Wealth Rule No. 8: Have a Sound Inventory Policy
Inventory tracking is key to a sound cash policy. You don’t want to spend cash you don’t need to spend.
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Originally published: 04.01.16 by Ruth King
If you don't price to earn a profit, the more revenue you generate the deeper in the hole you will get. Many contractors dig themselves a hole simply by trying to price by the gross margin method, or even worse, to match the prices of their competitors.
This month I give you the steps to profitable pricing. It builds on the article I wrote earlier this year (Why Net Profit per Hour is a Better Way to Price).
Once you know the net profit per hour you want to earn, the next step is to determine the overhead cost per hour for each type of work you perform: service overhead per hour will usually be different than replacement, new construction, etc.
Similar to net profit per hour, overhead cost per hour is total overhead cost divided by billable hours. Generally, you calculate this number once or twice per year. If you try to calculate it every month, your overhead cost per hour will vary widely, depending on how busy or slow your company revenues are.
All pricing for profit follows the profit and loss statement — backwards.
Net profit per hour plus overhead cost per hour equals gross profit
To get your regular customer service rate, divide the maintenance customer service rate by 0.85 for 15 percent maintenance discounts and 0.90 for 10 percent maintenance discounts.
Remember to use the highest service technician hourly wage. If you use an average, you will lose money on your highest paid technicians and only earn a profit on your lower paid technicians.
If you're pricing flat rate service prices, remember to either divide the maintenance customer rate by the billable hour percentage or, my preference, add an additional 30 minutes for travel time to the flat rate price.
Using my preference, the maintenance flat rate in your flat rate books will be 1.5 times your maintenance customer service rate to include a 30-minute travel time.
Maintenance agreements must at least break even. My preference is to include a $5 net profit per hour.
Follow the same process.
Assume the following:
Using this simple pricing method, you will be pricing for profit. Just make sure your field employees do the work in the hours you estimate.
Ruth King is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. She has more than 25 years of experience in the HVACR industry, working with contractors, distributors and manufacturers to help grow their companies and make them profitable. Contact her at ruthking@hvacchannel.tv or call 770-729-0258.
Ruth King has over 25 years of experience in the hvacr industry and has worked with contractors, distributors, and manufacturers to help grow their companies and become more profitable. She is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. Ruth has written two books: The Ugly Truth About Small Business and The Ugly Truth About Managing People. Contact Ruth at ruthking@hvacchannel.tv or 770.729.0258.
Inventory tracking is key to a sound cash policy. You don’t want to spend cash you don’t need to spend.
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Sales count. Profits count. But they’re worthless if you don’t collect the money those sales and profits generated.
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Cash is the lifeblood of your company. You should watch it every day.
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