If you rely solely on Key Performance Indicators (KPIs) to chart the financial health of your HVAC or plumbing business, COMFORTECH 2016 presenter Ruth King says it time to change your way of thinking.
"A lot of contractors rely solely on Key Performance Indicators, and don’t really look at what’s going on in their financial performance picture," she says.
During Comfortech — which runs from Sept. 19 (workshops) to Sept. 22 — King will dissect 10 important financial metrics contractors must track to keep their businesses moving in the right financial direction. Her presentation is called Why KPI's are Dangerous & Data You Must Track to Ensure a Profitable Business.
"For example," King says, "let’s assume that your current ratio (current assets to current liabilities) should be somewhere around 1.8% to 2%. If your current ratio is 3%, you’re above the industry average, however you were at 3.2% the month before, and 3.8% two months ago. You don’t care about the fluctuation, because you’re above the 2% figure. But you should be concerned that you went from 3.2% to 3 to 3.8, which is the wrong trend, because you’re losing profitability.
"It doesn't matter what the industry averages are. What matters are your particular trends are," King advises. "To compare your profit margin against the industry average is a misnomer. You got to look at your trends, and what’s happening with your business."
For King, "net profit per hour" is the most critical financial performance indicator.
"In about 2007-2008 I started looking at my client base, some of which had great profit margins, while other were very bad. I realized something was wrong — I realized that when you’re dividing by 1 minus gross margin, you’re forgetting about overhead. I will use actual project data to show Comfortech attendees two jobs with identical gross margins. However, one project made $73/hour, while another lost $21/hour, at the same gross margins. So if you only use 1 minus gross margin, you could be in a world of hurt."
Ruth King has been an HVAC consultant since 1987, when she started working with the venerable Ron Smith's Service America group.
King is very skilled at helping business owners truly understand financials and build thriving maintenance bases. She was attracted to the dynamics of the contracting business from that first day in 1987. To help her relate to the contractor's world, along the way she earned a Class II (unrestricted) HVAC contractor's license in Georgia.
King authored the popular "HVAC Operations Manual Series: Best Practices for Running an HVAC Company" and the #1 Best Selling "Courage to be Profitable." She writes for industry publications and is a popular speaker for national and local events.
Topics in Ruth King's presentation will include:
- Why net profit per hour is the most critical indicator to track.
- How to know your financial statements are wrong in less than two minutes.
- The 10 operating ratios that really tell the story.
- How to price for profitable sales.
- What your callbacks and warranty calls really cost you.
- The best question to ask prospective maintenance agreement clients.
- Pricing maintenance - do's and don'ts.
- The maintenance agreement process which beats the national maintenance enrollment average by 15% to 50%.
- How to determine whether your marketing dollars are wasted.
- The counterintuitive marketing process that saves money and makes the phone ring.
Contractors may bring their own financial statements for review, although time will not allow reviewing every one. However, King will have examples of financial analysis done right, and mistakes to avoid.
"Bring a pencil and a calculator. We will be doing some addition, subtraction, multiplication and division," she says.