![\"\"](\"https:\/\/hornvaluation.com\/wp-content\/uploads\/2021\/03\/Picture1.jpg\")
<\/p>\r\n<\/p>\r\n
Can you answer these HVAC job pricing questions quickly?
-> Do you price jobs using a consistent method?
-> Do you know your direct labor and materials on every job? (Cost of Goods Sold).
-> Do you know your annual overhead? (Fixed costs you must cover every month).
-> Are you shooting at a target profit or cash flow on every job?<\/p>\r\n
If not, you’re probably dying a death by a thousand cuts every hour\/day\/week\/month\/year. How can you fix this? Let\u2019s take a simple example for an installation. How should you price this job?<\/p>\r\n
<\/p>\r\n
If you don\u2019t know your Cost of Goods Sold (direct labor and materials), overhead percentage, and net profit goal per job, please stop right here<\/strong>. You should be able to get the first two from your accounting system. If not, it\u2019s broken and please contact me right away<\/strong>. The 10% profit goal was one I set, and I\u2019ll explain why it\u2019s reasonable in a moment.<\/p>\r\n Let\u2019s say you used a \u201cmarkup\u201d method. This is common and why it\u2019s often dangerous.<\/p>\r\n Using a 1.6X Cost of Goods Sold markup ($4,000 X 1.6) resulted in this HVAC business losing $679 of cash on this installation job. If they did this 10 times a week for 52 weeks, the installation portion of their business would burn through $353,000 of cash in a year. This is, unfortunately, what a lot of HVAC businesses that don’t survive do.<\/p>\r\n Let\u2019s dust off those algebra skills and try another method. Please be patient. I\u2019m going to make this very easy at the end \u2013 no algebra required.<\/p>\r\n Solving for \u201cx\u201d, we determined the price on this job should be $7,692<\/strong> to hit our target 10% profit. Does this work? Let\u2019s find out.<\/p>\r\n Pricing this job at $7,692 allowed this HVAC company to hit the 10% profit goal. More importantly, they hit positive cash flow of 7% which will allow them to reinvest cash back into the business<\/strong> and pay owner dividends<\/strong>. This is why 10% is a good profit target to start with on installs, especially if you\u2019re way below it. You can always crank it up later as you get better at the method and continue to deliver outstanding service. This was a $633,000 increase <\/strong>in annual cash flow over the markup method!\u00a0<\/p>\r\n I said I was going to make this easy. Once you nail down the Cost of Goods Sold, Overhead, and Profit Target, it\u2019s very simple. Do you see the percentage of Cost of Goods Sold? 52% can now be used for single factor pricing<\/strong>. You\u2019ll want to model your exact numbers and target before implementing this<\/em><\/strong>.<\/p>\r\n $4,000 Cost of Goods Sold \/ 0.52<\/strong> = $7,692<\/p>\r\n From here, as long as you can correctly calculate your direct labor and materials (Cost of Goods Sold) you expect on the installation, know your overhead rate, and have your target profit, you can use your single factor (in this case only, 0.52) to price installation jobs. You\u2019ll want to monitor this to make sure it\u2019s delivering the profit you want, particularly since the prices of everything go up. Let me know if you want help implementing this in your HVAC business.\u00a0<\/p>\r\n Please buy this book<\/a> if you haven’t already. This isn’t an affiliate link and I receive no royalties.\u00a0<\/p>\r\n Thanks, \r\n\r\n<\/p>\r\n Sign up for this blog\u00a0here<\/a> if you want tools to increase the value of your business or want a refreshing view on business valuation from a recovering CPA. I\u2019m Josh Horn, CPA, CVA<\/a> of\u00a0Horn Valuation<\/a>. I value businesses for growth and exits with a focus on HVAC and trade contractors. I also assist litigation and divorce attorneys as a business valuation consulting or testifying expert. My clients are business owners and attorneys. If you\u2019d like more information, email me at josh@jhorncpa.com<\/a>, or call me at 217-649-8794<\/strong>.<\/p>\r\n \r\n\r\n<\/p>\r\n \r\n\r\n<\/p>\r\n I’m a licensed Certified Public Accountant (CPA<\/strong>) and credentialed in business valuation<\/strong>\u00a0(CVA<\/strong>). I’ve been a tax and business consultant in a top 100 CPA firm and a controller in a large international company. I’ve also valued and advised small family-owned and multimillion-dollar companies. You can connect with me here on LinkedIn<\/a>,\u00a0Facebook<\/a>,\u00a0Twitter<\/a>, YouTube<\/a> and Instagram<\/a>.<\/p>\r\n \r\n\r\n<\/p>\r\n![\"\"](\"https:\/\/hornvaluation.com\/wp-content\/uploads\/2021\/03\/Picture7.jpg\")
<\/p>\r\n![\"\"](\"https:\/\/hornvaluation.com\/wp-content\/uploads\/2021\/03\/Picture5.jpg\")
<\/p>\r\n![\"\"](\"https:\/\/hornvaluation.com\/wp-content\/uploads\/2021\/03\/Picture6.jpg\")
<\/p>\r\n
Josh<\/a><\/p>\r\n