TM, a tech, recently sent the following e-mail: “I have appreciated your articles in Phc News magazine on running a business that's profitable. I was wondering what thoughts or suggestions you would have for someone considering starting their own business. Overhead is much lower as a one- or two-man shop, but what things should you consider in figuring your true cost? I know I've looked into business insurance, but I haven't worked that out into an hourly cost yet. What other things should be factored in? At this point I don't know whether I am ready to take the plunge, but if and when I do, I would like to start out right and actually be profitable. Any help would be appreciated.”
Your inquiry brings to mind a quote attributed to Colin Powell, who said, “There are no secrets to success. It is the result of preparation, hard work and learning from failure.”
In the words of an old saying, “If it was easy, everyone would do it.”
Colin Powell’s quote should serve as a guide to help you earn the reward you deserve.
To become a technician, you had to be taught the trade, starting with the fundamentals and progressing through stages to become a well-rounded technician. You may have attended a trade school, a formal apprenticeship program or worked for a master technician of your trade who taught you. You prepared for your career as a tech and eventually, master of your trade.
Being a master of your trade does not make you a master of business. Simply giving you a list of expense items to consider could be misleading. If you gave a complex tool to a green helper without training them to properly use the tool, the results would be anti-productive.
To become a master of business and properly manage your business so you can have an opportunity to succeed, you must also master the fundamentals of mathematics. You must draw up a master business plan, which will give you an opportunity to attain your goals. Be prepared to work hard; be willing to learn from your mistakes and make adjustments; and employ common sense. If you disregard any of these requirements, you will be in for a rude awakening, undue stress and much frustration.
As an example, if you set your pricing policies based on what other contractors charge, rather than your own true operational cost and desired profit margin, you are placing yourself on a path to failure.
There are three choices regarding your prices. You can sell above, at or below your true cost. Two of the three choices defeat the reason for being in business. Add to that fact, many contractors—who don’t really know their true cost—sell their services below their true cost. If you mimic their prices, you too can sell below your true cost. When entering the business arena, the most important thing to know is your true cost.
There are 1,708 annual revenue producing hours per tech in a 40-hour work week, when you subtract two weeks for vacation, six holidays and one non-productive hour per workday. Selling your services for $1 per tech hour less than your true cost (based on 1,708 hours) will shortchange your business $1,708 per tech per year, if you sell all available revenue-producing hours.
If you sell less than all your available revenue-producing hours, or establish selling prices that are more than $1 per hour less than your true cost, your loss will be greater.
Many contractors sell their services for $30 per tech hour less than their true cost. Follow that, you can shortchange your business $51,240 per tech, annually.
To attain and maximize your success, it is imperative that you be properly prepared in the correct way to run your business. Your master business plan must include:
•Your intent to deliver excellence to your clientele.
•The ability to properly identify and calculate your true cost.
•The application of a proper profit margin that will get you where you want to go.
The realization of my following favorite sayings: “Fair is a two way street” and “Excellence costs more to produce than mediocrity."
And, when you deliver excellence and are questioned about your prices, remember, "Our firm may not be the cheapest, but we are the least expensive.”
You state that overhead is much lower as a one- or two-man shop. That statement seems true because the total dollar overhead burden would be less than a larger shop. But the statement is problematic. Although the total overhead cost is greater, as the number of employees grows, the overhead cost per tech hour is not necessarily higher. It may be lower.
First, you must realize there are two types of overhead: fixed and variable. Fixed overhead is that which does not change regardless of the number of employees. Variable overhead is that which changes, such as adding a new tech. With each new tech added comes the cost of another vehicle and other expenses.
For example, you rent a building that costs you $10,000 per year. When you have two techs, the overhead burden per tech/truck is $5,000 annually. But when you add another tech/truck, the overhead burden per tech/truck is only $3,333 per tech. And when a fourth tech is added, it drops to $2,500.
When you enter the business arena, your business becomes one of your children. Good moms and dads know there is no "off" button to the responsibilities of parenthood. So it is with business ownership. Therefore, it is incumbent upon you to apply a work ethic to your business that is similar to good child rearing skills.
In the contracting business, you must relate to others in a positive manner, because poor business management produces lackluster results, which lead to failure.
Learn from failure
Preparation and hard work will put you on the road to success. However, mistakes tend to veer you off course. Pencils have erasers because humans make mistakes. If you are not recovering your true cost and earning the profit you would like to earn, your game plan, which includes your pricing structure, is flawed. If you err and do not adjust, you are destined to repeat your error.
A common error contractors make is using a time and material pricing method. I believe T&M pricing is wrong for the following reasons:
You will probably use an hourly rate that is close to competitors who sell their services below their true cost.
Your clientele can suffer from sticker shock because they won’t know the final cost of a task until completion of the job.
Sticker shock leads to arguments.
Arguments lead to stress and frustration.
Stress and frustration lead to unnecessary hard work.
You get the picture.
Although hard work comes with ownership of a PHC contracting business, and mistakes are inherent to humans, preparation can decrease the amount of hard work and errors. If you make a mistake, fixing your errors properly will put you back on the road to success.
I applaud you, TM, for your due diligence in trying to figure out operational costs before taking the plunge into the business arena. My book, "Solutions Management Theories & Methods for the Contracting Business," can help guide you. You can order this book by giving me a call.
I have had the privilege of writing for Phc News for 15 years, and I hope to keep it up far into the future. I thank all my followers for reading. My intent has always been to help you understand how to balance the complexities of business management with your technical skills, so you can deliver excellence to your clientele while earning the reward you deserve for your delivery of excellence.
From input I have received from readers, I know some wait for each month’s issue, which is good. However, if you or any of my readers want to enhance business abilities in an accelerated manner, I suggest calling me for individual assistance in calculating your numbers correctly; preparing your game plan properly; seeking my advice and support when in a quandary; or addressing your specific business problems.2
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 email@example.com.