You did it. You started your own HVAC company and do what you love every day. You’re living the American dream.
But is your business turning a profit? How much profit? Do you even know the answer to these questions?
If you don’t, you’re not alone. Many small businesses lack knowledge of their finances. And that’s part of the problem when it comes to decreased profitability.
In this guide, we will teach you how to calculate your profitability and provide tips to help your business turn a profit.
HVAC Business Profitability: An Outlook on the Industry
The demand for HVAC technicians is high and is projected to rise throughout the years. The Bureau of Labor and Statistics reports that the demand for HVAC technicians is expected to grow by 15% through 2026.
Has COVID-19 Affected the Demand for HVAC Services?
At the beginning of the COVID-19 pandemic, HVAC technicians were deemed as “essential workers” by the Department of Homeland Security.
Despite this, the majority of those in the HVAC industry saw a 19% decrease in revenue between April 2019 and April 2020. This loss of sales resulted in many small HVAC businesses being forced to close their business.
Today, some HVAC businesses are still recovering from the loss of sales during the height of the COVID-19 pandemic. But the businesses that made it through the pandemic intact likely did so because they had strong profit margins.
The Profitability of Your HVAC Business Is Influenced By Cash Flow
82% of failed small businesses cite cash flow as a factor in their failure.
Cash flow isn’t just about the amount of money coming in and coming out of a business — it’s about timing.
For example, if you are involved in a construction project installing HVAC systems for homes in a new development and your final invoice isn't paid until after your loan payments are due, you could end up with a cash flow problem.
Cash flow problems are nearly inescapable — they come with the cost of doing business. The Flexbase Card is the first credit card on the market specifically designed with growing HVAC businesses in mind.
With 10x the credit limit compared to traditional credit cards and perks like 0% interest for the first 60 days* and no annual fees, you can use the Flexbase Card to finance needed equipment, float your expenses when in a cash flow bind, and more.
Click here to get pre-approved for the Flexbase Card today.
What Is the Average Salary for HVAC Business Owners?
The national average salary for HVAC business owners is $56,606. However, the average salary for an HVAC business owner can vary greatly based on the state and city the business is located in.
Average Salary for an HVAC Business Owner By State
Here is a look at the average salary for HVAC business owners by state:
Is Owning an HVAC Business Profitable?
Yes, it is possible to own a profitable HVAC business. HVAC businesses that turn a profit all have the following in common:
- They know their financials, including costs, pricing, and profit margins.
- They know how to increase efficiency
- They employ effective strategies to increase their revenue
- They retain high-quality employees
- And more
4 Steps to Creating a Profitable HVAC Business
Step 1: Create a Business Plan and Stick to It
It’s critical to plan for success. Writing a business plan will help you outline every aspect of your business, including:
- Services you plan on offering
- Marketing strategies you plan to admit
- A cost and budget analysis to determine business expenses and how much revenue you’ll need to bring in to become profitable
- A plan for hiring employees
- And more
These insights can help you create a roadmap for success and profitability from the get-go.
Step 2: Determine Your HVAC Business Profit Margins and Overhead Costs
To make your business profitable, you have to determine your profit margins and overhead costs.
Overhead costs encompass ongoing expenses required to run your business. Your typical overhead costs include:
- Equipment financing and maintenance
- Rent and utilities (If you have a physical location)
- Company vehicles and gas
- Accounting and legal expenses
- Licensing fees
- And more
Once you understand what your overhead costs are, you can determine your gross profit margin. Here’s the formula you need to use:
(revenue - expenses)/revenue x 100 = GPM (Gross Profit Margin)
Add up your annual expenses for overhead costs. Subtract the total of overhead costs from your revenue. Then divide this number by your annual revenue and multiply it by 100.
Here’s an example demonstrating how to determine gross profit margin by service:
One of your HVAC technicians completes an air conditioner repair, which costs $400. The overhead costs for this service comes out to $125. Your gross profit is $275 (400 - 125 = 275)
Now let’s put this information into the equation:
(400 - 125)/400 x 100 = .68
This equation shows that based on your revenue and overhead costs, you’re profiting .68 cents for every dollar charged for this service, which gives you a 68% gross profit margin.
Step 3: Develop a Pricing Formula
So with profit margin and overhead expenses in mind, you need to develop a pricing formula.
There are a lot of factors that will play into your pricing strategy, including:
- Whether you plan to charge for services at an hourly or flat-rate
- Whether you will charge more for emergency/after-hour calls
- What your competitors are currently charging for services
- And more
Here are some factors to consider when building out your pricing strategy.
Base Hourly Rate
The base hourly rate represents the standard hourly wage employees are paid.
To determine your base hourly rate, divide the dollar amount you plan to pay employees by the number of billable hours employees will work each week.
Billable Hourly Rate
The billable hourly rate represents the amount of time it takes to complete services, which is charged to the client.
To determine a billable hourly rate, start with calculating your profit margin and overhead expenses. Add the total to your base hourly rate to determine the billable hourly rate.
If you plan on offering commercial HVAC services, you’ll likely need to submit bids for these types of projects.
Bidding prices can be determined by considering the cost of:
- Materials and permits
- And any additional expenses related to the project
Step 4: Take the Current Market Into Account
Now that you’ve figured out the necessary math to formulate your pricing, pay attention to what your competition’s pricing looks like. Is it lower? Higher? Are there certain services that seem to be higher in demand?
Your pricing should be competitive but don’t feel like you need to offer the lowest prices to attract customers. Low pricing can actually end up turning customers away from your business. Customers don’t always equate “cheap” prices to quality.
Besides, your project volume doesn’t carry any value if your profit margins are too low. Focus on quality, not quantity.
