Caption: Ruth King schools HVAC contractors at the 2020 AHR Expo on the financials they need to be monitoring and tweaking to make their companies more profitable.
Profit is defined as the “difference between the amount earned and the amount spent in buying, operating or producing something.”
Many HVAC contractors have no idea if they are profitable, or assume they are because of the money coming in. They aren’t paying attention to the correct numbers, noted Ruth King, CEO of HVACChannel.tv, Feb. 4 at the 2020 AHR Expo in Orlando, Fla.
She said that HVACR contractors could determine if they were profitable by answering three questions:
- For every dollar you bring in the door, how much are you spending on payroll and payroll taxes?
- For every billable hour, how much overhead do you need to add to the cost of that billable hour?
- For every billable hour, how much profit do you generate?
Regarding question No. 1, how much contractors spend on payroll can be calculated using the Productivity Ratio (also called compensation percentage), King said: total payroll plus payroll taxes divided by sales.
The ratios for each business segment are:
- Service Productivity Ratio — less than 40 percent
- Replacement Productivity Ratio — less than 30 percent
- New Construction Productivity Ratio — less than 20 percent
For question No. 2, calculate overhead cost per hour dividing total overhead with billable hours. For service, that number should be less than $40 per hour; the replacement overhead cost per hour should be less than $30.
“Start tracking billable hours; they will go up!” King noted.
Lastly, question No. 3 is where contractors focus on the wrong number. “Net profit tells you nothing,” she said. “Net profit per hour is what you need to look at.” Determine your net profit/hr. by dividing total net profit with billable hours.
King added that contractors should have a net profit/hr. for every technician: “If someone’s not making you money, you’re probably the last one to know. Always be hiring!”
