How much money does an HVAC contractor need to run a business and live their desired lifestyle? Many contractors have no idea. Others think they know, but really don’t. A recent presentation put on by The New Flat Rate aimed at showing HVAC contractors how to use honest, accurate numbers to drive their businesses.

In the end, the success or failure of an HVAC firm comes down to income. A contractor needs enough money coming in to cover expenses and make a profit. Income consists of two factors: pricing and sales. If prices are too high, sales decline and income falls. If prices are too low, sales rise, but income still falls.

So what is the right price? Some contractors use a simple formula to determine their pricing, such as the cost of equipment multiplied by a given number. Others try to figure out their price by adding on a certain percentage for overhead and another for profit.

A more sophisticated model makes decisions based on total sales. In these models, overhead and profit are percentages of total sales. The problem with this model is that it’s backward-looking, said Rodney Koop, CEO of The New Flat Rate. What happens when sales fail to meet expectations? That can happen for many reasons, not all of them within the control of an HVAC contractor.

This leaves the contractor with two choices. One is lowering prices. HVAC contractors control the prices they charge. What they can’t control, at least as much, is the costs they incur — in other words, overhead.

“Overhead is money you are obligated to pay,” Koop said.

Charging More Means Spending More

The other option is charging more. But charging more can cost an HVAC contractor more as well. That’s because consumers expect to get more when they pay more, Koop said. In order to charge more, for example, an HVAC contractor may need to guarantee the work. That’s fine until something goes wrong and the contractor is suddenly doing work for free.

What should a contractor do to ensure the pricing model works? One is to develop realistic goals for a business and for a personal life. The other is to approach sales in a different way.

Being realistic means paying out what a business should. Profit is one area. Koop said if a business is truly profitable, the owner should deposit that profit every week. The money should go into a different bank than the one the HVAC contractor uses for expenses.

“If it’s profit, it does not have to be spent,” Koop said. “Don’t pretend you’re profitable when there’s no cash laying around.”

At the end of the year, an HVAC contractor may choose to reinvest that product, such as by upgrading the firm’s computer system. That’s a legitimate use of the money, Koop said. Covering monthly expenses is not.

Another area is rent. HVAC contractors should always pay rent, Koop said, even in they own their buildings. This allows an easy transition if they move for any reason.

Pay Yourself a Realistic Salary

Then there is the owner’s salary. An HVAC contractor should always pay out a personal salary, Koop said, because it avoids problems with taxes. To determine that salary, HVAC contractors need to create an accurate personal budget that reflects both their needs and their wants. An HVAC contractor’s salary must match that budget. If it doesn’t, Koop said, the contractor needs to either cut personal costs or get a raise. That usually means increasing a firm’s income.

The best way to do that is by thinking like a retailer rather than a wholesaler. Koop said many HVAC contractors learn sales techniques from distributors and wholesalers. But residential HVAC contractors are selling to consumers, not businesses. They need to adopt the techniques of general retailers, Koop said.

One of these is actually not selling. A technician should present a consumer with options and let the consumer decide. Another is setting the price to make money rather than to make a sale. Koop said the right price is whatever the market can bear. HVAC contractors should avoid discounts, Koop said.

HVAC staff also need to speak the consumer’s language. This means avoiding technical specifications, such as SEER ratings. Instead, they should focus on features.

No matter what approach an HVAC contractor takes to sales or pricing, that approach needs to be adaptable.

“When the numbers change, you change,” Koop said. “That’s the No. 1 rule of business.”