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7 Essential Accounting Practices for Your Contracting Business

Know Your Financials

Accounting is the basis of good business decisions. For that reason, you must familiarize yourself with your financial statements. These include Balance Sheet, Profit & Loss, and Statement of Cash Flow (or Cash Flow Statement).

A Balance Sheet shows the company’s total assets, liabilities, and equity at a particular point in time. Your Profit & Loss (or Income Statement) shows the revenues generated and expenses incurred during a particular date range. The Statement of Cash Flow shows details of the flow of cash (in and out) as a result of the company’s operating, investment, and financing activities.

Don’t Be a Victim of Employee Theft

Not a month goes by without our office hearing from a contractor that discovered they were being robbed by an employee. The last call I took was from an owner who discovered that a trusted employee had been stealing from him. He discovered that at least $55,000 had been stolen over the course of three years.

Most victims have a few things in common. They are usually companies owned by a single person who has little to no interest in office work, especially accounting. There is a single primary person in charge of bookkeeping and accounting functions. The company does not have an outsider perform basic audits or even perform bank reconciliations.

Always Use Purchase Orders

Be sure your company uses purchase orders for all purchases. Keep in mind, a purchase order is a permission slip to buy something and it is the basis of all good bookkeeping systems for contractors.

Purchase orders should contain specific information about what items or services were agreed upon as well as exact pricing and terms of the sale. When orders are picked or delivered to you, there should be a packing slip. Carefully compare the packing slip to what you are picking up or what was delivered. Sign the packing slip and turn it in to the office. Your next step is to acknowledge receipt of the items. In many software programs, this is called an item receipt. This is where the purchase order (permission slip) is converted to a financial transaction. You can think of an item receipt as a temporary bill. This process gets the item(s) into inventory quickly so that you can keep your financials up to date and get your invoices out quickly. When the bill arrives, evaluate it against the item receipt and the purchase order. All item numbers, quantities, and prices should match. Many of our clients are very surprised how often there are pricing mistakes – mistakes that are not in their favor.

Purchase orders should also be used for ordering services. For example, if you need to call to have your copier repaired, create a purchase order and tell the vendor to include that PO number on their bill. When the bill is being evaluated for payment, the bill payer will look to the PO for verification. An old trick was for a would-be fraudster to call companies and ask for the model and serial number of a copier, or other appliance. They would then send an official looking bill for repair work. Many times, the legitimate looking bill was paid by an unknowing worker.

Don’t Manage Your Company on a Cash Basis

Cash basis is the simplest form of accounting. You recognize and record revenue when cash is received, not when the work is done. Expenses are recorded when bills are paid, not when the item was used.

In the accrual method, revenues are recognized and recorded when earned. Expenses are recognized and recorded when consumed or when an invoice is received. Remember, when using this method, revenues and expenses don’t have to be paid before they are recognized.

Some accounting software allows you to print your reports using the cash basis of accounting. While cash basis reporting can be necessary when paying sales tax or preparing your tax returns, it is a very dangerous way to manage your company. Do not use cash basis reports to analyze your financial performance or to help you make day-to-day management decisions.

Never Mix Personal with Business Expenses

Your personal finances should never be mixed with your business finances. Your company should have its own bank accounts, checking accounts, and credit cards. According to Publication 535 from the IRS, a business expense must be “both ordinary and necessary.” An “ordinary” expense is one that is common and accepted in your trade or business. A “necessary” expense is one that is helpful and appropriate for your trade or business. Don’t be tempted to write-off personal expenses, pleasure trips, or anything else that is not a legitimate business expense.

Don’t Import Transactions from a Website

Would you let your credit card company or parts supplier sit down at your desk and enter their own bills for you to pay? Would let your banker drop by to enter all of your banking activity into your accounting software? Would you trust their work so much that you would skip the normal process of “checks and balances” to verify these transactions? Most people would say no. However, that might be exactly what you are doing when you own software that allows you to download banking activity, credit card transactions, and vendor bills. Importing transactions directly into an accounting program can allow employees to skip critical internal control mechanisms, that guard against fraud, theft, and errors due to omission.

Hire a Good Accounting Firm

When is the last time your accountant called you to ask you questions about your financial statements? Most contractors only hear from their accountant when its time to work on their tax returns. In this case, they don’t have an accountant, they simply have a tax preparer. Your accountant should review your financials quarterly and discuss the numbers with you. They should ask you probing questions designed to test your accounting practices and controls. Their job should be to give your company a “financial physical” by checking all of your vital signs.

3 Opportunities to Improve Your Bottom Line

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You may have your sales routine down to an art, but there's always room for it to evolve to help you achieve your greater business goals — such as a higher close rate or increasing the size of the sales that you do close.

Studies show that offering payment options to your potential customers significantly improves your chances of getting the job, along with growing the average job size, eliminating the need to use discounting as a closing tactic, and reducing cancellations. That's probably not news to you. But the trick is knowing when to talk about payment options. Turns out there are three times that are key to making payment options work for you.

  1. In your advertising. Bring in more leads from the get-go by letting all your potential clients know that when they work with you, they can get the project they want without money being an obstacle. Include a reference to two payment options in all your marketing materials: billboards, flyers, showroom signs, on your trucks, social posts, web banners, and on your website.

    Those two choices should be a same-as-cash option and a low monthly payment loan.

    "Offering payment options helps us close about 25 percent of our work.," said Larry Sinn, owner & CEO of 5 Star Plumbing Heating Cooling. "It's responsible for $1 million in sales per year. We've been experiencing steady growth of 20 to 25 percent per year, and a big part of that is definitely due to advertising payment options."

  2. Setting the appointment. When you first set the appointment with a customer for assessing the job or for going over the estimate with the customer in advance of closing the sale, that's the second opportunity to talk about your payment options. Start by providing a brief mention of your promotional payment options, including — you guessed it — a same-as-cash and a low monthly payment loan. You might say, "Don't forget to ask your sales rep about our special 12-month same-as-cash promotion." Plant those seeds to prime the customer ahead of time, so when it's brought up again in the home, it won't be something new.

    "There's no way to compete in the world today without offering financing," said Sinn. "And it's always best to figure out upfront how the customer plans to pay for the job."

