How HVAC Owners Can Fix Pricing and Increase Net Profit Per Hour with Ruth King

All right, guys, welcome back to part two with Ruth King. Now, as you can tell, she knows her stuff when it comes to

financials and things. I don't really understand all that much like P and L sheets and balance sheets and all this kind of stuff.

I let my bookkeepers deal with that and I ask them questions, but Ruth, we're asking her questions today.

She's answering them for us and you guys that want to be a business owner or you're already in business for yourself.

She's got some good advice for you guys and good knowledge and good to listen to here.

So this is Ruth King with myself in Furman, guys. Let's get to it. This is the HVAC Know-it-All Business Edition podcast.

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Welcome to the HVAC Know-it-All Podcast.

Recorded from a basement somewhere in Toronto, Canada, your host and HVAC tech Gary McCreedy will take you on a deep dive into the industry discussing all things HVAC.

From storytelling to technical discussion, enjoy the show.

So that leads me to a question then Ruth, is a contractor starting out now or has been on the road for a year or two?

What sort of profit margin should they be aiming for at minimum to continue to bring in that positive cash flow and to grow at the same time?

Is there a sweet spot number? It's all over the board from what I understand.

From your experience, what number should they be aiming for?

They should be aiming for at least a net profit per hour more than you can make in a fast food restaurant.

If I don't buy any of the profit margin stuff, we generate, we have new in this industry by billable hours.

No billable hours, no service, no billable hours, no install, no billable hours, no projects, no billable hours, no maintenance.

You need as a contractor to know for every billable hour how much overhead you have to attach to it and how much drops to the bottom line.

I don't care where your margins are because it all comes out in the bottom.

You can put everything you want into cost of goods old and have a low gross margin.

You can put everything in overhead so that you have a high gross margin.

I could care less. I'm most concerned with what left on the bottom line.

So my thing is I never tell any contractor what they should have for their net profit per hour.

My only request is that it's higher than what you could earn in a fast food restaurant.

And if you're not making it, at least that go work for the fast food restaurant because you have a lot less hassles and headaches.

The very good way of looking at the world, and I promise you, it's the way that we generate revenue and profit, period.

It's an interesting take. I do want to build on that a bit.

When you say fast food restaurant as much as you make it a fast food restaurant, what exactly do you mean by that?

Because it could be all over North America, that number could be a very wide range.

Can you just tell us what you mean by that?

Because I'm sort of confused on it.

It's somewhere between 16 and 20 dollars an hour.

That's it. California will be 20.

Mid-America will probably be 15, 16.

So if you're not making at least 20 dollars an hour, net profit, go work for a fast food restaurant.

So you're saying every billable hour you should be making more than 16 to 20 dollars an hour on it is what you're saying.

Net.

Now I understand what you're saying.

Okay, perfect.

Net of everything else.

And maybe it's worth spending a minute on the question of overhead.

You said something important, Ruth, which is you have to actually know how much overhead to add to

on an hourly basis.

How does one calculate that?

So what I would do is I would take last year's

P&L year end of 2025 and whatever the overhead was divided by billable hours.

Now billable hours if their one or two men shopped includes their hours because they are billable.

So if they were working billowing hours that were, you know,

and let's just use 2,000 to make life easy.

And we had another guy who was another 2,000.

So we have 4,000 billable hours for last year.

And our overhead for the year, let's say, was $100,000.

So 100,000 divided by 4,000.

That's $25 overhead costs per hour.

So if we want to at least earn what we could earn in a fast food restaurant and we have our

$20 an hour there, I'm doing easy numbers here.

And we have our $25 overhead cost per hour.

So before we even do anything, we're at $45 gross profit.

And then add your actual cost to it and that's what your revenue needs to be.

If you're trying to figure out your service pricing, for example,

and we use that $20 an hour, which is really, really, really low for service.

It's my nationally in the U.S., the average is about $75 net profit per hour.

And some areas it's larger, some areas it's less.

But basically let's do this $75 net profit per hour and then we have our $25 overhead cost

per hour. So that gives us a gross profit of $100 and our tech makes 30.

So our minimum is $130 now for pricing for our maintenance clients.

And then if you're only billable half time, then you're

hourly rate demand service is B260, double it, which you should be charging.

It's very easy. It's not hard.

There's no multiplication and percentages and guessing about what a percentage should be.

And what you got on the bottom line, how much is your overhead cost?

Add your direct cost. It's that easy.

Well, I love it. I love when we use simple examples like this because I think it'll

be very concrete for a lot of guys out there listening.

What if overhead, as someone's starting to scale?

Right? Let's say they go from one truck to three or four trucks.

Often it's overhead that can get out of control.

How do you break down overhead into its component parts?

And how do you think about how to manage your overhead as you scale?

So actually the overhead cost per hour with four guys rather than one guy goes down

because you have more billable hours. Now think about it this way.

