Correctly knowing and understanding the realities of life are the foundation upon which correct decisions are made so mistakes affecting your potential business success are avoided.

Do you know the reason you decided to enter the contracting business arena? You should since you did it.

Was it because no one else would hire you and you needed a job to support yourself?

Or was it that the contracting business was your family’s business and you naturally gravitated to it by family succession?

Maybe it was because, as an upcoming entrepreneur looking to enter the business arena, you thought the contracting business was a great way to achieve your American dream.

Regardless of the reason, one fact is certain: You intended to bring in more money into your coffers than it cost you to be in business. 

However, this brings up other questions. Do you know the true operational business costs you incur to operate your business?

Do you know it is your foundational responsibility as a contracting business owner to draw up a sound business plan that includes a comprehensive operational budget of the expenses you will incur to run your business?

If you don’t have a sound budget plan that is as close to accurate as it can be, you cannot be certain that any price you quote to consumers for a task will give you an opportunity to recover the true costs you will incur for it. If you don’t know your true operational business costs, you have a 2-to-1 chance that you won’t make a profit.

That’s because any price you quote for a task can only be at, below or above the true proportional cost you will incur to perform the task.

Selling at your true operational business cost doesn’t allow you to bring in more money for the task than the task costs you to perform. Always breaking even eventually makes you a loser because true operational business costs are always in a state of flux. Just look at the volatile prices you pay for vehicular fuel. 

If you don’t constantly monitor your estimated budget in comparison to the realities of operational cost fluctuations, your prices based on outdated budgetary information will eventually dwindle as your costs increase. At some point, profits will disappear as losses begin to appear. 

Selling below your true operational business costs obviously makes no sense. Selling at, or below, your true operational business costs gives you two chances of spending more money than you are bringing in. Selling above your true costs gives you only one opportunity of making more money.

However, even if you use the correct pricing methodology — one basing your prices on your current true costs and chosen profit margin — another question arises. Do you know what profit margin to choose?

Profit margin 

Basing budgetary operational business expenses on selling all your available revenue-producing tech hours and selling less than your maximum revenue-producing tech hours, your profit margin decreases and possibly disappears as the grim thought of losses rears its ugly head.

Do you know that if you only sell 70 percent of your available revenue-producing tech hours in any fiscal period, and your profit margin is 30 percent, you only break even on labor and overhead operational business costs? 

Do you know that if your chosen profit margin is 20 percent when you only sell 70 percent of your available revenue-producing tech hours in any fiscal period, you lose money for that fiscal period?

In those examples, you would need to choose at least a 31 percent profit margin to make more money than it truly costs you for labor and overhead.

Do you know there are two types of expenses you incur to operate your business?

Tangible costs consist of salaries and salary-related expenses, vehicles and vehicular expenses, tools and any other legitimate business-related expenses you purchase.

Intangible costs are customer relations, callbacks and warranties, etc., taking away valuable revenue-producing time. In turn, your revenue-producing tech hours decrease and your hourly tech labor/overhead costs of actual hours sold increase.

The technician factor

Do you know that your techs are your pseudo-partners since they interact with your clientele more often than you do?

Do you know it is your responsibility to hire techs who have the intent and ability to deliver excellence to your business’ clientele?

Do you know you must train and observe so your techs deliver excellence to the public?

Do you know that if you do not compensate techs in a fashion that will allow them to be content in your employment, you may lose them?

Do you know that good techs are hard to find? I think you do. Therefore, if you want them to stay with you, you must compensate them in a manner commensurate with their contribution to your business. And it must be considered in your aforementioned budgetary concerns.

Implied warranties

Do you know that most of your workmanship includes an implied warranty? 

Some services are that — a service. Unclogging a drain, in my opinion, does not have an implied warranty if you thoroughly test the drain after you snaked it and the drain functions properly. That’s because you can perform the task, and anyone can clog that drain as soon as you are finished by introducing items into the drainage system that should never be introduced into it.

On the other hand, installing a drainage system does have an implied warranty.

For HVAC contractors, answering a no-heat call in one zone of a building that appears to be rectified by tapping the zone valve and testing several times for opening and closing isn’t a service with an implied warranty, especially as long as you emphasize that fact to the consumer. However, changing the zone valve does have an implied warranty.

Implied warranties place the onus on your business to stand behind your workmanship. For clarity’s sake, I suggest that you always honestly explain the warranty status of any service. It might even increase your sales numbers if consumers choose to opt for a service including a warranty. 

And do you know that warranties are items that must be considered in your operating budget? After all, any legitimate business expense needs to be calculated for your business to be successful. 

Other considerations

Do you know that you need the professional assistance of lawyers, accountants and consultants in order to be in line with governmental rules, regulations, mandates and tariffs and to run your business in a proper businesslike manner? And those professionals cost you money. So, put those costs in your budget calculation.

Do you know that consumers love paying with credit cards? They like the rewards and mileage they get. Therefore, you should accept credit card payments. Make sure you understand that the fees you incur in accepting credit card payments are legitimate business expenses that should be included in your operating budget. 

Do you know bad debt affects all businesses in some manner? Not getting paid or altering your price by lowering it after the fact costs you money.

Do you know that tools must be purchased, maintained, repaired and replaced? Of course you do, and it costs you money.

Do you know that Murphy’s Law — Whatever can happen will happen — affects your business and must be considered in your operating budget? Equipment sometimes doesn’t last as long as you budgeted it to last. Accidents happen to cut into your productivity. Employees, unfortunately, get sick and personal problems come up in their lives, shortening the number of tech hours you have available to sell. 

Whatever is not included in your operating budget affects your true operating business cost.

Do you know you are only human and that humans make mistakes? So, if you find yourself making a mistake, don’t make another by not fixing your mistake. 

If you don’t consider and remedy situations and problems that crop up in the everyday running of a contracting business, instead of being upset with the situation, be upset with the person who allowed it to happen — you. The buck stops at your desk.

Throughout this column, I have used the phrase “Do you know …?” to emphasize what you should know. Don’t jeopardize your American dream; it’s important to realize it. The enlightenment of knowledge outshines the darkness of ignorance since knowledge is the light showing you the path to success. And the realization that you need help gives you the courage to seek it so you can see that light. 

If you need me, call. l

Richard P. DiToma has been involved in the PHC industry since 1970. His Contractor Profit Advantage podcasts, Solutionars and programs show contractors how to improve their business results. DiToma has authored books on contracting business management as well as customized contractor price guides. Contact him at 845-639-5050, richardditoma@verizon.net; or R & G Profit-Ability, P.O. Box 282, West Nyack, NY 10994, www.contractorprofitadvantage.com. For podcasts, check iTunes.