  3. At the sales appointment. It's show time…as soon as you're in the client's home, open the conversation with something like, "Before we get started, I want to let you know about our easy payment options, such as our same-as-cash promotion. Now, let's talk about your project." This takes price out of the equation from the start, and shifts the focus to value. Now they can think about the job they really want instead of worrying about how to pay for it. Once you do get to talking about pricing, objections over price are not even an issue. At that point, remind them of the payment options you previously mentioned, and give some more details about how using an unsecured loan means there's no collateral needed, as well as talking about no-payment periods, low interest rates, and explaining how quick and easy it is to apply using an app, with approvals provided in minutes.

    "Offering payment options has been key to the growth of our company," said Keith Uhde, General Manager of A+Derr Heating & Cooling. "It's helped us grow 30 percent year-over-year for the last few years. You're missing out on a huge opportunity if you aren't using financing."

Financial Reporting Structure for a Contracting Business

Accounting is the basis of business decisions. While you may not be an accountant, or even like accounting, you are likely a decision-maker. You are asked to make numerous business decisions every week and your decisions need to be correct the vast majority of the time.

Will we need to borrow money soon? How much cash should we have on reserve? Does each technician produce a profit? How many gross profit dollars do you need per day? Should we buy or lease? How much should we charge? These questions and others are much easier to answer with great financial reporting.

The accuracy and completeness of your financial reports depends heavily on your company’s financial structure. Here are the main elements of a great financial structure.

Cash Versus Accrual Accounting

On the accrual basis, income (sales) is recognized at the time the product or service is sold. Expenses are recognized when the inventory is used. This method is GAAP compliant and is a necessity to properly manage your business.

With cash basis, income is recognized when you receive the money. Expenses are recognized at the time the money is actually paid (and cleared the bank). This method is not GAAP compliant and is not useful for business management purposes. Do not use cash basis accounting to manage your business.

Don’t let the subject of income taxes confuse you. That is a different subject entirely. That decision is related to tax management, not business management.

Divisions and Departments

We recommend creating a set of divisions such as HVAC, Plumbing, and Electrical. These should be separated as Residential and Commercial. Create a set of departments within each division. Examples of departments might include Demand Service, Replacement and Addon, IAQ and Accessories, New Construction, Design and Spec, Remodel, and others. All financial transactions must include a department.

Chart of Accounts

Financial transactions are recorded with a set of codes called the chart of accounts. These codes are classified by assets, liabilities, equity, income, cost of goods, overhead, and more. The chart of accounts is the foundation of your financial reporting system. It should be detailed and very well thought out.

Fixed and Variable Overhead

It is very important to separate your overhead into fixed and variable types. Fixed overhead remains essentially unchanged within a certain range of income. Examples include salaries, liability insurance, and rent. I like to refer to variable overhead as “somewhat variable overhead” because it varies slightly with changes in income. Examples include gasoline, small tools, office supplies, and legal fees.

General Ledger

The general ledger (GL) is a master accounting document that provides a complete record of all the financial transactions in a business.

Thick versus Thin GL

This is a standard accounting term used to describe how much detail your GL contains. A thick GL contains a robust chart of accounts. Additional information will be added to each transaction. This includes marketing, product categories, departments, employee names, labor minutes sold, labor minutes paid, fixed assets, warehouses, warranty, callback, service agreements, and more.

Budgeting

A budget is an essential piece of your company’s financial structure. It is a projected income statement and establishes your company’s financial goals. A budget may also include a balance sheet, statement of cash flows, and other reports. A budget is an action plan that helps you allocate resources, evaluate performances, and formulate plans.

The basic process of creating a budget starts by listing your business's monthly fixed and variable costs. Your next step is to predict what your monthly income will likely be. Finally, decide on the allocation of funds to achieve your goals.

Putting this Information to Work

Extensive financial and business information is used to create highly detailed reports, performance dashboards, and key performance indicators. Now you are ready to make better, more informed business decisions.

Departmentalized Income Statements

You will have the ability to produce income statements by department, right down to net profit. You will be one of a very small group of contractors that have divided their financials into important segments and knows exactly how much net profit (or loss) is generated from each one.

The Power of Breakeven

(Income – Cost of Goods Sold) = Gross Profit

(Gross Profit – Variable Overhead) = Contribution Margin

(Contribution Margin – Fixed Overhead) = Net Profit Before Taxes

When contribution margin dollars cover your fixed overhead, you are at your breakeven point. Every single contribution margin dollar becomes net profit.

Imagine the power of knowing the exact day of each month where your company breaks even. Based on facts, you can offer discounts to fill unused capacity or turn down low-profit work in favor of something more beneficial. You can offer performance bonuses with confidence.

Performance Dashboards

A detailed set of dashboards offer a deep look into every finite detail of your business. There will be complete transparency regarding technician production, department profitability, sales lead production by employee, marketing success, customer experience, health and safety, HR, and so much more.

Specialized Accounting Software

If you want the things mentioned in this article, but do not know where to begin, invest in great software and use it properly.

Do not let your employees or an outside accountant tell you what software to use. If your accountant suggests generic store-bought software, get a better accountant. They are more concerned with themselves than your business.

You need specialized contracting business management software that puts a strong emphasis on accounting and financial structure. Do not be fooled by bells and whistles or the promise of “this software is super easy to use.” The only way to make software easy to use is to cut out important features and remove options.

You likely invest significantly in training for your technicians. The same should be true for people that use your financial software. If you have great software, it is vital to use that software to its fullest extent and the way the designer intended it to be used.

Strategic Financing Partners Can Greatly Increase Sales

Know Your Financials

Accounting is the basis of good business decisions. For that reason, you must familiarize yourself with your financial statements. These include Balance Sheet, Profit & Loss, and Statement of Cash Flow (or Cash Flow Statement).

A Balance Sheet shows the company’s total assets, liabilities, and equity at a particular point in time. Your Profit & Loss (or Income Statement) shows the revenues generated and expenses incurred during a particular date range. The Statement of Cash Flow shows details of the flow of cash (in and out) as a result of the company’s operating, investment, and financing activities.

Don’t Be a Victim of Employee Theft

Not a month goes by without our office hearing from a contractor that discovered they were being robbed by an employee. The last call I took was from an owner who discovered that a trusted employee had been stealing from him. He discovered that at least $55,000 had been stolen over the course of three years.

