Close your eyes. Find a quiet place. And Dream. Dream about what you want your business to be. Visualize what you want it to look like. Do you have a spacious, neatly organized office? Are the sounds that of an organized office, where you hear phones answered with a positive, upbeat smile? Is your building professional in appearance and well-identified? Are all your people in uniforms? Are your trucks uniquely branded?
Describe what your marketing looks like for both maintaining and growing customers. Are you paying yourself a good salary and are the profits reflective of the blood, sweat, and tears you’ve invested in the business?
Now that you have this vision adequately drawn and vividly colored in your mind, ask yourself the following questions. And if the answer to each one is yes, you are well on your way to making your dream a reality. And if the answer to any of them is no, adjust your overhead and gross margin for estimating today.
Q: When the selling price for an installation is estimated, is the estimated overhead not for covering the costs of the business today, but of your dream for what the business will be?
A: Too many contractors determine their current overhead costs and then add profit to determine what gross margin to use for pricing. (Even worse, some of you use a gross margin someone else told you was a good number.) The real overhead costs (and gross margin) used in estimating a selling price should include rent for a building, a salary for your spouse who does the books, marketing expenditures that develop your brand in the neighborhoods where you want business. The overhead used for estimating a selling price is for what the business will be — not what it is.
Q: Is seven percent of sales built into the overhead used for pricing for your salary as the general manager?
A: We recommend that if you are the general manager for your business, you should put seven percent of sales in the overhead used for estimating. This is in addition to any hourly wage for working in the field and 10% of sales for profit.
Having at least seven percent of sales for a salary built into your overhead for estimating allows you and your family to be more financially secure so that you can concentrate on fulfilling that dream. If seven percent isn’t built into the estimate, you may never achieve financial security.
Q: Is a sales commission built into each installation estimate?
A: Many small business owners wear a minimum of four hats. The owner is the owner, the general manager, a field employee (at least on occasion) and the primary salesperson. And many times the owner isn’t adequately compensated for any one of these jobs much less all four. Several factors impact how much a full-time salesperson is paid, but generally it’s between eight and 10% of his or her sales.
Perhaps, the business of your dreams includes a full-time salesperson (besides yourself). The reality of the business is that a full-time salesperson is in place today. He or she is just not being compensated for filling that position.
Q: Are warranty costs built into the estimated selling price?
A: Even if the company includes a purchased labor warranty with each estimate, some percentage of the selling price should be included for warranty. Many of the available extended-labor warranties don’t begin coverage until 30 to 90 days after the installation, meaning your company is responsible for call backs and their associated costs for that period of time. And for all other installations, the company is responsible for the first full year of labor.
Track the cost of your warranty call-backs on installation and include this projected percentage of sales into each estimate. In the meantime, include between 2 to 3% of the selling price for the warranty estimate.
Q: Is the cost of material shrinkage being built into the estimated selling price?
A: We often see companies having invoices from suppliers totaling two to five percent more for small materials than is ever accounted for in estimates. Why does this occur? Some reasons include damage, theft, and materials thrown away rather than being re-stocked. Certainly, the company needs to implement practical procedures for tracking and restocking small materials, but some shrinkage will always occur.
Build into estimates between one and two percent of material costs to recover the material shrinkage that occurs in inventory.
Consider that, by themselves, none of these underestimated costs of doing business is huge, but together they very well may be the difference between achieving that dream of the business you want to own and not.
Vicki LaPlant has worked with HVAC contractors for the past 30 years as a trainer/consultant. She helps people work better together for greater success. Vicki is a longtime Contracting Business.com editorial advisory board member and can be reached by e-mail at [email protected], or by phone at 903/786-6262.