COLUMBUS, Ohio — The 2012 Heating, Air-conditioning & Refrigeration Distributors International (HARDI) Profit Report shows how a typical HVAC distributor can reach the same level as a high-profit firm by paying close attention to four Critical Profit Variables (CPVs) — sales change, gross margin, payroll expense, and non-payroll expenses.

HARDI distributor members were invited to participate in the annual survey that provides an analysis of the previous fiscal year’s financial and operation characteristics. To maintain confidentiality, responses are collected by an independent third party, The Profit Planning Group.

According to this year’s report summary, authored by Dr. Al Bates, the key to improved performance is to develop a specific plan for each of the CPVs and combine them in a positive way. “The goal is not perfection,” said Bates. “Perfection is always the enemy of the good. The goal is to do a little better across the board.”

The 2012 HARDI Profit Report suggests that at least some firms are well on their way to outstanding long-term profit performance. The key to understanding the economics of profitability is to distinguish between the performance of the typical firm and the high-profit firm. The difference is significant and appears to be widening.

“Every business has its own unique mix of strengths and weaknesses. The HARDI profit survey helps us spot the weaknesses we need to remedy and the strengths we need to exploit,” said Ken Abbott, vice president, Geary Pacific Supply, and vice chair of HARDI’s Management Methods Committee, which oversees this annual project.

With sales change, there is a misconception that rapid sales growth is a key to success. The ideal rate of sales growth equals the rate of inflation plus 2-5 percentage points. The report states that payroll expense is the most important CPV. Ideally, payroll costs should increase by about 2 percent less than sales. The majority of non-payroll expenses usually only require minor adjustment if sales are rising faster than inflation. Rapid sales growth can tax the operating system and cause more problems while solving others. In a down market, firms get antsy and cut prices in order to combat dwindling sales. An adequate gross margin can determine a firm’s profitability. A firm must always monitor its gross margin performance.

“The typical HVACR distributor is showing signs of healthier sales volume and making investments to capture continued growth opportunities as the market improved in 2011,” said Dan Miller, COO, Dakota Supply Group, and Management Methods Committee chair. “The caution, however, is that gross profit margins continued to decline for the third year in a row. This decline, coupled with a rush to add more salespeople and inventory, resulted in typical HVACR distributors seeing a decline in their bottom line profit rates from 2010. With a renewed focus on improvements on each of the critical profit variables; our typical HVACR distributor can look forward to higher returns as the market continues to grow in 2012.”

The complete 2012 Annual Profit Report is available at

Publication date: 8/6/2012