Most victims have a few things in common. They are usually companies owned by a single person who has little to no interest in office work, especially accounting. There is a single primary person in charge of bookkeeping and accounting functions. The company does not have an outsider perform basic audits or even perform bank reconciliations.

Always Use Purchase Orders

Be sure your company uses purchase orders for all purchases. Keep in mind, a purchase order is a permission slip to buy something and it is the basis of all good bookkeeping systems for contractors.

Purchase orders should contain specific information about what items or services were agreed upon as well as exact pricing and terms of the sale. When orders are picked or delivered to you, there should be a packing slip. Carefully compare the packing slip to what you are picking up or what was delivered. Sign the packing slip and turn it in to the office. Your next step is to acknowledge receipt of the items. In many software programs, this is called an item receipt. This is where the purchase order (permission slip) is converted to a financial transaction. You can think of an item receipt as a temporary bill. This process gets the item(s) into inventory quickly so that you can keep your financials up to date and get your invoices out quickly. When the bill arrives, evaluate it against the item receipt and the purchase order. All item numbers, quantities, and prices should match. Many of our clients are very surprised how often there are pricing mistakes – mistakes that are not in their favor.

Purchase orders should also be used for ordering services. For example, if you need to call to have your copier repaired, create a purchase order and tell the vendor to include that PO number on their bill. When the bill is being evaluated for payment, the bill payer will look to the PO for verification. An old trick was for a would-be fraudster to call companies and ask for the model and serial number of a copier, or other appliance. They would then send an official looking bill for repair work. Many times, the legitimate looking bill was paid by an unknowing worker.

Don’t Manage Your Company on a Cash Basis

Cash basis is the simplest form of accounting. You recognize and record revenue when cash is received, not when the work is done. Expenses are recorded when bills are paid, not when the item was used.

In the accrual method, revenues are recognized and recorded when earned. Expenses are recognized and recorded when consumed or when an invoice is received. Remember, when using this method, revenues and expenses don’t have to be paid before they are recognized.

Some accounting software allows you to print your reports using the cash basis of accounting. While cash basis reporting can be necessary when paying sales tax or preparing your tax returns, it is a very dangerous way to manage your company. Do not use cash basis reports to analyze your financial performance or to help you make day-to-day management decisions.

Never Mix Personal with Business Expenses

Your personal finances should never be mixed with your business finances. Your company should have its own bank accounts, checking accounts, and credit cards. According to Publication 535 from the IRS, a business expense must be “both ordinary and necessary.” An “ordinary” expense is one that is common and accepted in your trade or business. A “necessary” expense is one that is helpful and appropriate for your trade or business. Don’t be tempted to write-off personal expenses, pleasure trips, or anything else that is not a legitimate business expense.

Don’t Import Transactions from a Website

Would you let your credit card company or parts supplier sit down at your desk and enter their own bills for you to pay? Would let your banker drop by to enter all of your banking activity into your accounting software? Would you trust their work so much that you would skip the normal process of “checks and balances” to verify these transactions? Most people would say no. However, that might be exactly what you are doing when you own software that allows you to download banking activity, credit card transactions, and vendor bills. Importing transactions directly into an accounting program can allow employees to skip critical internal control mechanisms, that guard against fraud, theft, and errors due to omission.

Hire a Good Accounting Firm

When is the last time your accountant called you to ask you questions about your financial statements? Most contractors only hear from their accountant when its time to work on their tax returns. In this case, they don’t have an accountant, they simply have a tax preparer. Your accountant should review your financials quarterly and discuss the numbers with you. They should ask you probing questions designed to test your accounting practices and controls. Their job should be to give your company a “financial physical” by checking all of your vital signs.

Strategic Financing Partners Can Greatly Increase Sales

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In today's competitive marketplace, HVAC contractors need to differentiate themselves every day to win new business. That's a tall order for many individuals and companies. While it seems that your differentiation points surround your products and services—the variety of products or the quality of materials—or your excellent customer service and positive reviews, do you realize you can do more?

Of course, product solutions and customer service are key factors critical to your business' growth. Another essential area to set your services apart is collaborating with the right strategic partners so that you and your customers get what they need when they need it.

Consider the two most critical times a customer may need to purchase a new HVAC system: during the peak seasons of the heat of summer or cold of winter. They'll need to make a quick decision—it may be an emergency—about which system will be best for them, and hopefully last them for years. The typical customer will not have put aside the money needed to make a sound, long-term decision, and they will then need to figure out how they should pay for the new system.

That's where a great strategic financing partner can come in. A good financing partner will enable you to offer your customers a range of payment options, from same-as-cash to low interest, low monthly payments, helping them make the best financial choices. Our research and experience show offering a variety of payment options differentiates your company significantly.

Do your due diligence on a potential partner

Do your research into each partner you're considering. Look at their reputation, work experience and qualifications, online reviews, and their product and service mix. You want to ensure your financing partner will live up to their promises and both your expectations along with the customer's expectations. How they help your customers will reflect directly on your reputation, so you'll want to make sure your customers experience the same high-quality interactions with your financing partner as they'll have with you. Your short-term and long-term success depends on it. Finding a partner that specializes in home improvement financing is an extra bonus. The right strategic financing partner can enhance your customers' experience, reflecting on both you and your partner—increasing leads, sales and ultimately revenue in a dramatic manner.

The benefits of payment options for your customers

Payment options offer long-term strategic value to your business and benefit homeowners by helping them achieve their home improvement dreams. Consider these benefits:

  • Payment options provide a competitive advantage, allowing your customers to make choices that best suit their circumstances and situations. A great reputation and excellent customer service will get you in the door, but payment options can drive what it takes to close the deal.
  • Increasing sales through payment options is backed up by data — contractors who offer payment options show a 43 percent increase in project size.
  • Offering choices and solutions that will work for your broad range of customers will assure happy, satisfied customers. Especially for homeowners who need a quick fix, the option to finance the work quickly and easily helps provide a positive experience, one the homeowner is likely to share with family and friends, creating a referral base.
  • Educating your customers on all their possible choices by asking the right questions will empower them to make decisions that match their requirements and desires. Offering a full range of “good/better/best” options helps the homeowner understand what they can afford, as well as the full range of payment options they should consider to fulfill their desired outcome.

