchase order system as well as using weekly coded timesheets for labor.  These last 2 items allow you to properly assign both material and labor costs to the appropriate job and department inside of the income statement.  Let’s say you have now done this – congratulations!  You have taken a most important step on the journey toward developing financial information – not for the accountants or the IRS – but for your use in making management decisions about your company!  Now that you have this information, what is it telling you?

 

To answer this question we must look at some of the ratios.  For example, if we divide our HVAC installation material and equipment cost by our installation sales, we will see what percentage of our installation sales being consumed by material.  For new construction that percentage should run about 35 to 40% and for retrofit about 40 to 45%.  If the percentage is too low, that might be telling us that we are selling too much low end equipment and potentially not enough accessories.  Conversely, if our material costs exceed the upper end of these percentages we could be underestimating our equipment and material costs on each job or might indicate we have a waste or shrinkage problem.

 

What about labor?  If our labor costs exceed 15% of our installation sales, that could indicate that we are underestimating the amount of time it will take to complete a job, or it may indicate that we don’t have a good handle on our true cost of labor, including fringe benefits.  It could also mean that our field staff lacks sufficient supervision to complete work in a timely manner.  Before we leave this topic however we need to address one other key statistic.  Do you know what your warranty labor costs are as a percentage of sales?  This percentage should run 1 to 1.5%. Some additional percentage guidelines are listed below.  Hopefully this begins to give you a feel for how properly reported accounting information can be used to make management decisions that are critical for your company.

  • Cost of service materials to service sales ~ 15 to 20%
  • Cost of service labor to service sales using flat rate pricing ~ <25%
  • Cost of service labor to service sales using T & M pricing ~ <35%
  • Cost of service agreement labor to service agreement sales ~ 35 to 45%

 

Chart Courtesy of Warranty Week.com

Chart Courtesy of Warranty Week.com

Courtesy Of the HVAC Business Dr.


Departmentalizing Your Income Statement

If you have only been getting consolidated income statements like those described in the previous blog, it can be difficult to answer questions such as, should I increase my demand service rates or, am I making enough money doing residential new construction work?  It can be difficult to answer these questions if you can’t isolate the profits associated with doing each different type of business.  In addition, some segments of your business require a greater investment in things like inventory, while others such as your service business, may not be accounting for paid man-hours that are not billable.  These decisions become much more clear when you have a departmentalized income statement.

 

The first step in this process is to identify what the different areas of your business are such as residential new construction, residential replacement, service department etc.  When you are doing this, give some thought to the future.  For example, you may not be doing any commercial replacement business now, but you have been thinking about it.  If that is the case, then set up this profit center now so that it better fits into the flow of your accounting as you move into the future.  Once you have done this, the next step is to set up a purchase order system that will allow you to separate your parts, material and equipment purchases by profit center.  This may mean that you need to place separate orders when ordering equipment destined for installation from service parts when you order from the same vendor.

 

Similarly, you need to separate individual employees labor into the appropriate activity by using weekly coded timesheets.  By setting up new general ledger accounts, you can track the various labor accounts.  As you make these changes in your business, don’t be afraid to do some research and use the professional assistance at your disposal for advice.  For example, your accountant/CPA should be more than someone who just does your taxes.  They should be able to serve as a financial consultant to your company to advise you in such matters.  If they are unwilling or don’t have the expertise, you should find a new accountant or CPA.  In addition, if you use QuickBooks you can find an accountant who is an expert with this system to advise you.  If you use some other form of industry software, contact that vendor to help you devise the best possible system for your business.  After all, you encourage DIY homeowner/service technicians to refrain from diagnosing and attempting to fix their air-conditioning problems by calling experts such as yourself.  Why should your business be any different?

 

The next blog in this series will look at using information gained from departmentalized income statements to make better management decisions.

 

Service Tech: David Hours Worked Total Compensation
Res.  Replacement service 25 $500
Residential installation 6 $120
Svce Agreements 4 $80
Callbacks 2 $40
Res.  Installation warranty 3 $60
Total 40 $800

Sample Timesheet For Service Technician Broken Out By Type Of Work Performed

 

Courtesy HVAC business Dr.

