Business Builders


Why Are We Arguing about The $15 Per Hour Minimum Wage?

There has been a lot of talk in this year of a lot of talking about the $15 per hour minimum wage.  Leading the way are the usual suspects, New York State, California, and Washington state.  Other jurisdictions have legislative proposals for a phase-in to $15 per hour, including the federal government, Oregon, Missouri, and the city of Minneapolis among others.  Employer groups in industries such as banks, tech companies, and healthcare adopted this as policy in 2015 as well.  The reaction has been all across the map, as it is every time this subject comes up.  It ranges from “the government has no business affecting wages in the marketplace” to “the increase should be immediate and across-the-board.”

cr-minwa

The ACH&R news recently published an article about the subject as it applies to the HVAC industry.  As expected, you got a similar range of views as those described above.  In the article, (Debating the Impact of a Minimum Wage Increase by Nicole Krawcke, June 20, 2016) one contractor said “I don’t see how this can be a good thing.  The minimum wage legislation will put pressure on the HVAC industry, as it is a tough business for an entry-level worker.”  Another contractor said the $15 minimum wage legislation will not have a significant impact on his business because many of his employees wages are already at or above the proposed rate hike.  “When hiring more qualified people, they’re already commanding a higher wage, so many of our team members are well beyond this rate or right in line with it.”

 

The contractor making the latter point also outlined an issue that no one is talking about.  “One of the negatives is we now have less of a company wage letter to climb in a new norm of complacency can set in.  The new minimum wage raise is a salary or wage reduction to everyone else in the wage pool and will eventually become a negative to business.  To maintain or retain the top performers, they will also expect that relative increase.”

 

So here’s the thing.  For the past 40 years those of us who have been in the industry that long have heard about the worker shortage in the industry, and how it’s only going to get worse over time.  A recent article in a trade pub said the HVACR industry will need 100,000+ new technicians and installers in the next 7 years just to keep up with demand.  A study by the HVACR Workforce Development Foundation indicated the number of mechanic and installer jobs will increase by 21% through 2022, which is nearly twice the growth of employment in the economy overall.  The bottom line is that we need to attract new blood into our industry, and we need to make it attractive vis-à-vis other career opportunities.  Are we competing with bank teller employees, fast food workers, retail clerks or receptionists for our installers and service technicians?  No!  So why in the world are we arguing about a $15 per hour minimum wage in our industry?

 

One contractor put it best.  “Very few, if any, HVAC workers should be working anywhere close to that minimum wage.  We are going to have to convince the dwindling supply of capable workers that HVAC is where they belong, not in one of the other industries desperate for help.  If you want someone who actually knows something about HVAC and is also competent, $15 an hour is not going to cut it.”  Nuff said!


Using Monthly Average Overhead to Calculate Burden per Man Hour

In the last blog we looked at calculating monthly average overhead along with the breakeven point for your business.  In this blog, we will look at calculating the capacity of your business along with calculating your overhead per man day – possibly the most critical number in your business!

cr-iobpm

We can define capacity for your business as the number of units available for sale in a given month, and for a contracting business that capacity is measured in man days.  Now we know that field labor will never be 100% efficient due to lost time for vacations, holidays, sick days and warranty or callbacks.  Given that, you should strive for efficiency levels of at least 85%.  The following calculation defines your firm’s total capacity with this metric in mind.

  • 20 workdays per month X .85 = 17 days per month per man capacity
  • # Field Staff X 17 days = Total Capacity

Your field staff consists of service technicians, billable apprentices, installers and installation helpers.  The number of man days sold becomes another trackable goal for your organization.

Once you have determined this, you can then calculate your overhead burden based on capacity.  The result is the number of gross profit dollars each man has to earn each day to cover the firm’s overhead expenses.  If your firm’s overhead burden is $200 or less, (<$25/hour) it means you have a good balance of field staff as compared to your overhead expenses.  The higher your firm’s overhead burden, the less competitive your firm becomes.  This affects labor intensive work the most, such as ductwork, piping projects or maintenance agreements.