Offering homeowners a range of choices in payment options not only gets them out of the heat or cold faster and easier, but also makes your business the obvious choice over competitors who don't offer these options. Remember, every situation is different, so providing a broad range of payment options can help your customers get what they really need… and want.

Increase Your Average Ticket with Point of Sale Financing

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As a contractor, you know that sometimes the hardest part of your pitch isn't helping your customer understand how a roof, window, door, or HVAC replacement will improve their home - it's helping them figure out how to pay for it. Home improvements can be expensive, and sticker shock can be a major hurdle to overcome with some prospective customers.

That's why home improvement financing can be an invaluable part of your toolkit. While some homeowners might prefer to pay cash or rack up miles on their credit cards, a new survey from Citizens Bank and Mintel shows that giving customers appealing point of sale financing options can help you significantly expand your potential customer base - and close more deals.

Point of Sale Appeal

Released in November 2018, the findings from the inaugural Citizens Bank Point of Sale Survey include some striking numbers:

  • 76% of U.S. consumers are more likely to make a retail purchase if a payment plan backed by a simple and seamless point of sale experience is offered
  • 62% of consumers would prefer fixed monthly plans with clear payment terms
  • 66% of consumers feel that they have enough credit cards and prefer not to open more just to make a big purchase

It's not necessarily surprising that consumers value having financing options, but 76% is a huge, eye-opening number. How many other sales process changes can you make that would increase your close rate for over three quarters of prospective customers? It's also worth noting that home improvement projects were one of the most popular types of purchases for point of sale financing options included in the survey, along with electronics, appliances, and automotive repair.

What might be more surprising is the degree to which the survey reveals a dissatisfaction with current credit card financing options. Credit cards have played a growing role in home improvement financing due to the rise of no-interest promotions and greater speed compared to home equity financing – but average credit card interest rates can be higher than personal loans, and much higher if purchases aren't paid back within the promotional period.

This dissatisfaction makes that 76% number less surprising. After all, if home equity financing is too slow and cumbersome to apply for, and we're already drowning in (potentially high interest rate) credit cards, it's clear that there's a big need out there for something better.

Simple Home Improvement Financing? Mosaic Has an App for That.

Building that “something better” - a way for contractors to offer a simple, point of sale financing solution for home improvement projects - has been Mosaic's obsession over the past year. Mosaic has taken what they've learned from building an industry-leading home solar financing platform to create a new mobile app that provides an even better point of sale financing experience for home improvement projects, with features including:

  • Simple process and clean design
  • Instant credit decisions
  • Interactive payment estimator
  • Start proposals with just a phone number
  • Tools to manage existing jobs and customer pipelines
  • Ultra-responsive customer support and best-in-class training

These features - and a lot more - are delivered through a user-friendly interface that's compatible with all of your devices, ensuring you can run a smooth sales process when you're out in the field.

Beyond just the simple, streamlined app experience, home improvement loans through Mosaic offer other important advantages compared to other financing options. Compared to other home equity financing options, financing through Mosaic's platform is:

  • Faster than home equity financing
  • Not based on how much of your mortgage you've paid off (unlike home equity financing)
  • Lower interest rates than credit cards
  • “Same as cash,” deferred-interest financing option for purchases paid off within the promotional period
  • A connection to a network of trustworthy, vetted pro contractors

There's no such thing as a one size fits all financing solution, of course - certain customers will still prefer traditional options like HELOCs, or they might have funds set aside for an all-cash purchase. However, home improvement loans through Mosaic offer a distinct value proposition compared to other options, and the ability to offer them can help you close deals with that 76% of homeowners that are looking for better point of sale financing choices.

Pro Contractors Wanted

All in all, Mosaic's point of sale app is a game-changer for contractors because it makes the financial part of any home improvement project simple and seamless.

And if you're a contractor and all of this sounds good to you, talk to Mosaic today!

Why Does a Regulated Bank Lender Matter to Contractors?

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Eddie Jones, of Big City Heating & Air, ran into a bit of a problem with his last customer. Janet Miller had paid for an air conditioner and installation job by choosing a two-year payment option Eddie offered her. Trouble was, his lender wasn’t really a lender — it was just one of those third-party brokers — so when there was a glitch in the loan payment, Janet called Eddie, Eddie called his loan processing service, and the service told Eddie to call the actual bank funding the loan — whichever one happened to own the loan this week. So, Eddie told that to Janet, and Janet was an unhappy customer. Talk about getting the runaround. Not to mention harming your own reputation thanks to the company you keep.

There are many players in the home improvement lending game these days, but some are simply a smarter choice than others. Not every organization offering payment options is a chartered bank, and that can make a critical difference between a smooth loan experience and a headache for you and your customer.

So, why should an HVAC contractor work with a chartered bank? Here are three key reasons:

  1. You get paid — Get your money with no long-term issues in the financing process, because you’re working with the actual lender. This means the lender funds the loan with its own capital, and services the loan. Fast, easy, regular payment to you is critical to managing your cash flow.
  2. A Consistent Relationship of Trust — When you work directly with a regulated bank, you know who to talk to if something goes wrong, and they can mediate any issues that may come up. It’s even more advantageous if your lender assigns you a dedicated person who handles your account.
  3. Confidence — A chartered bank that’s Member-FDIC means the lender is subject to all federal and state regulations. There’s real oversight, so you can be confident the lender will do what they say, because they’re highly government-regulated.

A regulated bank may offer unsecured loans with no hidden fees, and a variety of loan products to meet your customers’ needs — including products designed to win bids, like true same-as-cash loans. Be sure to check out your options and work with a home improvement lender that’s an actual bank to grow your business and help you create a legacy.

Is Your Home Improvement Lender Giving You What You Deserve?

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You already know that offering your customers a choice of payment options is essential to a successful business model. But you've probably also figured out that not all home improvement lenders are created equal. Does your top choice of lender offer your HVAC company the above-and-beyond extras that are the mark of a true service provider? Things like a dedicated person to answer your questions and develop a loan plan that's specific to your company? Or a role-specific training program that makes sure you're not left to figure it out as you go? Not to mention the things you can't put a price tag on, like the peace of mind and security that comes from working with a member-FDIC financial institution.

