How Much Profit Should an HVAC Business Make?
How much profit should an HVAC business make? According to Contracting Business, the industry as a whole averages from 2.5-3.5% profit margin. Still, successful HVAC businesses can improve upon that number substantially, at 10% for companies that do well and 25% for companies that do exceptionally well. Only five percent of contractors will have a profit margin at or above ten percent, but you can join them. Here are some tips to help you better understand and change your profit margin.
What Is Your Current Profit Margin?
Many people who run HVAC businesses do not spend enough time understanding their numbers. Without knowing what your current profit margin is, it will be challenging for you to change it. If you’re using accounting software, it’s likely that it has a function to show you your profit margin without you needing to take out a calculator.
If not, you can calculate your profit margin by hand. We’ll aim for your net profit margin. But, in order to calculate that, you will need to determine your operating income. You calculate it as such:
Your operating expenses include almost everything you can think of, from staffing costs to gas, truck rentals, tool purchases, material purchases and much more.
Some people mistake this number for their profit margin, but it doesn’t take income taxes and interest into account. For that, you need to calculate your net profit margin. Calculate it as such:
((Operating income – Other expenses – Interest – Taxes) / Revenue) x 100 = Net profit margin
This will show you how much profit your business makes after all expenses, including interest and taxes. It is the “truest” form of your profit margin.
Changing Your Profit Margin
Disappointed? That’s okay. Many highly successful businesses started out as operations that were not making any profit at all. In the process of calculating your profit margin, you probably saw some numbers that left you skeptical. Are you really buying that many tools? Are you keeping too much inventory on your truck? Why are you charging so little for certain jobs when it turns out they cost a lot?
If you didn’t get a sense of where you may need to improve your business to change your profit margin, here are some things you may want to consider:
- Your marketing spend: Most HVAC businesses do not spend a great deal on marketing, but this can be a big mistake. A marketing campaign will cost you, but it can also help you get valuable customers who end up boosting your profit margin. This is especially true if you want customers who are willing to pay higher prices.
- Job pricing: Some jobs will be very profitable, others not so much. You can change how you price jobs to increase your profit margin. You can also focus on promoting and selling the jobs that will make you the most.
- Reducing costs: There are ways to reduce how much you’re spending to complete the job, including signing up for fuel cards, choosing different materials and more.
Hopefully with these tips, you can get your HVAC company’s profit margin closer to where you think it should be.
You might also be interested in 7 Ways to Grow Repeat Business for Your HVAC Company and How to Maximize Your HVAC Company’s Profit Margin.