5 common reasons why HVAC/sheet metal businesses fail- Snips Magazine

BusFailfeature2Originally Published in Snips Magazine- May 2017 edition

Have you ever wondered why a company that appears to be successful goes out of business? It seemed like there was nothing wrong and then suddenly, it’s gone.

This scene is far more common than we think. Every month, thousands of companies cease operating for all sorts of reasons. Of course startups represent the highest failure rate, but what really gets attention is when an established business turns out the lights.

The following is a list of five very common reasons why longstanding businesses close and what you can do to avoid the same fate.

1. Cash flow

The lack of cash flow has brought many businesses near death and the size doesn’t matter. Small and large enterprises have seen their demise even though they were profitable on paper, but couldn’t pay their bills.

Cash flow can be considered the oxygen every business needs to survive. Much like people need oxygen to survive, businesses need cash flow.

So what is cash flow? Cash flow is nothing more than the intake and outflow of money in a business. Much like breathing, getting paid for your work is like inhaling. Paying all your bills is like exhaling. You can only breathe out for so long before there is nothing left. The same applies to your business. There is only so long you can go on paying your bills without sufficient cash coming in.

One solution is to require deposits. For some reason, many HVAC construction business owners are reluctant to ask for a deposit from customers once they’ve made the sale. The minimum you should be requesting is 50 percent because that amount usually goes a long way to covering most, if not all, your hard costs for the job.

By getting this amount upfront, the customer actually pays for the new equipment before you even have to buy it. In addition, this should also cover most of your labor costs. Having that money in the bank before you start a job goes a long way to easing the pain of covering payroll.

Another option is requiring full payments. Much like deposits, your HVAC sales technicians should never leave a job without complete payments. The last thing you want to do is chase after the balance once you’ve left with all your newly installed equipment now locked behind you.

If you’re not doing these things already, you’ll be pleased to see easy it is to implement. People today are far more accustomed to prepaying than ever before. Successfully executing these two steps will go a long way in reducing, if not eliminating, your overdraft needs, and thereby lowering your bank charges and increasing your profitability.

2. Lack of skills

Many HVAC market contractors are technical experts as far as their trade goes, but are lacking in basic business skills. This isn’t surprising, considering most became experts by performing work and got into business because they saw an opportunity. Nowhere along the way did they get any training in business skills.

This lack of business know-how really didn’t matter when they were small, but the minute they began to grow, the cracks began to appear. As they continue to grow, these small cracks soon overwhelm the owners as they grapple with the business side of the business.

Many people let pride and ego get in the way of asking for help because just working a little harder was all that was needed to fix things. Unfortunately, learning to run a business can be like stepping into an abyss because in many cases owners don’t even know what questions to ask.

Instead, start by identifying the three things that are constantly frustrating you and then pick one to focus on. For example, if your company expenses seem to be out of control, start questioning every bill you pay. You can’t leave this to the bookkeeper; you need to do it yourself. You may be very surprised at where your money is going every month. Do some research to determine what the local HVAC industry norms are for your fixed expenses. Not sure what fixed expenses are? Google it. This is all part of becoming a business owner.

If your problem is service callbacks, look for patterns. Are your technicians leaving a job without double-checking everything? Are they going to a job without all the necessary parts and equipment, forcing them to make a special trip to the distributor? Once you start to track these issues, it becomes a lot easier to put a plan in place. By the way, screaming louder is not a plan.

For other areas of the business, like sales or marketing, signing up for some training may be all you need to give you a different perspective. There are many in-person sessions available, and online training courses are easy to find.

You may also consider hiring a business coach to help you. Alternatively, reaching out to successful business owners you know and admire and asking them to become your mentor may be all you need. In either case, make sure your personalities align, otherwise you may walk away disillusioned.

3. Profitability

Ever wonder why you’re overwhelmed with work, but can’t seem to make any money? Chances are you’re either not charging enough or your costs are out of line.