Personalized Service

A dedicated relationship manager is a crucial part of ensuring that your experience working with your loan provider is smooth and trouble-free — or, at least, that any troubles you may encounter can be resolved quickly and to your satisfaction. The sign of a good match is a single point of contact who understands your business and can align the right payment options to meet your goals — a best-of-both-worlds scenario. Be sure to partner with a lender that gives you that one-on-one attention and not just a general, international 800-number to call for help.

Targeted Education

Your home improvement lender should take the time to make sure you understand the loan programs and that you're well-versed in the best practices for offering payment options to your customers. Whether you're new to offering a choice of payment options, or just new to a specific lender's programs, it's important to get the training needed to be successful. As busy as you and your team are, it's beneficial to have a choice of on-demand training or live webinars. It's also a good idea to work with someone who offers more than a one-size-fits-all program, providing role-specific training that's tailored to meet the unique needs of owners, administrators, and sales professionals.

Actual Lender or Just a Middle-Man?

There are dozens of payment option partners out there, but few that actually fund and service their own loans — and even fewer that specialize exclusively in the home improvement market. Many companies just broker loan transactions, rather than back them. Be sure to gain the confidence of working with a member-FDIC institution that has been in business for a reasonable amount of time, rather than a fly-by-night outfit. A lender that services and funds all its own loans is a much more stable choice, and if you can find one that specializes in unsecured home improvement loans — rather than it just being one small part of what they do — all the better. Two huge benefits to working with a reputable lender: first, you can be sure you'll get paid — and paid in a timely manner; second, your customers will have a great experience, which will reflect well on your business.

In addition to these three must-haves, there are a number of other differentiators you should consider when selecting your payment options partner — such as access to customized marketing tools, user-friendly mobile application methods, and fast approvals. When you work with a lender that specializes in home improvement, you're more likely to find these value-adds because their whole focus is on developing the very best experience possible for contractors and their customers.

Financial Structure: From Novice to Expert

Many of our contractors came up through the school of hard knocks, learning the trade from the ground up, studying the mechanical aspects of the trade. It is a fantastic way to be sure the technical aspects of our business are covered; after all, what we do requires us to be able to solve mechanical issues and application work.

However, as many companies grow due to the Michael Gerber "E-Myth Contractor" model -- that the better we are technically, the more referrals and growth we get, causing us to reach our own Peter Principle -- our inability to control the new business as well when we hire folks.

The E-Myth is classic text, defining the very idea of why a company can prosper in one phase then struggle in the next phase, and therein lies what this material is all about. The technical phase is where we start, growing as an entrepreneur, then finally becoming more of a managerial company -- IF we make the steps of the progression happen.

The business of business requires us to layer on in that growth phase (and even BEFORE the growth phase) financial structure. The growth (entrepreneurial) phase is where many get into trouble.

The idea of financial structure is simple: have the company's accounting and reporting capability such that an owner gets the right information, on a timely, accurate basis.

The PURPOSE of financials is: to give a clear indication of how a company's operational practices are performing in reality.

This sounds simple in the vacuum of a business article. Timely, accurate, interpret -- simple words but rather tough to execute day in and day out in the real world, where so many areas of static are attacking the business like cruise missiles coming in one after another.

Financial structure starts with knowing there are three financial statements:

  1. The Income Statement
  2. The Balance Sheet
  3. The Projected Cash Flow Statement

Now most all basic software packages have these as statements which need to be set-up, but they do NOT come organized for the homes service trades. In fact, it's all ordered by the alphabet and, well, we don't run our business by the alphabet, so we have to take the 1st step:

Configure your chart of accounts

This is one of the biggest challenges we see. It is a recipe of sorts, and we use the GAAP (Generally Accepted Accounting Principles) to define it. What is crazy is they rarely conform to the GAAP standards, thus making it very difficult to review KPI's and compare your company to other great companies for operational changes.

Review the EGIA suggested chart of accounts for each statement. They exist based on GAAP and an example is the burden (benefit costs for field labor) – these costs are a "cost of goods sold (COGS)", and most companies do not have them attached as a chart of accounts in COGS. FICA, FUTA, SUTA are all attached to payroll, and are part of the benefit burden along with Dental, Medial, Vacation, Holiday Pay, Paid Time-off, etc.

A basic income statement example may look like this, given that revenue (sales) is simple and already understood:

Revenues (sales)
Cost of Goods Sold
Gross Profit $
Overhead (operating expenses)
Earnings Before Interest and Taxes (EBIT)

Now if you have this in your company operating expenses and not as a cost of goods sold, your gross profit is all wrong, so the accuracy issue is now a problem. Your data is misleading you, and this affects your pricing and even operational discussions.

The basis of having a properly organized chart of accounts is to be sure that our reporting and data are telling us what OPERATIONS are actually performing. A more refined version of the Income Statement may look like:

Revenue 100
Cost of Goods Sold
Direct Labor 9
Burden on Labor 3
Permits 1
Equipment 25
Parts/Materials 7
Subcontracts 1
Rebates/Financing-Promotions 2
Extended Warranties 2
Warranty Expense Plan 1
Sales Commissions 6
Total Cost of Goods Sold 57
Gross Profit Dollars 43

This of course is over simplified, but we are talking about structure. The next layer is the operating expenses. These expenses are very different than cost of goods sold-type expenses, in that they exist whether we sell anything or not. Rent is an example. It's due even if we have a poor sales month.

We should group those into 5 categories and make them sub groups.

Marketing Expenses
Employee Related Expenses
Vehicle Related Expenses
Plant & Equipment Expenses
Administrative Expenses

These five areas are called functional areas of operating expenses: we function to make a sale happen and then produce it.

Once again, we can review the EGIA chart of accounts and budget tools to help us define these accounts. When we allocate our costs in real life to the proper areas, we begin to see a picture emerge of our operating practices.

The second major lesson in this discussion is departmentalization. Once a company has the basic structure of what the accounting should look like, we need to execute the same idea across all business segments. So add-on is an income statement; service will have its own income statement; as will maintenance, light commercial, and so forth. Any business segment a company has that is important to its success needs to be accountable and tracked as a part of a departmental statement. Once again, giving clear, timely, accurate, and interpreting meaning for each segment.

