By Steve Lauten President
Total Air & Heat Co.
Owning a business will always be a risky endeavor. This is especially true during an economic downturn.
For 62 years, my contracting business, Total Air & Heat Co., has navigated endless risks to chart a successful course forward. Since becoming company president in 1987, I’ve called upon my three-plus decades of experience to ensure it is poised to meet our customers’ needs because if we don’t provide adequate solutions, I know they’ll find them somewhere else.
Fail to Plan – Plan to Fail
There are many things HVACR contractors can do to recession-proof their businesses.
To start, all contractors should create a business plan. Owners can’t manage what they don’t measure, and short- and long-term plans allow leaders to track a company’s performance at any time.
Contractors should aim to breakout data surrounding revenue, profits, losses, inventory, etc. across every department. This data should be plotted over three- to five-year periods to create trends that can help owners decide what’s working and what isn’t.
My annual plan includes adding new employees, vehicles, tools, etc. I then assign specific individuals to manage our deliverables, and we review our progress monthly.
Make Every Penny Count
Most HVACR contractors are former technicians and installers with little to no real business experience or expertise. Therefore, many contractors that get into business quickly find themselves out of business. Even businesses that may be profitable sometimes run out of operating cash. Financially, it’s important to make every penny count.
On every job, we question if the labor ratio is in line, if our material costs are in line, and if the job made a profit? If not, why not? If we did, was our performance in line with general industry key performance indicators (KPIs)?
Total Air and Heat has no debt. We buy all of our vehicles with cash, take advantage of stocking programs through manufacturers that offer discounts, and earn additional discounts because we pay our bills early. We regularly monitor our accounts payable and accounts receivable as well as review our goals during monthly managers meetings. We hire people based on our business plan and train those employees so that they understand our processes and procedures. All of this signifies that we’re planning to succeed rather than failing to plan.
Finally, even though my company is profitable, I have a line of credit in place if and when it’s needed. I haven’t needed to use it in many years, but it’s always there. This is all part of having an adequate plan in place.
Diversify Your Profits
Total Air’s business is divided into four departments: residential service, residential replacement, commercial service, and commercial replacement. Each has its own monthly financial reports. Prior to separating each department, I assumed my service department was profitable. When we ran the numbers, I was surprised to learn it was losing a bunch of money. The replacement department was carrying the entire company.
Knowing the profit margins of each department is vital regardless of how the economy is performing, though it’s especially important during a downturn. For example, my commercial replacement department can work on a lower profit margin doing rooftop package unit replacements due to the lower labor costs vs. material costs. We can replace a rooftop unit much faster than a residential system. If given the opportunity to bid a large rooftop replacement project, we can be more competitive and will likely get the job.
In 2003, I elected to shut down my residential new construction business. It was profitable, but 3 percent net profit was not enough for me to continue taking the risk. I felt those assets could be better utilized in our replacement and service departments. Looking back, that was the right decision.
Optimize Your CSRs
During the Great Recession, I started recording the calls between our customer service representatives (CSRs) and customers. I’m a successful businessman, and I was absolutely confident that our CSRs were the best in the business. I was wrong. While listening to these calls, I discovered several instances where potential customers would call and ask how much a service call costs. The CSR would answer the question and then end the call. What? There was no discussion about the problem the customer had, what the customer needed, or how we could potentially help. Opportunities were slipping through our fingers, even though the phone was ringing. Regardless of the economy, and especially during a downturn, your most important people are those answering the phone. Constantly coach and train them.
Training and Marketing
During the 2008 recession, repairs increased and replacements decreased. Recognizing this trend, we spent a lot of money training our entire team on how to coach customers through the repair versus replace decision. We also hold sales meetings often and practice overcoming objections that may surface more frequently during down times.
I go to financial training every year, and I see the same successful business owners there regularly. The leaders who need this training the most aren’t there.
I agree that advertising is an important way for a contracting company to attract new business; however, keeping the profitable customers you already have is much more important. We have a marketing calendar and will increase or decrease our advertising, as needed. If we’re booked for weeks out, we’ll pull our advertising to save some money. We don’t need new leads during this period. When things get slow, and during a downturn, we’ll ramp our advertising back up in hopes of securing some more business.
Surviving a downturn is a difficult endeavor that requires incredible attention to detail. Contractors must focus on every aspect of their business, from planning to training to marketing to customer retention to properly managing service agreements. Quit working in your business and start working on your business. Make sure that you’re as prepared as you can possibly be before the next storm arrives.