10 Tips for Increasing Your HVAC Business’s Profits
#1: Increase Your Cash Flow
One of the best ways to increase your business’s profitability is to increase your cash flow. Here are a few tips:
- Maintain a cash flow forecast. Study your cash flow patterns to minimize cash flow problems that may otherwise catch you off guard.
- Cut unnecessary spending. This can help reduce unnecessary money going out of your business while maintaining the money coming in.
- Negotiate quick payment terms. The sooner you can get your money for services rendered, the better.
#2: Analyze Your Business
Regularly analyzing your business can help increase your profitability by improving your growth strategy, increasing revenue, and improving decision-making.
Here are some critical questions you should consider:
- Which services are the most/least profitable?
- Which services are in most demand?
- Do you have any unnecessary expenses?
- Are jobs being completed efficiently?
- Are there any services or service areas you could potentially expand into?
#3: Step Up Your Marketing Game
When struggling with profitability, many businesses shy away from marketing because of the investment. However, the old adage is true — sometimes you need to make money to spend money.
Investing in marketing can help:
- Increase your exposure and generate interest in your business
- Attract new leads and customers
- Increase customer lifetime value
- Get more quality leads
- And more
There are many different types of marketing. It can be difficult to know where to start. Should you invest in SEO? Social media marketing? Ad campaigns? Should you attempt marketing efforts in-house or hire professionals?
Many marketing agencies will offer free website audits before clients decide to commit to services. This is a great way to identify which strategies will work best for your business from a professional lens.
While marketing efforts typically don’t provide overnight results, it can be a critical step in building the foundation for consistent, quality leads.
#4: Focus on Clearing Up Any Outstanding Debt
Interest payments on debt can kill your business profits. Make it a priority to pay off outstanding debts as soon as possible so you can allocate spending to other vital aspects of your business.
#5: Create a Budget and Stick to It
Getting your spending under control by creating a budget can help increase your profitability. Consider hiring a professional to complete a financial analysis for your business to help develop a budget based on your expenses and goals.
#6: Consider Offering a Referral Program
92% of consumers trust referrals from people they know.
Referrals are powerful.
Think of it this way:
Your team went above and beyond to fit in an emergency call for a mother with a newborn whose AC has stopped working in the dead of summer. The client raves about your business to her friend who is looking for an HVAC company to install a new AC unit in her home. That client then writes a positive review on Facebook recommending your business to all of their friends and families. The referral cycle continues.
There are many ways you can encourage your customers to refer your business:
- Offering excellent customer service. Going above and beyond for your customers is a great way to naturally gain referrals
- Participating in community activities. Offering a service package for a charity auction or donating school supplies to your local schools is a great way to position yourself as the community HVAC business.
- Offering discounts for referral business. Providing an incentive for customers to bring in new clients for your business is a great way to get referral business.
#7: Team Up With Local Businesses
Electricians. plumbers. remodelers. HVAC companies. All of these businesses have something in common — a similar target audience. All of these businesses provide services to:
- New real estate development
- Property management companies
- Brick-and-mortar businesses
- And more
And the best part? These businesses are not competitors!
Find local businesses in your area that you could potentially partner up and share business cards with. Your local electrician may be out on a job where a customer mentions they also have a leaking AC. Similarly, one of your customers may have a flickering light fixture they want to get checked out.
Teaming up with local businesses can help you gain more clients. The more jobs you complete, the more revenue profit you can accumulate.
#8: Consider Expanding Your Services Offered
Think about the services you offer. Are there any services your competitors offer that you don’t? Is there a demand in your service area for a specific service not on your list?
Maybe you currently only offer residential services and can increase profitability by also adding commercial HVAC services to your repertoire. When considering adding new services, ask yourself:
- Do I have the staff and bandwidth to take on these new services?
- Can I make a profit by offering these services?
- Is there a demand for these services?
Expanding your services offered could result in more job opportunities, which could bring in more revenue and profit for your business.
#9: Expand Your Service Area
Think about the cities/areas just outside of your service area. Is there an unmet demand for HVAC services? Is there not a lot of competition? If so, it may be worth it to expand your service area.
When considering expanding your service area, keep gas prices in mind and make sure to calculate it into your overhead costs to determine if you can maintain profitability by servicing these areas.
#10: Focus on Retaining High-Performing Employees
When it comes to how profitable your HVAC business is, your employees play a critical role. Retaining high-quality employees is one of the most cost-effective strategies you can implement to maximize your profitability.
Why? Because hiring new employees can be incredibly expensive. And finding highly-qualified employees could prove even harder.
According to the Work Institute’s 2017 Retention Report, it can cost a business 33% of an employee’s annual salary to replace them. That’s a lot of money to account for in your cash flow forecast.
For example, if you recently lost an HVAC technician with a salary of $60,000 because they found another job opportunity with better PTO benefits, you could end up spending $19,800 on:
- Putting out job advertisements and interviewing prospects
- Hiring a new employee; and
- Training a new employee to take on the job
So, how do you hold onto amazing employees? Here are a few tips:
- Have a good company culture. If your employees aren’t happy working for you, they will look for a job elsewhere. Besides, studies show that employees who feel valued are four times more likely to be productive at work.
- Offer as many benefits as you can. It's no secret that offering benefits can be incredibly expensive and difficult for small businesses to achieve. But offering benefits like PTO and insurance policies is an excellent way to incentivize retention and show your employees that you care about their well-being.
- Help your employees recognize and achieve their personal goals, even if that means eventually quitting. This advice may seem counterintuitive. But when you invest in your employees, they invest in you. Be willing to coach and mentor your employees, even if that means that one day, they may leave to start their own business.
- Offer performance incentives. Recognize and reward excellent work and effort. This is a great way to not only retain your employees but also motivate them to do their best.