To improve the firm’s overhead burden, you can do one of two things.  First, you can increase capacity.  As you have more man days, you spread the overhead expenses out reducing the overhead burden per man.  Second, you can decrease overhead expenses but this is extremely hard to do.  Remember, most of your firm’s overhead lies in overhead staff, so you have to examine whether you can increase sales or even maintain sales with a smaller overhead.  By understanding your overhead expenses, you will be able to determine each job’s true overhead expense burden, based on how long the job takes.  (Number of man days)

Courtesy of the HVAC business Dr. & Image Caption courtesy of stronglifts.com

Calculating Monthly Average Overhead And Breakeven Point

Calculating Monthly Average Overhead And Breakeven Point

Chart courtesy of Lanzarote Business Club

In this blog we will look at how to calculate your monthly average overhead and breakeven point as measured in gross profit dollars.  There are 2 steps required to calculate your monthly average overhead.  Why is that?  That is because there are 4 overhead expenses that should not be averaged.  These include office/officer/overhead staff payroll, payroll taxes on overhead staff, 401(k)/IRA for overhead staff and health/medical insurance.  Step A therefore is to calculate monthly overhead expenses for these 4 items.

The first element in Step A is to identify all your overhead or nonbillable staff and list their weekly compensation.  Multiply this number by 4.33, as there are 13 weeks  in a quarter.  The resultant number is your monthly overhead payroll expense.

The second element in Step A is to calculate payroll taxes on overhead staff.  There are 3 types of payroll taxes including FICA, FUTA, and SUI.  FICA taxes (Social Security and Medicare) are currently 7.65%.  FUTA taxes (federal unemployment tax) are currently 6%.  SUI taxes (state unemployment insurance) are different for each state so you will need to research this for your area.  Once you have determined that rate, multiply your total overhead staff compensation by the total percentage of payroll taxes to calculate your monthly overhead payroll tax expense.

The third element in Step A is to multiply your total overhead staff compensation by your matching 401(k) or IRA contribution, if applicable.  The final element in Step A is to determine your health/medical expense.  This can be done by researching last months health insurance bill.  Add together the numbers obtained in each of the 4 elements of Step A.  This number will be added to the number determined in Step B below.

Step B involves looking at the overhead chart of accounts, referencing the chart we showed in the last blog.  First, highlight the 4 areas we showed in Step A above.  Then, add the yearly totals of all overhead expenses with the exception of those highlighted and divide by 12.  Add this result to the number determined in Step A to obtain your total average monthly overhead.

This average monthly overhead expense represents the firm’s monthly breakeven point as measured in gross profit dollars.  It is important to periodically review these expenses to see if things have changed in order to have the correct average monthly overhead.  In the next blog, we will show how to use average monthly overhead to calculate your overhead per man day burden.

Courtesy of HVAC Business Dr.


Understanding Overhead in Your Business

Recent blogs have provided a wealth of information for home services contractors with regard to properly pricing service labor and understanding the income statement.  If you missed these, I highly encourage you to revisit them, as follows.

 

February: Correctly Pricing Service Labor & Calculating Demand Service Rate.

 

March: Understanding the Income Statement; Departmentalizing Your Income Statement & Analyzing Your Income Statement.

 

In the next few blogs we will start to take a look at the importance of understanding your overhead expenses, understanding and calculating your breakeven point and making more informed financial decisions as a result.

 

Let’s start off with a definition of overhead.  Overhead costs are those that relate to the ongoing expense of operating a business and which cannot be directly attributable or traced to any specific job.  Examples of these expenses include facility rent, office personnel and utilities.  Often times you will hear a contractor say that his overhead is 30% of his business.  When looking at a yearly aggregate for example that may be true.  When looking at it from a month to month basis however that may very well not be true.  For example, if your sales are $2,000,000 a year, 30% overhead would equate to $600,000.  Your sales however are not equal every month so one month you may have $200,000 in sales, and in another only $85,000.  If your overhead runs about $50,000 a month, that would mean it was 25% in the month you sold $2,000,000 and 59% in the month you sold $85,000.  The point here is that your monthly overhead is a dollar amount, never a percentage.  After all, your fixed monthly expenses cannot be paid with by a percentage.

 

In order to accurately determine your firm’s average monthly overhead, you must first make sure your overhead is properly classified.  You can use the chart below to do this.  First, using this chart, highlight all direct costs or cost of goods sold that you currently have classified as overhead expenses.  Next, reclassify and move the general ledger accounts that should be listed in your cost of goods sold section but are listed as overhead in your P&L.  Incoming blogs, we will go through how to compute your average monthly overhead and breakeven point.

 

The following chart should serve as a guide for properly classifying your overhead expenses.

