Profit is the money left in your PHC contracting business after all your operational costs have been paid. It is the reward (above your salary) you deserve for the delivery of excellence to your clientele, and for the risks you take in the delivery. It can be compared to a stock dividend.
Your salary for working for your business is a legitimate operational cost, which you must consider when calculating your true cost of operation.
As the owner of your business, you are the CEO, chairman of the board and general manager. You might also be the bookkeeper and the complete office staff. In a one-person enterprise, you are also the technician, the parts manager and the assistant, among other things. You get the picture. If you neglect to include your salary for performing those tasks in your budget, your budget will be flawed. Your selling prices will be lower than your prices should be. Instead of maximizing your profit, you will be on the road to loss.
Loss is the money you must personally add to your business to cover all of your business’ true operational costs, including the salary you should have earned to make a living for yourself.
Breakeven is when you have no money left over after all expenses have been paid, and you do not have to dip into your pocket to add money to subsidize your operational costs. In which case, there would be no point to being in business. You could work for someone else and not have to endure the responsibilities that come with business ownership.
If you, like many contractors, neglect to include all legitimate business costs, including a salary for yourself commensurate with the duties you perform for your business, you will skew your true profit/loss numbers. Your accountant will claim you have a profit, but really that profit was due to the salary you neglected to include for the labor you put into your business.
Many contractors would love to hire you if you are willing to work without being paid. But, isn’t working without proper compensation foolish?
PHC contracting businesses require number crunching
When you install a drainage system in a building, you crunch numbers to calculate fixture units to arrive at proper piping sizes. Heating systems require number crunching for heat loss calculations to determine correct boiler size and baseboard lengths.
Likewise, establishing properly profitable selling prices that are above your true cost requires number crunching calculation of your true cost, and the application of proper profit margins. It’s vital to your business success.
At present, the minimum cost per technician hour to a contracting business in the USA for a qualified PHC technician in a service vehicle, inclusive of proportionate overhead burden, is between $100 and $250, if all annual tech hours are sold. If only 70 percent are sold in a year, the lower end of that range ($100) is really $142.86.
It is imperative to understand the reality of the numbers, because wrong numbers produce wrong results. If you do not understand numbers, instead of profit, you will get loss. If you don’t believe the aforementioned minimum cost range to any PHC contractor, including you,then at least remember, "two plus two equals four—never less, never more." If you calculate your cost properly, you will fall into that range at this time.
To give you an idea of where hourly selling prices for one tech could be on a cost/profit margin basis, Figure 1, column 1 shows the hourly cost per tech to the contractor starting at $100 and increasing in $25 increments to $250 per tech hour (based on all tech hours being sold). Columns 2 through 6 indicate selling prices for one tech hour based on profit margins starting at 10 percent and increasing in 10 percent increments to 50 percent.
Your cost and/or profit margin may be more than $100 per tech hour and 10 percent, but based on Figure 1, if you are charging less than $111.11 per hour, you should definitely check your numbers. Regardless, you should check your numbers constantly anyway. That’s just good business.
I previously stated that at a cost of $100 (based on all available tech hours being sold), when you only sell 70 percent of available tech hours, your cost for a tech hour jumps to $142.86. In that instance, you must apply a 30 percent profit margin just to recover your hourly tech cost ($100 ÷ 70% = $142.86). Less than 30 percent and you have a loss on labor. At 30 percent, you break even. To attain a profit, in that instance, you would need a profit margin greater than 30 percent.
Profit requires business people, not just people in business
I’m sure many readers at this point are shaking their heads, saying that there is no way those numbers could be charged. People won’t pay them. If you are one of those readers, close your business and go to work for someone else, because you don’t belong in business. You just don’t get it.
Real business people realize the reason they are in business is to make a profit, not incur a loss or break even. To make a profit, you must realize you only have three choices regarding your selling prices: sell services at, below or above your cost. Two of those choices will not result in a profit.
If you believe consumers wouldn’t pay those prices, you must find a way to explain why consumers pay the ever-increasing prices associated with everything else. You may have PHC contractors in your area who charge more than you. They exist. Get over yourself. Properly profitable selling prices require you to correctly check your true costs. This requires you to itemize each business expense you incur to deliver excellence to your clientele. To arrive at your hourly costs, you must apportion your total costs to the number of tech hours you have available. To arrive at properly profitable selling prices, you must apply a proper profit margin to your true costs.
You may require assistance to do this properly. That, I can offer. Just call me. But, whether you do it yourself or with my assistance, it must be done and done properly. Whether you do it or not is your choice. With one choice, you profit. With the other, you lose. l
Richard P. DiToma has been involved in the PHC contracting industry since 1970. He is a contracting business coach/consultant and an active PHC contractor. For information about the CONTRACTOR PROFIT ADVANTAGE or to contact Richard: call 845-639-5050; e-mail firstname.lastname@example.org; mail to R & G Profit-Ability, Inc. P.O. Box 282, West Nyack, N.Y., 10994; or fax 845-634-7236.