 

 


Understanding the Income Statement

The income statement is, in practical terms, one half of the set of documents that make up your financial statements.  This blog will discuss the elements of your income statement along with the case for cash versus accrual accounting methods.

The income statement tells you whether or not your firm is profitable or not and consists of 3 major sections; the revenue section, the cost of goods section and the overhead expense section. The revenue section is just that, it is a description of the revenues generated for the business that are invoiced or collected as a result of performing the work that your firm does.  This revenue can be broken down by profit center or can be shown as all revenue for the firm.

The cost of goods section is where you show all costs that can be directly attributable to the work performed.  For example, costs shown here would be those for material used, labor performed, subcontractors used, permits taken, items rented etc. – in other words, costs that would not be incurred except for the specific job for which they were.  Again, these could be shown for the firm as a whole or broken down by profit center.

Overhead expenses represent general operating costs that cannot be attributed to a specific job, but are costs shared by all jobs.  Examples include rent, utilities, phones, office supplies, office staff etc.  Note, these expenses must be paid even if there is no revenue!

Understanding the Income Statement

Example courtesy of slidepayer.com

There are 2 types of accounting systems used to record these activities, the cash method and the accrual method.  Both measure profitability for a specific period of time, but vary in one important aspect.  The cash method records a sale when the money was received, and an expense when the bill is actually paid.  Therefore, if you ran a COD service call in August and replaced a homeowners compressor, the revenue would be recorded in August but the expense for the compressor you purchased from a vendor may not be shown until it was paid for, perhaps September or October.  In contrast, the accrual method accounts for activity during the time period in which it happens.  So for example, with the accrual method both the revenue and expense for the service call described above would be accounted for during the month of August, regardless of when the invoice for the compressor was paid.  Why would you choose one over the other?  In general terms, the cash method is simpler to execute and easier to understand while the accrual method offers a truer picture of profitability.  In addition, if your business maintains inventory, is a corporation or has gross revenue in excess of $5,000,000 per year, you are required to use the accrual method according to the IRS.

The next blog in this series will look at departmentalizing the revenue and cost of goods section of your income statement.


Is the HVAC Industry Still Doing This?

A Contractor Actually Installed This Furnace Exhaust!

A Contractor Actually Installed This Furnace Exhaust!

It was not uncommon in the last century to see a news sting on TV of an HVAC contractor caught in the act of ripping off a customer.  It was a real irritant to everyone who made an honest living in the HVAC industry because it gave us all a black eye.  Manufacturers, distributors and contractor associations such as ACCA made a concerted effort to get rid of this behavior in their midst.  I can’t remember the last time I saw one of these news stories showcased on the local news.  It appeared that perhaps at last, we had as an industry, put this behavior behind us.  Apparently that is not the case.

 

The most recent issue of the ACH & R news featured a guest article by Butch Welsch, a St. Louis area contractor, where he says he is seeing an increasing and discouraging trend of contractors using unethical tactics.  He cites two of them that are pretty hard to even imagine.

 

The first was of a lady who called and said that a contractors service technician had condemned her furnace because it had holes in the heat exchanger.  He had red tagged the furnace and told the lady if she ran it it could kill her.  When Butch’s technician went out he found a 17-year-old furnace with a heat exchanger that lacked even a speck of rust.  Although the technician attempted to ensure the lady the furnace was in really good condition, she had been scared to the point where she wanted the furnace replaced.  Following the replacement, the old furnace was returned to Butch’s shop where they had the heat exchanger removed and thoroughly checked out.  There was absolutely nothing wrong with it.  This is

a-typical of the kind of stories you used to see on the local news channel and it is despicable, but if you think that’s bad, read on.

 

The second story begins when one of Butch’s salespeople showed up at an appointment to give a couple a price on a new furnace.  When they arrived there was a truck from another company in the driveway, so not wanting to be rude the salesperson waited in his car.  After 30 minutes, the salesperson decided he had waited long enough and knocked on the door.  As he attempted to apologize for interrupting, the lady of the house apologized profusely saying “I can’t get rid of him.”  The couple went with Butch’s sales engineer to the basement to inspect the furnace, but the other salesperson refused to leave – sitting on the couple’s living room sofa the whole time.  When Butch’s sales engineer had finished looking at everything, the lady finally got tough with the other salesmen and asked him to leave.  This kind of behavior is not only totally unprofessional, it is downright embarrassing to the industry!