 

Employee Expenses

Officer Salaries

Office Salaries

Sales Salaries

Payroll Taxes

Uniforms

Employee Benefits/401(k)

Insurance Expenses

General Liability Insurance

Life Insurance

Health Insurance

Dental Insurance

Property Expenses

Property Taxes

Rent

Cleaning/Sanitation

Refuse Removal

Utilities

Communication Expenses

Cell Phones

Answering Service

Office Expenses

Postage

Software Updates & Support

Office Equipment Repair

Office Supplies

Marketing Expenses

Trade Shows

Travel/Meals

Advertising

Printing

Web Expenses/Yellow Pages

Professional Expenses

Professional Fees

Dues & Expenses

Payroll Services

Retirement Plan Fees

Financial Services

Bank Service Fees

Collection Service Fees

Credit Card Fees

Interest Expense

Other Expenses

Truck Leases

Bad Debt/Returned Checks

Depreciation

Amortization

Leasehold Improvements

Courtesy of HVAC Business Dr.


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!


Running And Planning Promotions

Running And Planning Promotions

Picture courtesy of startupnation.com

This blog is the 3rd in a series which discusses marketing plans. The 1st one talked about the need for and benefits of having a written marketing plan. The 2nd talked about the three elements of a marketing plan, the importance of promotions and a sample of product, service and other types of promotions. In this blog we will discuss how many types of promotions you should run and when, along with how you make people aware of these offers.

 

The question of how many types of promotions you should run is a function of of what you are trying to accomplish. Do you want to increase business for your service department during the slow season, tap into preseason equipment sales or try to drive overall business during a cooler than normal summer? While retaining the ability to be flexible should be an element of your promotional schedule, one thing that all experts agree on is that you have to be consistent. It is consistency over time and not the “splash and dash” marketing effort that produces results. The best way to make sure this effort is consistent is to plan it into a monthly calendar. The calendar below is an example demonstrating this concept.

January February March April May June
Heating 2-3 2-3 1-2 1-2 ? ?
Cooling ? ? 3+ 2-3 2-3 2
Service 1-2 1-2 1-2 1-2 1-2 1-2
July August September October November December
Heating ? ? ? 1-2 1-2 1-2
Cooling ? ? 1-2 1-2 ? ?
Service 1-2 1-2 1-2 1-2 1-2 1-2

How much should you spend on marketing, advertising and promotions? Experts say you should be spending 2 to 5% of all replacement and service sales on marketing. For some of you that number may come as a shock, but the industry average is 4.3%. If you want to be aggressive, you can add manufacturers co-op on top of this number and if you want to be more passive you can use co-op to reduce from these percentages. Once you have decided how much you are going to spend, what format these promotions will take and how many you will run and when, there is one more question to be answered – how do you make people aware of your promotions? Broadly speaking, there are 2 audiences to be reached, internal and external. External audiences or customers can be reached through the many channels utilized to advertise and promote your company – website, print media, electronic media, social media and direct mail. The mistake some companies make is forgetting about that 2nd audience, internal staff. You never want a service tech or someone who answers your phone to be surprised by a customer who tells them about a promotion your company is running! That is both embarrassing and unprofessional. Prior to the start of any ad or promotional campaign, make all of your office, installation and service staff aware of the specific ad/promotion that will be running and the dates during which it will run. Create a large wall calendar that clearly identifies every ad and promotion you are running as well as the dates, and post it in a prominent place where employees can see it. Your employees should all be part of your social media audience, and it goes without saying that all promotions should be prominently displayed on your website. These are just some of the steps that will firmly put you in the position of running your business – as opposed to having your business run you!

Courtesy of HVAC Business Dr.


Elements of a Marketing Plan

When you talk with small and sometimes medium-sized contractors about the need for a marketing plan, you can almost see eyes roll. Many such contractors got into business for themselves so they could be their own boss. The ones who successfully survive the startup years then often find themselves a victim of their own success. They find that their business is succeeding, often beyond their own expectations, yet they don’t want their role in the company to change. If profitability is to be maximized and further growth achieved however, their role must change. It must evolve from being a startup entrepreneur and knowledgeable technician to a business owner. In short, they must learn to work on the business as opposed to in the business.