And once we have this, we can effectively use "Key Performance Indicators" (KPI's) to compare our operations to the best of the best and make adjustments.

The KPI's are broken down by each business segment so we can analyze operations and be very definitive about our patterns of success and what may need to adapt.

There is a great deal more to all these conversations, and ideas, so feel free to reach out to EGIA and learn more. The model of success exists and is waiting for you as a contractor to take action. Get control, get timely, get accurate, and learn the next phase of how to grow by becoming more effective at being a manager not just technically superior.

Pricing in Contracting

Contracting in the 21st century is a complicated business with many moving parts, and one of the critical success factors to be able to produce positive cash flow and a 20% + profit structure is pricing.

Pricing is a massive topic, with many aspects, so in this article we’ll explore the high level areas of how a contractor can improve pricing systems and implementation.

Pricing touches virtually every aspect of your business, fitting snugly inside the marketing discipline. It also has a touch of artwork, tying to your business philosophy as well. So much of pricing is mathematical, yet we should not forget that pricing also ties to the ever changing market place conditions and choices you make as a contractor.

Strategy is a Major Factor in Success of Pricing:

The very first issue a contractor should engage is what the actual strategy for pricing is. What is your pricing trying to accomplish for the company? What are you trying to communicate? What value are you establishing?

Pricing Rules to Follow:

  1. Know your costs – the costs of goods, overhead, seasonal changes
  2. Be departmental – at least to a Gross Profit line (sales minus Cost of Goods leads to Gross Profit)
  3. Understand your desired company strategy – boutique/value/volume price to the desired strategy
  4. Understand your methods – there are many varying methods
  5. Know your target business segments. Each segment of business has its own pricing methodology (service/maintenance/change-out/new home/plumbing repair/commercial service/commercial contract)
  6. Price to YOUR market value - recognize that the market may bear more than your cost + profit, so study the market, know your true value not just your costs. The price value relationship. Can anyone deliver what you deliver versus the raw costs?
  7. Establish a company policy for discounting, and coordinate with your desired profit goals.

If you followed these rules to their fullest extent you may find how your pricing system and possibly strategy could be enhanced.

The next logical question is: Does the system I use as a contractor give me the best results?

Most contractors know high-material, low-labor jobs make for better profitability. And high-labor, low-material jobs, while they keep our field personnel busy, usually are not that desirable since we know overhead expenses climb upwards with the use of each labor payroll dollar. Quite the opposite of material, hence the reason we generally appreciate high material jobs. I am excluding a shoulder season choice to accept high-labor jobs intentionally which can be useful when you have capacity and little or no work.

This is where your pricing methodology can either help or harm you. Not all pricing systems can separate the good jobs from the harmful ones.

We want to use the methods that assign overhead as it truly is created in our company not as we hope it is created, and for that we use dual overhead. It is the one method that evaluates how any cost of overhead is occurring in our company and we use two factors to define the overhead in a job price. One for labor related on the job, and one for all non-labor related on the job.

Dual overhead will price high-labor jobs at a higher breakeven than, say, a high-material job of the same base cost of goods sold. Why? The overhead creation occurs because in contracting labor drives overhead. A duct modification job with no rooftops has lots of time, trips, and labor using resources that cost money. Versus that same rooftop equipment set with no real labor, we can finish quickly and the equipment received a nice markup that didn’t cost the company overhead.

Years ago I worked with a company in Akron, Ohio. They were not making a profit and were selling many attic jobs, taking lots of labor and very little materials. We pinpointed their pricing was the issue. The choice was raise the prices using dual overhead since the method would force recognition of this cost, or stop accepting so many of those style units in high labor areas. We opted for dual overhead, raised the price, learned to sell better at a higher price and presto, the company began making a lucrative profit structure.

Not all pricing methods are equal, and some are downright deceptive, so be careful to learn the strengths and weaknesses of each method and how they apply to your business.

Example Pricing Methods – none of these are in detail here and you should take it upon yourself to learn more about each method and its application in contracting.

SWAG – Guessing – My Dad used it, I use it. A common method in trades.

Divisor Method – Simple, but very dangerous unless jobs are one day – avoid. It is by far the most common method used in our trades and a reason for weak profits. It treats labor and material as equals in overhead creation which just “ain’t so” in life.

Markup/Multiplier – Same issues as divisor – also simple, but avoid. Assign a target multiplier that gets a desired gross margin percentage on a job, except we don’t spend margins to pay our bills, percentages will fool you. You spend and need raw dollars.

Gross Profit Per Man-Day – Assigns a target to gross profit per hour or day or man, and allows you to cover up overhead per day, a number you calculate by segment of your company. This is the method that gets you to the raw dollars per day you want or need as a company. It’s a better method than divisor or multiplier, but requires some financial discipline.

Dual Overhead – Assigns overhead to material, and labor – creates two factors. We then use those to apply to each job to get breakeven before then adding desired profit. Requires financial discipline, which is why it’s not used more, but it’s the most precise method to know the true effects of contracting work.

Flat Rate Service – We assign a labor time, a retail labor rate, a parts cost and a parts markup, and create a known price for any given repair, inclusive of costs. Done well with knowledge of overhead, a very effective service pricing strategy.

We have much more detail in each of these areas, and you as a contractor owe it to yourself to study the methods more.

The basics of financial management come into play as well, meaning if you lack good solid information from your accounting systems, these methods may seem out of reach or confusing. That is not a good reason to ignore them.

In fact, it is the primary reason our industry suffers from lack of profitability. Not being able to see our decisions in pricing as results occurring in real life makes it “out of sight, out of mind.” It contributes to death by a thousand paper cuts over time.

Get your financials departmentalized and organized, timely and accurate, then move to a method by segment and don’t be afraid to ask for help.

Leverage: How High-Performance Contractors Can Excel, Profit, And Make Customers Happy

The year was 1990 in my family contractor business. The union was picketing our offices and commercial jobsites. We were ’cash-on-delivery’ with all our suppliers and manufacturers. Two builders went bankrupt and stiffed us for over $500K in receivables. The general manager made a bone-headed accounting error on work-in-progress billing that inflated sales by almost half a million dollars (fictitiously). The Yellow Pages did not print our ads in 5 of the 9 books in which advertised. My mom hit my dad with divorce papers. And, the family dog of 17 years, a little Yorkshire Terrier named Cuddles, died.