The only way to figure out if you’re not charging enough is to dig into your costs. Too often, owners haven’t established a formal costing model. Start by itemizing exactly what goes into every job. All too often, quotes are nothing more than off -the-cuff guess estimates. It doesn’t end there though. Once a job is completed, you then need to do a follow-up analysis of the actual costs. This way you can determine where you’ve nailed it or what you missed in your original quote. This way you can continually improve your quoting accuracy.

The added benefit is that by doing this post-mortem of every job, it helps you to start questioning every expense item and gives you the opportunity to look for ways to become more efficient. Everything should be questioned, from costs of parts, labor and even travel time. The thing is, most accounting software packages have this functionality, so you only have to start using the job costing module.

While you’re at, it may be time to start looking at all your other costs from cellphones, insurance and fuel to see if you’re getting the best deal. Every dollar you save or spend either goes into your pocket or comes out of it.

You can only improve your profitability if you know your numbers.

4. Attitude

One silent destructor of business is the owner’s attitude. If you’ve managed to survive in business for 10-plus years and dealt with all the stress and challenges that come with being an owner, you now have to guard yourself from becoming cynical.

Owning and running an HVAC or sheet metal products business is tough, hard work, and over time the joy of running your business may become less and less appealing. You may find your tolerance to legitimate customers’ concerns or questions more of a pain than an opportunity to reinforce their decision to do business with you. The same applies to those routine inquiries by your staff that have now become a source of frustration. If this is the case, you may need an attitude adjustment.

The best thing you can do when you find yourself with a less-than-happy disposition is to figure out what is really annoying you.

In many situations, it comes down to not enjoying the entrepreneurial journey anymore. Business ownership is not for everyone and as the business grows, we get further and further away from the things we really enjoyed when we first started out.

One effective solution is to spend at least one day a week doing the things you enjoy. If performing manual ductwork fabrication is what you’re missing, then go ahead and do it. It’s your company and you have earned the right to do any job in the company you want.

5. Burnout

Much like attitude, burnout creeps in over a period of time. Of course, during the early years you need to work to ensure survival. Unfortunately, many owners never evolve with their business and remain in that mode long after they should have shifted into the next level of business ownership:  management.

Maintaining a startup mode after the initial three to five years is a sure way to end up suffering burnout.

One of the first things you need do is give yourself permission to take a break. That could be nothing more than playing hooky for a day to taking a full-fledged vacation. Either way, you need to gain some perspective.

The second thing you need to do is stop doing everything and start delegating. Start with some small tasks that you really dislike doing. I find one of the least-liked duties that owners perform is bookkeeping and administration. Outsourcing the bookkeeping is pretty straightforward and delegating some of the administration duties is a good starting point.

The same applies for scheduling and parts ordering. Can someone else assume some of these responsibilities? Granted they may not be as good at it as you are, but chances are they’re better than you used to be when you first started.

You’re not invincible, and you need to seriously look at unburdening yourself. You’re not supposed to be the hardest working person in your company. Otherwise, what’s the point of being in business for yourself?

They say the first step in correcting a problem is to admit you have one in the first place. Taking a hard look at yourself and your business might help you to identify any of these five items early in order to avoid the fate of so many wonderful businesses that simply disappeared.

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Small Business Minute #48 – Know Your Strengths

Know Your Strengths

 

Every entrepreneur goes into business with a list of dreams, hopes and desires for their business and their life. Unfortunately, dreams require more than just hoping and praying for a successful outcome.

What we need to realize is that dreams are just the starting point of the entrepreneurial adventure. Dreams get us in the game, but to be successful in business requires being able to put all the pieces together in order to create a prosperous enterprise.

 

Those elements consist of:

  • Sales
  • Marketing
  • Operations
  • Administration

The thing is, most of us are only really good in one or, if we’re lucky, two of those areas.

Self Assessment

Each of those areas require a wide ranging set of skills, yet many entrepreneurs have no ideas what real strengths or weaknesses they possess. Putting our dreams aside for a few moments, we need to ask ourselves some questions. A little self evaluation, if you will.