 

If you know of a contractor in Texas who is exhibiting behaviors such as those described above, report them to the Texas Department of Licensing and Regulation, regardless of whether they are licensed or unlicensed.  The link to their website is below. We should all pledge to drive this kind of behavior out of our industry once and for all!  https://www.tdlr.texas.gov/Complaints/

Courtesy of Contracting Business Magazine


If You Were Fired – Would You Be Missed?

If You Were Fired - Would You Be Missed?

Courtesy of blogging4jobs.com

A couple of years ago there was a great article in the ACHR News that asked the question, what makes an employee indispensable? One employee that I used to know said the secret was to be like a blade of grass – keep your head down so it doesn’t get chopped off. That strategy however would suggest that you blend in, fly under the radar, not stand out, fit in, in essence – be an average employee!

 

The article then referred to a post by Joe Crisara of ContractorSelling.com who posed the question that is the title of this blog. Joe suggests that rather than being invisible, you should strive to be indispensable. He further pointed out that being indispensable is a three-legged stool which includes the traits of being the go to expert, having customers who are your fans and bringing home the bacon. Joe went on to explain in his post that being good with customers is not enough if you have callbacks, and that being technically sound is not enough if you are not good with customers.

 

Being a good employee means that you have to put yourself in the mindset of your employer or supervisor. Do you know what their goals are and how they are being measured? If you don’t know, you should ask. Furthermore, look at those employees in the organization who are succeeding and who are getting the promotions. Observe their behaviors and see what it is that makes them successful. Often times, you will likely see that they are the people who tackle the tough jobs, not the easy ones. You will also likely find them to be among the first to lend a hand to a coworker who is having difficulty with something, and a common denominator of these individuals is that they have a positive attitude about both their job and the company. Finally, the successful individuals in any organization are not ones who look at their job as an 8-5 proposition. They are the ones who work to better themselves by becoming a knowledge expert, studying after hours in an effort to hone their expertise. When you’re amongst the 80/20 crowd, be the latter, not the former!


Calculating Demand Service Rate

calculations for your trucks, overhead and net profitIn our previous blog we discussed how to price your service labor. You may want to review that before looking at this blog. If you recall, we said that in order to determine your demand service rate, you have to price your labor, trucks, overhead and desired net profit. In this blog, we will go through the calculations for your trucks, overhead and net profit.

 

In order to figure out how much your service trucks cost your firm per hour, you first must review your P&L statement (preferably a 12 month statement) and locate all the general ledger accounts that relate to the operating cost for your company’s vehicles. These would include accounts for things such as monthly payment/lease costs, fuel, maintenance, repairs, insurance, depreciation, registration/tolls, taxes etc. The summation of all these items gives us our total yearly truck expenses. We take that number and divide by 12 in order to come up with the total truck cost per month. Then divide the total truck cost per month by 17 days per month to come up with total truck cost per day. We used 17 days instead of 20 days in order to account for the 15% inefficiency in our service department that we talked about in the last blog. (20 X 85% = 17) Just like our service labor, we want to make sure we price unbillable truck time into our demand service rate. When we talk about company trucks, we are only talking about service or installation vehicles that are used on a regular basis. We do not include management or office vehicles, sales vehicles, delivery or spare vehicles into this calculation. Next, we take the total truck cost per day and divide by the number of trucks to come up with the individual truck cost per day. Finally, we divide the individual truck cost per day by 8 to come up with the individual truck cost per hour.

 

When setting your demand service rate, your goal should be to achieve a net profit margin of 20% on your service labor, which means you should be achieving a gross profit margin of 50 to 60%. In the examples we have been using, we first calculated an average labor cost per hour of $35.39 per technician. In order to set our demand service rate, we need to add to this our individual truck cost per hour and then divide by our desired gross profit margin percent to come up with our hourly demand service rate charge. For example, let’s suppose we had calculated our individual truck cost per hour to be $11.22. Our total labor and truck cost would be $46.61 per hour. ($35.39 + $11.22) The formula for determining selling price is our cost ($46.61) divided by 1 – desired gross profit. (let’s say 55%) Our demand service rate therefore becomes $103.58 per hour. ($46.61/(1-55%) = $103.58.