Not to mention that my father signed personal financial guarantees with everyone to keep the doors open. By all measures we were on the brink of bankruptcy … something our competition were sure to share with every homeowner we mutually encountered.

In contrast, by December of 1996, we turned a $6.5 million-dollar company (mostly residential new construction) earning 4% net profit, into a replacement, service, and indoor air quality business. We were now generating $8.0 million at 22% net profit and my father sold the company to a local utility company and retired shortly thereafter a wealthy and happy man.

SO HOW DID WE DO IT?

We shifted our mix of business from low-profit, slow pay, RNC work to mostly replacement, ductwork, and indoor air quality sales. This carried high margins and immediate cash flow. Let me share with you one of the ways that had the biggest impact by far.

In my 28 years in the home services business working with contractors of all trades across North America, I witnessed them struggle with the same challenges we experienced. Key among them — low-priced competitors who undercut good companies that quote the right scope of work for the right price. Of course, there are also always those homeowners who object to price, who don’t understand perceived value and affordability.

In my never-ending commitment to help contractors change paradigms, destroy self-limiting beliefs, challenge industry precepts, shatter expectations, create extraordinary experiences, and raise the level of performance, I found one of the most effective tools to deal with contractors’ struggles is LEVERAGE!

Think about this:

  • What do QVC, Best Buy, appliance retailers, and the most successful realtors, furniture and car salespeople, and ultra-successful in-home salespeople have in common?
  • How can you effectively and ethically eliminate competition on every job?
  • How do you offer customers the highest level of service and earning what you are worth, while the customer gets what they pay for?
  • What can you offer today’s consumer that almost guarantees they buy from you?
  • In 1990, what did an almost-bankrupt-contractor use to reverse their misfortunes?

The answer is leverage.

WHAT IS LEVERAGE?

BusinessDictionary.com defines leverage as: The ability to influence a system, or an environment, in a way that multiplies the outcome of one’s efforts without a corresponding increase in the consumption of resources. In other words, leverage is the advantageous condition of having a relatively small amount of cost yield a relatively high level of returns.

Most contractors refer to this as consumer financing. To that I say: “Quit dropping the ‘F-bomb’ in the home!” Don’t talk about what it is, talk what it does. I call financing: “A convenient and flexible investment plan that makes buying what you want TODAY easy and affordable, which allows energy and repair cost savings to pay for, or offset, the investment.”

Providing resources for your customers to borrow money to do business with you creates money flexibility or options, much like a mortgage does for homebuyers. The problem is that 95% of contractors use this resource ineffectively or incorrectly by: (1) Not offering payment options to EVERY CUSTOMER EVERY TIME; (2) Not offering multiple options; (3) Offering it in a Reactionary fashion to the following:

  • Customer’s price/perceived value objection (total price or versus another option)
  • Customer’s perceived affordability objection
  • Competitor’s lower price
  • Customer’s inquiry about other solutions.

USE LEVERAGE CORRECTLY

When used correctly, leverage is the most effective way to share your investment options with customers. It shows customers how easy and affordable doing business with you is, especially if/when you are higher-priced (differently priced) than your competition. In fact, leverage can render customer price, perceived value, and affordability objections neutral. And, using leverage requires no additional investment in marketing and lead generation.

This is great news for Performance-Based Contractors. You’re pricing is not thousands of dollars more than a traditional contractor. You are thousands of dollars different than low-priced competitors who want to sell products not solve problems.

When you quote your solutions with low monthly payments paid for or offset by energy, repair, and premature replacement costs, you show customers how they benefit from a home that is safer, healthier, and more comfortable. All that for just a few dollars more a month than cheaper purchases.

This is even better news for performance-based contractors who believe homeowners are sensitive to price. According to CNN Money: “75% of U.S. households live paycheck to paycheck”. The problem is these people suffer from “cash separation anxiety” and prefer to pay monthly for items that pay for themselves. However, most contractors quote solutions based on the total investment rather than a small monthly expense comparable to other monthly expenses customers regularly pay.

TYPES OF BUYERS

Most of today’s homeowner consumers are payment customers, not cash buyers. Let’s take a brief look at the various types of buyers:

  • Cash Buyers – They have the cash and can and will pay upon completion.
  • Cautious Buyers – They have the cash but are hesitant to write a big check.
  • P.M. Buyers (Other People’s Money) – They may or may not have the cash, but like options with no money down and 0% or deferred interest and/or payments. They may use credit cards to get points, miles, or cash back.
  • Payment Buyers – They want or need the lowest monthly payment to pull the trigger.
  • Credit-Challenged – Don’t forget the 30-40% of applications that can’t be approved by “A” paper lenders. These people want to buy and understand their monthly payment may be a little higher than they hoped but will act if their desire or need is met.

To meet market demands, performance-based contractors need to offer a variety of payment options:

  • Secured and unsecured loans with long terms
  • Low-rate long-term options
  • 0% APR or deferred interest and/or payments
  • Plans for the credit-challenged.

By the way – you should offer all these plans to all your customers.

WHAT DOES LEVERAGE DO?

Remember: The only ways to increase sales are: (1) Run more leads (more time and marketing dollars); (2) Close more leads; (3) Increase average sale; (4) Increase frequency of sale (repeat business); (5) Generate more referrals who purchase.

Execute one of these measures and you can increase sales, profits, and personal income marginally. Execute two measures to yield geometric growth. Execute 3 or more initiatives and you’ll experience an exponential explosion in sales, profits, and personal income much like my company did in the 1990s.

This is the leverage I am talking about. It allows you to compound time and money for the mutual benefit of the customer, your company, co-workers, salesperson, and owners without increasing expenses (any dealer cost is absorbed in the overhead and paid for by the customer). You can achieve exponential results.

Leverage will help you improve low closing ratios, increase average sales and profits, stop you from losing jobs to lower-priced/lower-value companies; increase customer perceived value, perceived affordability; give customers access to money; and increase a salesperson’s and the business owner’s personal income. Leverage also offers greater customer happiness and co-worker satisfaction with the company’s ability to deliver a better all-around experience for everyone it serves and employs.

