“Busy going broke” may sound a bit like a cliché, but it can be true if you are not careful. So many times, we get to the end of the air conditioning season and our cash flow hasn’t changed. This might leave you scratching your head and wondering why this is happening. You might even be busier than you have in years with a new install every day for every crew, and yet, your finances don’t feel strong enough.
Brian Costello, a well-known financial guru from the 1980s and radio personality, would always tell companies to spend 90 cents out of every dollar. The remaining 10 cents should be net profit or EBITDA (earnings before interest, taxes, and depreciation). This means cash in your pocket when everything has been paid for.
Simple enough, right?
Nowadays, it’s not uncommon to find companies that don’t have the full attention of the working owner. They might be too busy with the day-to-day stuff to realize what is happening to costs. They have no idea that they are buying a dollar and selling it for 99 cents. The busier you are, the faster you are going broke. The adage “when it slows down, I will take a look at what you are saying,” might sound great in theory, but not so much in practice. Look at it now before it’s too late.
First lesson
Instead of daydreaming of slower workdays, take the time now, even if it’s just an hour or two out of your day, to train your employees. This will help limit the number of callbacks you receive due to gaps in their know-how. Limiting the number of callbacks will also help your company stop bleeding unnecessary capital. After all, you are sending them out on a non-revenue generating call anyway.
Labour overhead
With the year-and-a-half we’ve gone through, we have lost control of unbillable hours. Do we pay employees to stay home, or for their days off due to vaccine reactions? Do we even know what our true cost per hour is anymore? Competition for your staff or hiring others to fill your labour voids have impacted average hourly rates by 20 to 40 per cent. Employee benefits, such as health and dental, have risen 10 to 15 per cent.
The effective rate of paid hours versus billable hours has decreased to below 50 per cent, while the cost of effective labour has risen from $36 per hour to $61.62 per hour. What we now know through HVAC business courses is that no more than 22 per cent of our revenue should be labour. To put his into perspective, an average hourly rate of $20 per hour, with all the adjustments, equated to a $163 chargeable rate. The same technician today has a billable rate of $280.09. Use your numbers to prove your billable rate.
Where did all my money go?
Company overheads have risen dramatically over the last two years, and unless your revenue has increased at the same rate, you might be in for a rude awakening. If you think your overheads are 20 to 25 per cent, you might not realize that you now are at 30 per cent or more overhead. Some of the contributing factors could be increased energy bills, gasoline prices, vehicle costs or maintenance, cost of an oil change, personal protective equipment, or COVID-19 protocol and processes. The list could almost be endless at this point.
Rising costs
Remember when a two-by-four-by-eight stud was $2, maybe $3? Pre-pandemic two-by-fours were $372/1,000 board feet. Today’s price for the same 1,000 board ft. is $1,132. Plywood has gone from $530 per 1,000 board ft. to $1,233 per 1,000 board feet.
Copper has gone from $4,700 in 2019 to $10,700 per tonne in May 2021. Aluminum went from $1,762, up now to $2,600. Steel prices are expected to increase to $1,000 per tonne up from $420 per tonne. All costs are in U.S. dollars.
There is little wonder why HVAC manufacturers have increased finished goods by over 40 per cent in the last two years. Shipping has gone through the roof; delays are almost a guarantee. When the supplier says you should have it on Tuesday, make sure you ask which Tuesday, after all, there are 52 of them.
Thunder before the storm
To give a bit of a recap, all we are looking for is 10 per cent earnings before interest, taxes, depreciation, and amortization (EBITDA) labour rates have gone up, and billable hours have gone down. This has resulted in a 100 per cent increase in labour costs.
General overhead has increased to possibly 35 per cent, which means, if nothing else, we need a 45 per cent gross margin to achieve 10 per cent EBITDA.
We have discovered material costs can increase job costs by 35 per cent. Put it all together and what do you have? Your pricing must be adjusted upwards of 30 per cent!
Final lesson
Our industry needs a bit of a wake-up call. Every other industry has adjusted with the times, with basic swimming pool installs going from $40,000 to $60,000. There is a one or two-year wait as well. We won’t even talk about food prices.
Why then are we still trying to sell on price and are afraid to raise our prices? There is no such thing as a $2,000 or even $3,000 central air conditioner. Why are there posters out there advertising air conditioning units starting at $1,999 then?
It goes back to what was said earlier. “When it slows down, I will look at my pricing.” The excuse of “I will just suck it up till I get the time” doesn’t cut it. Contractors have told me they haven’t raised their prices in two years because they are afraid of losing jobs. News flash, there is more work than equipment or manpower.
Don’t continue to buy a dollar and sell it for 99 cents! Shoot for 10 or maybe even 15 per cent EBITDA. You deserve it!