 

Elements of a Marketing Plan

Courtesy of Chriscolotti .us

Recently we published a blog about the need for having a marketing plan. Such a plan need not be long and complicated, as we will illustrate in this blog. Essentially, there are 3 elements of a marketing plan, and they are:

  • Promotions Planning Calendar
  • Marketing & Advertising Calendar
  • Marketing & Advertising Budget

 

What are promotions? In short, promotions are offers that give your customers and potential customers a reason to contact and purchase from your firm. The stronger the offer, the more likely you will be contacted. Depending on the makeup of your operation, you want your promotions to address the following areas in your business. Residential Replacement Installations – IAQ Accessories – Demand Service Calls – Service/Maintenance Agreements.

 

There are a number of sources you can tap in order to develop your promotions. For example, equipment suppliers or manufacturers typically offer consumer financing or equipment rebates at various times of the year. The downside to these is that many contractors have access to the same or similar programs from competitive suppliers. Sometimes government entities and local utilities will run promotions for efficiency upgrades as well, but again these are available to everyone. Perhaps the best source for offers come from in-house promotions. While these may or may not have the opportunity to attract supplier or government money to help fund them, you have complete control over the type and timing of the promotion. The creativity for in-house promotions is limited only to what you can devise, and the advantage here is that no one else in the market will be offering what you are. The following table is a small example of the different types of in-house promotions you can develop – let this serve to fuel your own imagination!

 

The next blog in this series will discuss when and how many types of promotions you should run, along with how you make people aware of these offers.

 

Product Related Service Related Other
Free Thermostat Free 2nd Year Service Agreement Free Gas Grill
Free Merv Filter/ Upgrade Extended Warranties Free Christmas Tree
Free CO/Smoke Detectors Product Checkup Discount Cause Marketing Offer
Free evaporator coil with AC purchase Duct Leakage Analysis and Sealing Event Tickets (i.e. ballgames, museums etc.)
Free Humidifier Air Distribution Analysis Getaway Vacation
Free Energy Analysis Free Blower Door Test Staycation Package
Free Duct Cleaning Svce Agmt W/combo Pch Free AC Cover
Free Attic Insulation Total Performance Diagnostic Through Call Smart W/Service Call Consumer Electronic Giveaway (i.e. TV, Tablets etc.)
Free Dehumidifier Reduced Rate Service Calls For Certain Time Periods Free American Flag & Mounting System
Free Grill/Register Upgrade Free Evaluation for Generator W/Service Call Free Thanksgiving Turkey

 

Courtesy of The HVAC Business Dr.

 

 


Do You Have a Marketing Plan?

Does your business have a marketing plan? Is it documented? If you don’t, you might be asking yourself, “What is a marketing plan anyway, and why do I need one?” Those questions represent a good place to start.

 

Do You Have a Marketing Plan?

Image courtesy of manhabrasileira.com

Most people think marketing is just advertising or perhaps they think of it only as selling, but it is much more than that. Marketing is an umbrella that encompasses everything from market research to name recognition, to lead generation, to advertising, to sales, to sales and lead tracking, follow-up and customer retention. In short, marketing is the single word that describes everything in your business related to finding, getting and keeping a customer.

 

“Well,” you say, “I know what kinds of customers I want, I know how I want to advertise to them and I know what my selling proposition is. Isn’t that enough?” If that is your plan, that puts you in the majority. It has been reported that 77% of all contractors do not have a documented marketing plan! “Why do I need to document it,” you ask? There are actually four good reasons for documenting your marketing plan. Better Results. When you document your plan and map it out, it will create more leads and selling opportunities then if you don’t. Better Timing. When you document your plan and map it out, you will be creating opportunities during the timeframe of your choosing, as opposed to reacting to market conditions. Better Use of Funds. When you have a documented plan, you are less likely to spend money emotionally or on impulse. You will find that your funds go further and have greater impact. It is not unlike going to the store with a list – you’re much more likely to spend less money and make fewer impulse purchases. Better Communication with Staff. When you have a documented plan, your staff will be aware of your promotions and will be positioned to communicate these offers both to your customers and others they come in contact with.

 

A marketing plan need not be long, complicated or take a long time to prepare. Future blogs will delve into the elements of a marketing plan in order to give you the basics for putting together your own. Remember however, as the owner of your business this is not something you can delegate to others. It is one of the elements which separate owners who work on their business from those simply working in their business!

 

Courtesy of The HVAC Business Dr.


Cash Versus Accrual Method of Accounting

While many people have heard the terms cash accounting in the accrual method, some may not be aware of the exact differences between the two. In this post, we will examine each along with their relative advantages and disadvantages.