We have one guy and you have $100,000 of overhead.

So that one guy is responsible for the entire $100,000.

We had another guy. It's not going to add, it's not going to double your overhead.

Maybe it'll add 10,000, maybe 20,000.

So let's do it at 10. So we have two guys that $110,000.

So that's $55,000 of overhead per guy.

We now have three guys. We've added another 10.

So we're at 120,000 divided by three.

So it's now down to 40,000, a guy from one.

So as you add people, as long as they're billable, you're okay.

The caveat to that is as you add more people,

you might need to add more overhead because you might need more support

as you add more text in the field.

You might need more stuff going there.

So you'll get to a point where like say you have

five field guys, you're probably going to need somebody in the office as a dispatcher

to cover both the service and the replacement stuff that's going on.

And that person is going to be really expensive at first.

But what will happen is that person will then, as you,

you can do a whole lot more field guys, or crews, or whatever,

for that one office person.

But adding that one office person initially is going to be very expensive from overhead

until you grow to the point where that person's salary gets

dispersed over a whole lot of field guys.

And you're going to find that initially with that, with marketing people,

your bookkeeper should be there from day one.

So that's not going to affect it.

I have found not from the dispatch perspective,

but I have found from something like a marketing perspective or an HR perspective.

And you know, those things are really important.

You can, there's some people in our industry who actually outsource that.

And we'll find you people who would be willing to work, you know,

20 hours a week or something along those lines,

so that you don't have the payroll issues and everything along those lines,

it's basically outsourced.

And as you are growing, that might be the way to do it.

That was not supposed to be a plug for work here, Ruth.

But that is exactly what, that is exactly what work here was.

We do do it exactly.

And you're right.

Like there are a lot of, that's why we started work here,

is there's a lot of small businesses out there who can't yet afford a full-time

admin, but need someone part-time.

And there's a lot of power to that.

Absolutely.

I mean, and it's crazy not to do it that way, especially in the beginning.

It's somebody you trust.

Somebody you know who's going to do a good job for you.

Because if they're not, you're bad, the bad word will spread really fast.

Yeah, exactly.

What are some other, for the company that's scaling, right?

You've probably, maybe you've seen them grow from, again,

like half a million to two million in a couple of years,

and you're reviewing their financials.

What are some other common mistakes or challenges they're facing in their financial

picture of their business?

And what are some other things that you are working with them

on financially fit to help them?

So if they're scaling, they've gone through one level, what I call no man's land,

which is where you, where Gary originally said,

what happens when you have to hire that first office employee?

There comes a point about a million to a million to where you've got to add the office.

I don't care if you don't want to implode, you got to do it.

So we got to make sure that those there and we grow it to two million that they're also

productive and can do their jobs and that type of thing.

I often find that as you're adding those overhead people,

the overhead, the net profit power goes down until they are, you know,

you hit the two million and you've actually got to the point where you've got more

field people to allow them that profit prior to go up.

So I look specifically to make sure if they're growing very rapidly, I want,

this is all balance sheet stuff, it's not P&L stuff.

I want their current ratio to be two or higher and growing, you know, like if it was 1.5

and then I wanted to go to 1.6, 1.71, 1.8, that type of thing.

I want the receivable days, if they're COD, better be under 20 days.

There are counts receivable plus cash divided by payables should be greater than two also.

So I'm giving you ratios of, it's not a P&L side, it's the balance sheet side to make sure that

they're growing healthfully. Is that a right word?

Growing healthy? I don't know.

I make up words all the time when I'm podcasting.

I don't even know if they're real words, but everybody knows what we mean when we say them.

So that's what I do. So I look at.

Super helpful.

Gary, I was going to, I was going to let you go, but I got, I got, I got a few more here for Ruth.

I also just want to, Ruth, maybe you can tell us a little bit more about,

about what you're doing at financially fit. I mean, for your reputation, certainly,

proceed you for most of the industry, but for those who've never heard about your work,

tell us a little bit more about all of your coaching and that now what you're doing with this

new tool that you built.

So I have been doing financial statement analysis a little bit like what we're talking about,

by hand, from the 1980s. Back in the old days when we were doing sell spreadsheets by hand,

all right? About five years ago, I decided enough was enough, and we put together a software

program called financially fit business. And I taught AI how to read a financial statement,

a small business financial statement. No financial statement in small businesses is exactly the same.

They're just not. So it took us about a year to do that. And now if you go on to financially fit

business, the, or it's the ability to do it by yourself, I upload everything and all of the

data is on there, all the videos are on there, all the explanations are on there, everything

else like that. Step that I used to do personally, I have now the world can do it because I'm only one

person. And there's also an option. If you want, if you don't want it self-guided, you can have one of

us go through the financial statements with you every month to make sure they're head in the

right direction. And we have certified referral partners who can do that. And I do a little bit,

it's still because it's fun. So cool. I'm curious in the 25 years that you've been doing this work.

