Avoid Down Cycles
Originally published: 12.01.08 by Ruth King
Planning and saving money properly will ensure your business is protected during slower times.
Many hvacr companies got hit twice this year – first the weather wasn't extremely hot or cold. Second, the economy tanked in many areas. Keep in mind that the economy cycles. Sometimes the cycles are seven to ten years or more. When we have a great economy for 10 years, we have a tendency to forget that downturns come and we don't prepare for them.
Weather cycles are much shorter. We have no control over the weather. It is an opportunity or a threat. However, we can prepare for both business and weather cycles. Here are four actions you can take to be prepared:
1. Diversify your company in the hvac industry. You must have a strong service and replacement business. Commercial construction companies should be in the commercial service and replacement business. Residential construction companies should be in the residential service and replacement business. Heating and air conditioning is no longer a luxury. Businesses and homeowners must have it. However, in 2008 I saw more repairs and less replacements. The replacement systems were generally not the highest SEER or AFUE ratings. Even in slower economic times, people
Starting and growing a service and replacement business takes time. Finding the right technicians can be a challenge, as can executing the marketing plan to generate leads and customers. However, even if it takes three years to grow a profitable service and replacement company, you will be poised to take advantage of the next economic downturn.
2. Diversify your company with products outside the hvac industry. Indoor air quality products are not seasonal in nature. You can also add electrical, pool and spa, security, or plumbing divisions. If you choose this type of diversification, it is best to learn about these industries first. Hire someone who has a license and verifiable experience, or purchase a profitable company. If you purchase a company, make sure you do your due diligence. (See November 2008's column at www.hvacrbusiness.com).
3. Service agreements. Most customers realize the necessity of maintenance. They understand that your service agreement programs cut their utility costs. Even in slower times, I haven't seen a major decline in the number of service agreements. In fact, some companies have increased their service agreement customers this year. Residential companies should have 1,000 service agreements for every million dollars in sales. Commercial companies should have 600 hours of maintenance for every commercial technician.
It is a proven fact that in slower weather, your service agreement customers can keep your company profitable. In slower economic times, they can do the same thing.
4. Save cash. Decide how much cash you need for slower times. It might be a year's payroll and operating expenses. Then, take 1 percent or 2 percent of every dollar that comes in the door and put it in an interest bearing savings account. For every bank deposit you make, write a check for 1 percent or 2 percent of that amount and put it away. These funds add up quickly if you don't touch them. You'll have cash for the next weather economic down cycle. Just tell your bookkeeper to write a check into the savings account for the percentage you choose every time a bank deposit is made.
These four projects take time and a plan. Writing a business plan is essential to accomplishing the first three strategies above. Saving cash is easier.
If you don't need funding, you can use my three-page business plan (see November and December 2006 at www.hvacrbusiness.com). Those three pages are: goals, marketing/advertising plan, and a financial budget. Of course, it takes time to do the research necessary to get to those three pages. You might have to learn a new business. You might have to do due diligence. Now is the time to plan for 2009.
Once you've done your homework, write your plan. Get opinions from your managers and outsiders you trust. Actually the writing part is easy. Implementation is hard, especially when you get busy. Once it is finalized, act on your plan. Always take the time to review results, and keep sight of the goals, even if you are years away from achieving them.
The weather and the economy have hurt in 2008. Hopefully it was a wakeup call to the actions that you must take to avoid future pain. Invest the time and do what is necessary to ensure that you are protected during the next weather or economic down cycle.
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 firstname.lastname@example.org or 770.729.0258.
Articles by Ruth King
Are You in No Man’s Land?
No Man’s Land is a vulnerable stage in your business growth. Many contractors don’t make it out of this stage because they can’t make the transition from doing to managing and they don’t keep an eye on cash flow.
Where You Should Put Labor Burden
True profit is determined by net profit per hour, calculations which take both direct and overhead costs into consideration. Labor burden is included, whether you put it in direct or overhead cost.
Profitable Sales Turned into Positive Cash Flow is Critical
Although cash is king and is used to pay all of your bills, cash flow is important, but profitable sales turned into positive cash flow is critical.
Know When You’re Growing Too Fast or Too Slow
Business profitability doesn’t mean business survival. By running out of cash and not having the ability to borrow or get it in an equity investment, you can be profitable and go out of business by growing too fast.
Understand Your P&L: Overhead