Courtesy of HVAC Business Dr.


Correctly Pricing Service Labor

Air Conditioning Repairman 3This is the first in an ambitious multi-part blog that will discuss the elements required to correctly price a demand service rate. There are 5 elements to consider when determining what your firm should charge for demand service, they include labor, trucks, overhead, breakeven and net profit. In this blog we will discuss the calculations that go into pricing the labor portion, and there are 8 calculations that go into this number.

 

The first thing to do is to come up with your average labor cost. You can do that by adding out all your service technicians labor cost per hour and divide by the total number of service techs on your list. Your direct cost per hour is the sum of your total hourly labor cost divided by the number of technicians.

 

Next, you have to calculate your vacation days, paid holidays and sick days. Add the total number of vacation days your technicians have and divide by the number of people to come up with the average days. If there are 240 workdays in a year, then one day is equal to 0.04%. (1/240) That means that each paid day off costs your firm 0.4% of that individuals hourly compensation rate. If you average 7 vacation days amongst your technicians, you then take 7 paid holidays and multiply by 0.4 to come up with the percent of your average day that is a vacation day. Therefore, 7 X 0.4 = 2.8. This means it costs you 2.8% to provide vacation days to your technicians. To calculate in terms of dollars and sense, multiply your average labor cost by this percentage. For example, 23 X .028 = $0.64 per hour.

 

The calculation for paid holidays is similar. Let’s say you provide each technician 6 paid holidays three-year, if you multiply this by 0.4 you come up a percentage of 2.4%. If you multiply your average cost per hour of $23 by 2.4% you come up with $0.55 per hour in cost for paid holidays.

 

Sick days works the same way. If you provide 3 sick days per technician, you multiply this by 0.4 to come up with a percentage of 1.2%. If you multiply your average cost per our of $23 by 1.4% you come up with $0.20 per hour for sick days.

 

After that you have to account for payroll taxes, which include FICA taxes, (Social Security and Medicare taxes) FUTA taxes, (federal unemployment tax) and SUI tax. (State unemployment insurance) FICA taxes are currently 7.65%. (6.2% for Social Security and 1.45% for Medicare) FUTA taxes are 6% and SUI taxes have to be researched to determine your rate. If your firm does payroll internally, the rate is posted on the invoice you submit quarterly. If you use a payroll service company, they should be able to provide you with this rate. In Texas, the rate ranges from 0.47% to 7.49%, for the sake of example we will use 4%. If you add these 3 taxes therefore you come up with 17.65%.(7.65+6+4) Your cost per hour then is 23 X .1765 = $4.06 per hour.

 

You also have to account for Worker’s Comp. Again you will have to research this rate, which is usually stated as an amount of dollars per hundred. For the classification HVAC in Texas, we will use a cost of $2.26 per hundred. We then divide $2.26 into your labor rate of $23 per hour to come up with your Worker’s Comp. percentage per hour, and we come up with 9.28%. When we multiply $23 by 9.28% we come up with $2.25 per hour.

 

Don’t forget about the impact of 401K or IRA contributions that your firm offers. If your firm matches up to the first 5%, then you would multiply 23 x .05 and you would get $1.15 per hour as the cost for retirement.

 

Finally, you have to factor in inefficiency or unapplied time. Most firms have no idea what this percentage is, but it amounts to the time which you are paying your technicians for which you cannot bill to the customer. For the sake of this example, let’s say it is 15%. Therefore you would multiply 23 x .15 to come up with an average cost per hour for unapplied time equaling $3.45.

 

When you add all these cost together you come up with a total average cost per hour of $35.39 per technician. See the table below.