• What skills do we really need for our business?
• Are our strengths aligned with the skills required for our type of business?
• Do we have the temperament to even be in business?

Find Your Strengths

Relying solely on our own answers, only gets us part of the way. We need to get a little more scientific, because we all think we’re exceptionally talented. However, if we can leverage our true strengths, our path to success becomes just a little bit easier.

Once we’ve done a self-evaluation, we need to follow it up with a formal personality profile to see if our reality aligns with our perceptions. There exists a number of profiling tools available at little or know cost such as Myers-Briggs or Disc. These are readily available on the internet. If you’ve never complete one, I encourage you to do so as soon as possible. They are insightful. Once completed, compare it to your self evaluation.

By knowing our strengths and weaknesses that get uncovered by these profiling questionnaires, provide you with a framework for your personal development. To thy own self be true.

I’m Greg Weatherdon and this has been your Small Business Minute.

You may also enjoy reading Limitations

Copyright © Greg Weatherdon 2017

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Small Business Minute #47 – Pricing For Profit

Pricing For Profit

I’m frequently asked how one goes about pricing their goods and services for profit. It sounds like a simple enough question, but in reality, it can very complex. Get it right and all should be well. Get it wrong and you’ll be constantly chasing revenue, if only to pay the bills.

Now if your product is a “me too”, you don’t have a lot of flexibility, as the existing products have already established the pricing parameters and therefore you must compete accordingly. Raising your price becomes almost impossible. The only way to improve your profitability is either to reduce costs or add real value for which your customers are willing to pay a premium.

First Mover Advantage

Moving to higher quality or higher value allows you to break free of the commodity pricing, but with potential trade-offs. Chances are you’ll reduce the number of customers but add much higher profits on every sale.

Conversely, if you have a unique product or service, you can leverage the “first mover advantage” and command higher prices. This is because there is no opportunity for your customers to do any comparison pricing, because you’re the only one.

I leveraged this “first mover advantage” when I started the Marketing Resource Group. I expected to maintain my higher margins until such time as competitors caught on to what I was doing. Once that happened, I fully expected to reduce my margins, but that never happened and I maintained my premium pricing and margins.

Unfortunately, the vast majority of businesses, especially new businesses, are not sufficiently unique to enjoy unlimited pricing power. So how do you establish an initial price formula for that new product or service?

A Formula

What I have found to be an effective jumping off point is to use the 1/3, 1/3, 1/3 formula. This formula simply breaks down your costs into fixed and variable and then add the profit element. In practice, it would look something like this:

Fixed Costs                 $1 (33%)
Variable Costs            $1 (33%)
Profit Margin             $1 (33%)
_____________________
Selling Price               $3

Is this a definitive formula? Absolutely not! But it does give you a wonderful starting point to establish your initial pricing target. In reality, many businesses have higher fixed or variable costs, in those cases, the fixed and variable costs shouldn’t exceed 2/3rd in order to protect your profit margin.

I’m sure there are many more complex pricing theorem out there, but this has worked me and my clients in helping to establish some pricing parameters. It forces you to identify all the actual costs that go into your product or service. Once these costs are identified, you can then layer on your expected profit margin starting with a 1/3.

Adjust Your Profits

By using this simple formula, you will actually be able to see how much profit you expect to make. This is of particular value when you end up in a competitive situation and need to be a little more aggressive in your pricing. Chances are you can’t adjust your cost base, but you can adjust your profit. Seeing how much or how little profit you’ll make on a given proposal, let’s you decide whether it’s worth doing as you’ll no longer be guessing at how much, if any profit you’ll make.

Over time, you will build up enough information on this new product or service to be able to refine or develop your own formula. In the meantime, this Pricing For Profit formula takes out some of the guesswork.

You may also like Revenue Without Profit Is Pointless

I’m Greg Weatherdon, and this has been your Small Business Minute.

Copyright © Greg Weatherdon 2017

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