25 keep going, almost 40. Almost 40. There we go. I'm sorry for missing that number. I mean,

how have you seen things change for a contractor in terms of their financials? Like,

what are the, what are the, you know, things that a contractor today has to worry about? They

didn't have to worry about 30 years ago. And maybe vice versa. What are the, the easy,

the things that they have easier compared to? So 30 years ago, we had T cards. We had no software

for all intents and purposes. We everything was manual. Everything was hands. Our books were,

you know, binders and stuff like that. For the most part, QuickBooks wasn't invented yet. It was

still quickend, if you remember, quickend. There was large companies like banks and stuff like that

cobalt to do their financials. So we've gotten the ability to put financials on, you know,

electronically to have CRMs that are electronic. We also unfortunately have all the bad guys now,

so that they can steal our stuff a whole lot easier than they could have when we were, you know,

littler. But this is why we say to look at your bank accounts every single day online,

because you never know when a bank, a bad guy is going to get into your bank accounts. So just,

if it's like brushing your teeth, just do it. Takes less than five minutes

to be able to do that type of thing. So I think we've gotten, the tools are exponentially better.

I mean, when I was in college, I used the slide rule. All right. There was no calculators.

So I mean, look at me, you know, 55 or so years ago. And now we're on, you know, everything is on this.

So that has helped us a lot. The ability to take pictures of jobs has helped us a lot. The

ability to have AI as a tool has helped us a lot. But we also have to be more vigilant now because

there are so many bad guys out there who can steal from us. So I got a question because we're

going to be closing off. Well, maybe let Gary have a question. Yeah, I was going to, I was

pausing to see if Gary hadn't. Yeah, my, I'm delaying for some reason when I speak it if he,

okay, anyway, so I've got a question here because again, coming from the contractor side,

and a lot of this is very in depth. The average technician in the field may not understand all

of this. And that's totally fine because it starts the conversation. It gets the conversation going

so they can now research these things and look them up, learn them for themselves and educate

them themselves on it. But if you're going to give some advice to a first year business owner

with a truck to trucks and the things they need to get in line quickly and get an order quickly,

what may, might be the top three things that they should be doing to get themselves organized

financially. Can I say one thing before financials is to make sure you have a, get a customer,

get into a geographic area that you're comfortable with, ride your trucks in that area every Saturday

morning, you'll own that neighborhood within a year. All right. So you want a consistent, you know,

database of customers and small geographic area. Don't try to go 70 miles a swear or 70 miles that

way. Get local, so to speak. All right. So given that and you do that, then you want to make sure

that you look at the P&L and the balance sheet every single month. In the beginning, you're not going

to understand it unless you, you know, do something like financially fit by a book. I wrote a book

called The Courts, Reprofable, which is on Amazon and Kindle and Audible. It's 15 bucks by the book.

I don't get anything from it other than like 50 cents, but the reality is that it will teach you

what a, you know, all the pieces of a P&L and the balance sheet. And it's like the wiring diagram,

the first time you looked at it, you didn't know what it meant. And you learned it because you had

to be able to do your job. Well, if you're going to make the transition from being a service tech

to a business owners, you have to look at financials because that's now your job. Your job is not

only turning wrenches, your job is overseeing a business. And in order for a business to stay in

business, you need accurate financial statements. Okay. So that's one piece of advice outside of

the getting customers, give me another couple two piece of advice is for contractors starting now.

All right. So we've got the customers. We got understanding financial statement. Next thing is

to look at your bank statements. We talked about this every single day. And if customers are

past due, make the phone calls. You do your job. They have to pay you. Okay. Now that leads me to

my right. Okay. So that leads me to another follow up question. Should we be invoicing same day?

If we can at the door, some of us are in commercial, right? So sometimes we're going to wait a

while for money. But should we be invoicing same day? So we create a quicker cash flow for the

business. Residential should be COD. You should collect when you get there when the job is done.

Commercial, you would send out the invoices that night or the next day. Make sure you have all the

signatures that you need. And make sure you have a payment portal on your websites because a lot

of them will start paying off your website and you'll get paid faster. Yeah. Make sense. An

electronic way to pay is very helpful. I mean, I go into some suppliers where I purchase something.

They put it in their computer. And as I'm leaving, I get an email with the invoice literally as

I'm walking out the door as a customer. I'm like, man, I'm kind of annoyed that they're building me

that quickly. But as a business, you have to do that. So you get your money quick, right? Exactly.

I love the idea of learning how to read financial statements as well as you can read a wire

and diagram. I think that's a good goal for every contractor. Ruth, thank you so much. My pleasure

for joining us. I don't know any last words of wisdom. This is a fun business. Take care of your

customers and they'll take care of you. Just make sure you take care of them profitably so that you

can take care of them continuously. Great. Well, thanks for coming on and hope to see you soon.

All right. Thank you. Thank you, Ruth. Appreciate it.