 

 

  Cost/hour Vacation Paid Sick Payroll WC Retirement Unapplied Total
Tech 1 18 5 6 3          
Tech 2 24 7 6 3          
Tech 3 26 10 6 3          
                   
Total 68 22              
                   
Average 23 7 6 3          
                   
Days*0.4   .028 .024 .012          
                   
Cost/hour $23 $0.64 $0.55 $0.28 $4.06 $2.25 $1.15 $3.45 $35.39
                   
FICA 7.65%                
FUTA 6%                
SUI 4%                
Ttl 17.65%                
Workdays/year 240                
1/240 .04                
WC %/hour 9.8%                

Courtesy of HVAC Business Dr.


Sensible Talk about Climate Change

Any time you talk about climate change, you open the door to a lot of passion. On the one hand, you have people saying that we must take all necessary steps right now, regardless of cost, to reduce our impact on the planet lest we destroy it in the very near future. On the other hand, you have those saying that all the talk about climate change is simply hysteria, citing examples of those calling global warming “a multibillion-dollar worldwide industry, created by fanatical anti-industrial environmentalists.” In reality, the truth is somewhere in between.

 

Scientists have known about the heating potential of gases such as carbon dioxide since British physicist John Tyndall first began experiments in 1859, leading to the discovery that CO2 in the atmosphere absorbs the sun’s heat. In 1938 an engineer by the name of Guy Callander published a study suggesting increased atmospheric CO2 from fossil fuel combustion was causing global warming. In 1958 US climate scientist Charles Keeling became the first scientist to confirm that atmospheric CO2 levels were rising rather than being fully absorbed by forests and oceans. (Carbon sinks) In 1988 NASA presented testimony to the U.S. Senate stating that increases in CO2 were roaming the planet and changing our climate. The 1987 Montréal protocol is an international treaty designed to protect the ozone layer by phasing out the production of numerous substances that are responsible for ozone depletion. It was signed by all 197 members of the United Nations and has resulted in the phase down/out of CFCs (chlorofluorocarbons) and HCFCs. (Hydro chlorofluorocarbons)

Climate Change

Climate Change: Armageddon or a Bright Future?
Picture courtesy of themedicalbag.com

 

The current administration has been very active in the discussion on climate change, in 2010 it tried but failed to pass a cap and trade system. When that failed, they began tightening EPA restrictions by executive order, creating some consternation within the HVAC industry. In his 2015 State of the Union address Pres. Obama said that “no challenge poses a greater threat to future generations than climate change.” In 2016 the Obama administration essentially called for a carbon tax in the State of the Union address when the President suggested he wants to “change the way we manage our oil and coal resources so they better reflect the costs they impose on taxpayers and the earth.” This was followed up only this week when the president directed the Pentagon to incorporate climate change in everything they do, from weapons testing to training troops to war planning to joint exercises with allies. Critics like Nobel laureate Ivar Giaver rejected the president’s claims that man-made global warming is causing climate change, calling the president “dead wrong.” Giaver claims that global warming studies by Al Gore and Rajendra Pachauri (former United Nations climate head) measured the average temperature for the world for one year, and says this means nothing. He says that from 1880 to 2015, the temperature has increased 0.3%, and he says he thinks the temperature during that time has been “amazingly stable.” Still others cite the new Ice Age predicted by 1970s global cooling advocates, which hasn’t come to pass. More recently, MIT graduate Charles Clough argues that the link between CO2 levels and global temperature averages are insufficient, because they fail to look at their correlation before the Industrial Revolution. According to Clough, pre industrial CO2 levels remained relatively constant while global temperatures have not.

 

So what should we believe? It would seem prudent to take all reasonable steps to minimize our impact on the planet, which after all, is the only one we have. At the same time, we need to continue learning all we can about our planet and the things that affect it, without assuming that science as we know it today is all defining. Clean energy initiatives should be pursued with vigor, but with the realization (as cited in a recent MIT Technology Review article) that wind and solar power, in spite of declining costs are intermittent energy sources that are insufficient at affordable prices for a modern industrial society. In essence, we should avoid the temptation by some to overreact in ways that would throw tens of thousands out of work in certain industries while raising basic costs of consumer goods that could result in unforeseen economic changes. In other words, let’s use some common sense for Pete’s sake!