HVAC Profitability Score

January 19, 2005
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Imagine how difficult it would be to play a football game successfully without each player knowing the score, having a sense of urgency, and knowing how critical his individual contribution is to the overall game. Yet in the majority of the over 100 companies I have worked with, that is their situation.

The owners and managers may have the knowledge and sense of urgency of what is going on, but beyond that level, few others do.

When I ask service technicians about their individual profitability, callback ratios, average invoice, or revenue per hour, they look like a deer stuck in the headlights.

When I ask them who controls the profitability of the company, the overwhelming response is the owner, the manager - the boss.

They couldn't be more mistaken! If only they would grasp that they control the profitability!

The Control Factor

The following is from a workshop I host for all non-management people. It proves just how much control they have.

We establish that a reasonable ROOI (return on owner's investment) should be 10 percent. The industry average is 2 percent.

We establish that no one is losing furnaces, condensing units, or evaporator coils. (We don't talk about callbacks, unnecessary vehicle expenses, or thefts.) We talk about nickels and dimes. I ask the audience to help me build a model of reasonable losses that can occur on a truck in any given week. For example:

  • One roll of duct tape (it just rolled out the door into a sewer): cost $5.

  • Failing to weigh the jug results in giving away two pounds of Freon: cost $3.

  • Mrs. Jones is on Medicare so we didn't charge all we should have: cost $5.

  • Not taking care of truck stock causes us to have wasted parts: cost $5.

  • Not returning all unused installation products to the shop: cost $10.

    Total of just these nickels and dimes for one week is $28. This total multiplied by 50 weeks equals $1,400; $1,400 times (let's say) eight trucks equals $11,200.

    If the company wants a 10-percent net profit, how much new revenue does it take to overcome just the $11,200 loss? Just multiply the $11,200 times 10 and the answer is a whopping $112,000. That is just to break even on the loss.

    Bring in $112,000 at a 10 percent net and you have captured $11,200 - just enough to cover the lost profit.

    But what about rent, uniforms, insurance, utilities, and all those other little things that must be paid each month? The real mathematical calculation should be to double the $112,000 to $224,000. That is almost a quarter of a million dollars.

    Why double it? Bring in $224,000 at 10 percent and you have captured $22,400. Now you cover the loss of $11,200 and have another $11,200 to pay the rent, insurance, spiffs, etc. Imagine how big the number would be if we started figuring in callbacks, insurance deductibles on claims, and unnecessary vehicular expenses.

    Good As Gold

    Remember we are still talking about gold dust, not big nuggets. Therein lies the problem. They are seemingly insignificant. The truth is, they cause HVAC contractors to be unprofitable.

    The next step is to show the practicality of how the people in the trucks can change their behavior to keep those nickels and dimes in the company. The more profitable a company is, the more it can afford to pay its people, implement a profit-sharing plan, have better insurance plans, better trucks - just a better place to work.

    Who controls the profits of HVAC companies? The people who drive the trucks, wear the uniforms, and deal with customers. We need to help them learn to become better stewards of the company's money.

    Garofalo is a partner in Callahan/Roach and Garofalo, Houston. He can be reached at 800-462-8217 or garofalojohn@yahoo.com.

    Publication date: 01/24/2005

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