THE RULE OF MORE

Leverage is the secret to putting a tourniquet on losing sales to lower-priced low-value competitors that don’t solve the customer’s problems or address their concerns. You can stop leads from being burned and put an end to wasting marketing dollars to create leads you don’t close. Leverage is the magic that leads to opportunity maximization.

LEVERAGE is the key to help companies generate MORE!

I am talking about a lot of ‘MORE!”

  • MORE opportunities created and converted
  • MORE money MORE often, for MORE profit, MORE effectively, and MORE efficiently than anyone else.
  • The result is MORE customer happiness and co-worker satisfaction making you the most reviewed, highly respected, regularly recommended, and graciously referred companies in your market. This will also make your company one of the most sought-after employers of choice.

BOTTOM LINE: MORE juice for the squeeze and MORE bang for the buck.

UPDATE YOUR THINKING

In 1937 Frank Bettger famously wrote in his book ‘How I Raised Myself from Failure to Success In Selling’: “When you show a man what he wants he will move heaven and earth to get it.”

I have updated his thinking to using payment options to help consumers buy what they want: “Show people what they want most, why they shouldn’t be without it, how they can afford it, how they can pay for it, and they will buy it…FROM YOU!”

In a subsequent article I will share the specific strategies, techniques, and language we teach our client’s to effectively use leverage payment options to yield record performance. We’ll provide sales performance expectations, KPIs, and specific lending resources.

Live life by the drop! Experience greatness.

Performance Based Compensation

For the purposes of this article, Performance Based Compensation (PBC) is a process of paying employees for a specific outcome or paying extra for work that goes above and beyond the normal call of duty. If you think about it, most business owners are paid strictly on PBC. If an owner performs well, they thrive financially. If they perform badly, they don't get paid as well.

The main idea of implementing PBC is to reward top performing employees and provide a clear incentive to do more than what is required to simply keep their job.

Each contracting company is different, so there is no absolute way to setup PBC. Your industry niche, your employees, and your company's culture all play a part in designing the best PBC plan. With that in mind, we will provide several examples to get you thinking about how to create the perfect plan for your particular circumstances.

Let's start with the service department. To reduce unbillable time, consider paying technicians two rates; one for unbillable time and one for billable time. Your unbillable rate might be 50 percent below the street rate while billable time would be 30 percent above it. You might pay technicians a set fee for drive time that is equal to their billable rate multiplied by their typical drive time. If travel time is difficult to average out, consider creating travel zones that allow for different travel time. Let's say that the street rate for an average service technician is $25.00 per hour (direct cost with no overhead) and drive time between calls averages 30 minutes. Here is how it might look on paper.

Travel compensation per service call: $16.25

Compensation per billable hour: $32.50

Unbillable compensation per hour: $12.50

Unbillable time covers training, meetings and drive time not charged. It also covers call-backs on that technician. For warranty work and call-backs not under that technician's control, you would pay them their billable rate. If you use flat rate pricing, consider paying the technician a flat fee for travel and diagnostics plus the "book time" for the task. Here is an example:

Travel and diagnostics: $32.50

Replace stock fan motor and capacitor: $32.50 (1hr book time)

Paying technicians a higher than average flat fee for each repair and holding them accountable for call-backs creates an incentive to maintain an organized well stocked truck with the correct tools and equipment. If you simply pay them by the hour, they have no financial reason to be accurate and efficient. Be sure to clearly define what a call-back is and is not.

You should also pay bonuses for selling service agreements, creating sales leads and other desirable activities. Create a complete list of bonuses and incentives. Here is an example to get you started:

Service agreement sales bonus: $10.00 (per system)

Humidification or filtration system: $25.00

Wi-fi thermostat: $15.00

Sales lead resulting in sales presentation: $25.00

Sales lead resulting in a sale: $50.00

Should a technician be paid to sell equipment?

This is one of the most popular questions we get. If a sales opportunity presents itself during a service call, we prefer that technicians pass the sales opportunity to a sales person who can respond immediately. If that is not possible, we recommend creating a menu of replacement and accessory pricing for your technicians to follow. Be careful not to create technicians that are more interested in selling than making appropriate repairs.

PBC for the installation crews

A PBC plan for this department can be more challenging. Consider creating a comprehensive list of installation scenarios or tasks and label each with a set number of hours you will pay out for that work. You may also create a list of fees, but it may be easier to offer your existing installer a raise and begin paying them a higher hourly wage multiplied by a set number of hours for a given scenario. Here is another example to consider:

Residential replacements

Complete residential HVAC system change-out (standard): 16 hours

AHU change out (horizontal): 7.0 hours

Condensing unit change out: 3.0 hours

6" x up to 25' supply run (open accessible area): 1.75 hours

Single cold air return duct drop: 2.25 hours

Flue vent stack replacement (up to 25'): 3.25 hours

Residential new construction

Residential system rough-in (12 drops): 12.0 hours

Each additional duct drop rough-in: 1.25 hours

Each additional duct drop trim-out: 1.0 hours

Residential system trim-out: 6.0 hours

Install electronic air cleaner with trim out: 1.0 hours

Complete system start-up: 1.25 hours

Your list will likely include far more scenarios. My actual list includes about 100 different scenarios.

PBC for the office

The key to designing this plan is to think about what the office has some control over and can easily understand. Since CSRs often lay the ground work for service agreement sales, one of our favorites is to set aside $10.00 for each agreement sold (per system) and split those funds out evenly to each fulltime office employee.

Company-wide profit sharing

You should consider some type of PBC for the entire company that is based on specific financial performance. Your plan will depend on what type of financial information you see as important and what type of information you are willing to share with the company. Keep your plan simple and easy to understand. If your plan relies on numerous formulas, caveats, or things that are out of the average employee's control, the plan will be seen as "rigged," in favor of the owner.

As we have seen, there are a lot of different ways to pay and incentivize your employees. You must think about your company and your people before deciding what works best for you. Whatever you decide, make sure that your compensation plan can withstand the "newspaper test." If your plan was somehow published in the newspaper, would you be ashamed or embarrassed? Of course, the answer must be "no."