Either accounting system looks at activity for a specific period of time. Typical periods include month end, year to date and year end. Each of these is a way to measure how your company is performing. Both systems look at the same activities in a slightly different way. The three types of activities we will look at are the accounting for the sale or revenue collected, the accounting for the cost involved (both cost of goods sold as well as overhead expense to support that sale) and the resultant net profit. Let’s look at the cash method of accounting first.

Courtesy WordPress.com

Courtesy WordPress.com

Under the cash method of accounting, a sale is booked when you collect the revenue from it. Therefore, if you ran a service call in July but were not paid for it until August, you would account for that revenue in the month of August on your books. When we look at the cost of performing that call, there are two aspects involved. The first is the direct cost which can be directly attributable to a specific customer or sale. This is called the cost of goods sold. For example, if we send a service tech Billy out to Mrs. Smith’s house to run a service call on July 12, we will account for the cost of the service techs time in the month of July – even though we may not have been paid for that service call until August. The second aspect of cost is called overhead. Overhead represents costs which are incurred to support sales but which cannot be attributed directly to any one sale. For example, the cost of rent for the building that we are using for our business is required for all the business we conduct, and therefore would not be attributable to any one specific customer. In the case of the service call for Mrs. Smith, overhead to support the cost of her July 12 overhead would likely have been paid in July and would have been accounted for accordingly. Net profit for the service call would not be recorded until we had received payment for the call, which would have been in August – so that’s when it would be accounted for in this case.

So how does the cash method differ from the accrual method? The accrual method accounts for revenue, all costs and net profit when the expense occurs. Therefore in the above example of a July 12 service call, all activity would be recorded during the month of July. Based on this, you can see where the accrual method will paint a more accurate financial picture of the activities of your business, but the sales method of accounting is less complex. Which is better for your business? That is best left up to a discussion between you and your accountant or financial professional.

Courtesy HVAC Business Doctor


Don’t Be Your Own Worst Enemy

Why did you go into business for yourself? You did it because you thought you could do a better job than others, you did it for the opportunity to make more money and you did it so you could be the boss. After all, no one else can match the passion, dedication and hard work that you bring to your business. There’s one thing you might not have thought of however, and that is that like all of us, you are not equally talented at all things. And now that you are a business owner – you have to do all things! You have to run the load calculations, you have to make the sales, you have to run the service calls, you have to do the books and you have to collect the bills. Some days, perhaps many days, there just isn’t enough time to do everything, so those last two things get set aside for “later”. Those last two things being the books and collecting the bills. The second of those two – collecting bills – is a lot more important to your business than you might think. Consider the chart from last week’s blog, shown below.

The Irresistible Lure of the Large Customer

Chart courtesy of the Commercial Collection Agency Association

What is that really telling you? For one, it shows you that the job of collecting the bills cannot be sloughed off until “later”. According to the Commercial Collection Agency Association who developed this chart, you have less than a 90% chance of collecting a bill that is only 30 days old. By 90 days, your odds are less than 70%. Now, let’s turn that into dollars. What is the value of a 90 day old receivable that you originally billed out at $3000? According to this chart, it’s only worth about $2100 because by all odds you’re only going to collect about 70% of your 90 day old bills. Even worse, what happens if you have to write off that $3000 sale. Consider the following chart which defines the amount of sales you need to recover a bad debt write-off of $3000, given your company’s net operating profit.

 

$600,000 $300,000 $150,000 $100,000 $75,000 $60,000 Sales
0.5% 1% 2% 3% 4% 5% Net profit

 

Don't Be Your Own Worst Enemy

Picture courtesy of ACHR news

Therefore, if your net profit percentage is 2% you need $150,000 in additional sales to recover the $3000 you wrote off. Keep in mind on that $3000 sale that you just wrote off, you have already paid your suppliers for the materials, you have paid for the labor that created the sale and you have paid for the overhead that supported that sale. The only thing you haven’t done was to collect the debt which paid for those expenses – plus of course the profit which that sale was supposed to generate. If the two charts shown above don’t shock you into paying attention to your sales terms and accounts receivable, then it’s probably because you already know this and have good processes in place.

Of course, collecting when the job is complete – and letting the homeowner know of this requirement up front – is a great first step in reducing receivables to begin with. This policy coupled with having an array of consumer financing tools available can go a long way to avoiding some of the nasty numbers shown in these two charts.