As I was about to write this column, I received a phone call from an HVAC contractor looking for my assistance. He said he was in business for 35 years. As the conversation continued, he expounded on the fact that he used to have four to five people in his employ before the COVID-19 pandemic, but his company only has one person now — him. He explained that his technicians left his employ and started their own businesses.

He had read one of my columns and thought I could help him with his situation.

Since this contractor opened his business 35 years ago, he isn’t a youngster. He wanted to continue running the HVAC company and get it into a financially sound condition so that he can sell it when he decides to retire.

He claimed that he had 3,000 clients and thought his client list was worth something to any prospective buyers. Under the right conditions, I would agree. So, I started asking him questions to ascertain the conditions under which his business operated.

Since business is always about the numbers, I asked him to tell me how much he wanted to earn annually from his HVAC company. He told me $100,000.

He seemed confused as to the reason why I asked that question. I told him that numbers must be properly and correctly calculated to attain his goals in business.

He responded that he was good at installing and servicing HVAC systems, but didn’t know the importance of the numbers needed to run a business properly.

Losing his employees and not knowing the importance of using the correct numbers to manage his business made me wonder how he ran his HVAC company for 35 years. It gave me insight into why he lost his employees.

To uncover the reasons for his predicament, I went to the numbers. I asked him what he charged consumers to replace a capacitator. He quickly answered $215.

When I asked the HVAC contractor how he knew that the capacitator needed to be replaced, he told me he diagnosed the problem. I wondered if he charged for the diagnosis; he said that if the consumer agreed to replace the capacitator, there was no charge for the diagnosis. His response made sense if the numbers were properly calculated and the cost of the diagnosis was included in his $215 selling price for the replacement of the capacitator.

At this point in the conversation, I told him I didn’t think he made money at his $215 price. He wondered how I came to that rapid conclusion. I told him that the numbers didn’t add up to earn $100,000 annually for himself and pay all his overhead expenses. Then, I broke it down for him.

Labor, Overhead and Ancillary Salary Costs

He told me the capacitator cost him $25 and that the task would take about an hour inclusive of all time from when he knocked on the front door, performed the diagnosis, changed the capacitor, tested the work performed, got paid and departed from the location. That made sense to both of us. I told him he must add to those times the initial time it took him to travel to the consumer. 

He told me his average travel time was about 30 minutes. For this job, he spent 1 hour and 30 minutes to perform the service.

To earn his $100,000 annual draw from his company, he would need to include all other business expenses related to the operation of his HVAC company. He agreed.

He first needed to consider the ancillary costs associated with his salary: FICA matching fund; unemployment and disability insurance; workers’ compensation insurance; liability insurance related to payroll; health insurance; vacation, personal and holiday pay; and retirement pay. Those ancillary salary costs add about 25 percent to his salary expense. It means his $100,000 salary costs his business $125,000.

He only has a maximum of 1,708 annual revenue-producing hours in a year. This is based on a 40-hour work week, 16 days for vacation/personal/holidays, and one lost hour per 244 annual workdays for nonrevenue-producing duties. 

$125,000 divided by 1,708 hours equals $73.19/hour of salary cost to his HVAC company if he sells all his potential revenue-producing hours annually. The $73.19 is higher if all potential revenue-producing hours are not sold annually.

His overhead costs per hour are at least $75 for each potential revenue-producing hour if he considers all that it takes to run a company in a business-like manner. That means his minimum labor/overhead cost per sellable hour is $148.19 if he sells all his available revenue-producing hours.

Therefore, his labor/overhead cost to perform the task of replacing the capacitor, if he sold all his annual revenue-producing hours, is $222.29 ($148.19 x 1 1/2 hours). Add $25 for the capacitor, and his cost to perform the task is $247.29.

Since he only charges $215 for the task, he has a $32.29 deficit ($247.29 cost to his business less $215 of revenue brought into his HVAC company). Because he has 1,708 potential revenue-producing hours each year, he can perform that same task 1,139 times yearly.

Based on his goal of a $100,000 salary draw from his company, $32.29 multiplied by 1,139 times equals $36,778.31 of loss. This means that the most he could earn annually from his HVAC business is $70,577.35.

Realistic prices = well-compensated employees

Let’s do the math: $70,577.35 of salary x 125 percent = $88,221.69 in salary and salary-related expenses. When you divide $88,221.69 by 1,708 hours, the hourly labor cost becomes $51.65. Add $75 per hour for all other expenses, and the cost per labor/overhead hour is $126.65.

So, $126.65/per hour multiplied by 1.5 hours to perform the task is $189.98. Add the $25 for the capacitor, and you get $214.98. A profit of 2 cents, but the contractor doesn’t get the $100,000 salary he wants.

It’s important to realize that no contractor company sells all its available revenue-producing hours all the time. So, even if this HVAC contractor lowers the amount of money he gets from his business, he loses money.

If he only sells 99 percent of his available revenue-producing hours, he sells 1,690.92 hours. In that instance, his labor/overhead cost per hour sold becomes $127.93. 

Let’s see how I arrived at that number: $126.65 of labor/overhead cost per hour x 1,708 available revenue-producing hours = $216,318,20 of total annual labor/overhead cost to the contractor’s business. By dividing $216,318.29 of labor/overhead cost by 1,690.92 hours sold, the labor/overhead cost per sold hour rises to $127.93. 

When you multiply $127.93 by 1 1/2 hours to perform the task and add the $25 material cost, the cost for his business to collect $215 would be $216.90 — a loss of $1.90.

So, $1.90 multiplied by 1,139 times per year equals $2,164.10 of annual loss. Sell fewer than 99 percent of hours and the loss is higher yet.

I told the HVAC contractor that his techs went into business for themselves because the prices he charged could not possibly keep his techs in his employ. He couldn’t compensate them because instead of making money for his business, he was only moving money. And when you don’t have enough money to properly pay employees, you lose them.

Without properly addressing the numbers, his business would more than likely not be able to attract buyers for his HVAC company.

 I sincerely hope the information I gave him helps him and you realize that business is always about the numbers. Wrong numbers produce wrong results. Correctly calculated numbers that can help you achieve your goals can also allow you to put a smile on your face and money in your bank account — and add value to your business in the eyes of potential buyers if you ever decide to sell it.