How to Increase Your Profitability

Will Rogers, the great’ American philosopher once said, “Business is a matter of dollars and cents, if you don’t make a few dollars, it don’t make much sense.” Today, it’s harder than ever to make a profit in the HVAC industry. But by constantly focusing on the five areas that affect profitability, you can increase yours!

1. Raising prices
2. Reducing costs
3. Selling add-ons
4. Billing procedures
5. Tracking results

Raising Prices
Many managers believe the best way to increase profitability is to increase their volume. Some of their companies find themselves “hooked” on growth, and have to get the next big-job so they can pay for the last one. As the economy changes and slows, it becomes much more difficult to sustain rapid growth. In tough economic times, your first consideration should be on increasing profit margins, not volume. Resist the urge to lower your prices to get more work. In fact, you should seriously consider raising your prices. The prices you charge your customers should be based on two elements: the value they receive
and the profit you need. In our free enterprise system, the more value you provide, the more you can charge. The biggest misconception when it comes to pricing is that consumers are price sensitive and low prices are what it takes to make sales. Truth is,

People are value sensitive, the amount they are willing to pay increases with the value they receive

You can increase value by:

  • Showing customers how they will gain comfort, security, peace of mind, better health, energy savings, enhanced safety, a cleaner environment, etc.
  • Providing routine service 12 hours per day, seven days a week.
  • Training employees to do it right the first time.
  • Assuring everything the customer sees is spotless.
  • Following up to insure each customer is totally satisfied.

Your total cost of doing business must be built into your pricing

To establish the right selling price, determine from records and forecasting estimated: revenue, overhead, sales expenses, labor costs, non-billable time, annual equipment replacement cost and desired profit. When anyone of these items changes significantly, change your price. Establish your prices on what you need to make a profit, not what a bankrupt-bound competitor is charging.

Reducing Costs

You can’t make payroll with your inventory

It’s costly to become complacent, because a few businesses take advantage of their long-term customers. They charge these customers more to make up for the discounts and concessions they use to bring in new customers. Every six months or so, consider contacting each of your vendors and two of their competitors. Ask them to furnish YOUR price and terms on the products or services you routinely buy from them. Don’t change vendors, though, due only to an inviting price. Use the same judgment you want your customers to use when they select your firm.

Take a few minutes to list all the ways you can reduce your costs, consider:

  • Maximizing your equipment by getting every day of useful life out of it.
  • Consider leasing instead of buying to conserve cash.
  • Use existing parts, tools and equipment before buying new ones.

Sell Add-Ons
A percentage of every new job sold includes sales, administrative and management costs. When you sell additional products or extra services (“add-ons”) at the same time, your overhead usually remains constant while profits increase.

A few ways to sell more without increasing overhead include:

  • Selling extended (additional 2-5 years) service agreements
  • Selling higher level service agreement (from inspection to full labor coverage)
  • Selling supplies (oil, grease, solvents, etc.)
  • Selling expendable items (year’s supply of air, water filters, etc.)
  • Selling accessories, by explaining how the “system” won’t be 100 percent effective without them. Common accessories a residential customer may buy includes; a programable thermostat, electronic air cleaner and a humidifier
  • Sub-contracting additional items that a job may require (attic insulation, electrical, concrete work, air duct cleaning, etc.) then adding a fair mark up

Billing Procedures

Staff for minimum load periods and still get billing out within 48 hours

Most HVAC companies don’t get paid for all the work they do.

The two biggest reasons are:
1. The invoice the customer receives doesn’t reflect all charges due. .
2. The customer’s invoice isn’t sent immediately after the work was completed.

Start by planning a billing seminar for every employee who has any billing responsibility. This helps you clarify your thinking about billing and lets your people know what you expect from them. Before the seminar, outline what you believe is the best billing procedure for your company. Don’t be afraid to dream and list a few radical ideas. A major goal of this training is to help billing people understand what charges should be included in every invoice, regardless of the size of job. Reading P.O. ‘s, work orders and proposals is the easiest way to increase profits. During the training session, show examples of P.O.‘s, work orders and proposals and discuss legitimate charges that can be easily overlooked during the billing process. Also review all of the ways field employees fail to account for all of their time or materials they use on a job. Encourage discussion and solicit input. Afterwards, incorporate your outline and the good ideas of others into a written “Billing Procedures Guidebook.”

Your billing guidebook should also include a breakdown of all parts and materials used on routine jobs. For instance, a compressor change out usually includes a compressor, freon, driers, brazing materials, and miscellaneous supplies like rags, wire nuts, wire ties, leak detector supplies, coil cleaner, etc. This job could also include rental charges for a refrigerant recovery unit, vacuum pump and electronic test equipment. If a common part is missing on the technician’s work order/service report, your billing people will be alerted and can eliminate a potential profit loss before generating an invoice. Human nature being what it is, many people feel that if you’re in no hurry to send them a bill, they’re in no hurry to pay it. Furthermore, in today’s economic environment, some of your customers are looking for ways not to pay you at all. To combat this situation, your customers must receive their invoice immediately after the work is completed. If you wait longer than 48 hours to send an invoice, you’ve eliminated the “sense of urgency” that helps prove you’re serious about collecting what’s due. Being a fanatic about billing is more important than ever.

Tracking Results

The gross profit should be figured for every job

If a job doesn’t meet your company’s profit requirements, immediately determine why. Send every job not meeting minimum requirements for management review. This is also one of the easiest ways to spot a problem with a field employee’s technical ability, a salesperson’s sales and estimating skills or a billing person’s understanding of the billing requirements. When you initiate procedures and track results, you establish accountability. Accountability is one of the keys to making your employees responsible for their company’s profitability.

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