How to Calculate & Increase Your HVAC Profit Margins
May 2, 2023 | Read: 14 minutes
Most HVAC business owners decided to embark on the journey of being an entrepreneur both for two reasons: freedom and financial independence.
With industry standard HVAC business profit margins hovering between $50 000 and several millions, it looked like entrepreneurship would deliver.
Except for you, it hasn’t… yet.
Could there be some things that are holding you back when it comes to running your HVAC business?
You can see your HVAC business is growing. You’re hiring more people, you’re getting more customers, you’re spending more money on tools but one thing’s missing: profit.
Spending too much on manual processes can be a big reason you’re not making the big bucks yet.
The guide below will walk you through some of the challenges of automating an HVAC business. Let’s dive in:
What are the standard profit margins for the HVAC industry?
HVAC profit margins can vary a lot, based on a few things:
- Location – interestingly enough, sometimes HVAC companies based in rural areas can earn a lot more due to lower costs of running the business
- Specialty – some HVAC companies try to offer a wide range of services, whilst others focus on specific areas like residential, commercial, installation, maintenance, etc.
- Target customers – it might be more difficult to acquire high value customers, especially in the commercial space, but offering a premium experience can seriously influence your profit range
Statistically, however, the industry standard in the United States is between $50 000 and several millions. In percentages, experts say it can vary between 8% and 40%.
The Department of Energy suggests a 12% HVAC profit margins for successful businesses as the industry standard.
How to calculate your HVAC business profit margin
Here are 5 steps to help you calculate your profit margin:
1. Add up all your costs
A simple way to calculate your profit margin and see if it matches the industry standard (or exceeds it!) is to add up all your costs – and we do mean ALL your costs, down to the last paperclip. Some common ones are:
- Rent expenses (office, warehouse, vehicle parking, etc.)
- Cost of goods (office supplies)
- Running the business costs: marketing, accounting, lawyers, etc.
- Vehicle costs (fuel, checkups, insurance, etc.)
- Inventory and tools or equipment costs
- Employee salaries, benefits, and insurance costs
2. Calculate your total revenue
Then calculate your company’s total revenue – ideally, per year but you can also do this per month although we recommend trying to get an average total revenue number, rather than taking a high or a low month.
3. Calculate your Net Income
From your total revenue, you should deduct the business costs and then deduct the taxes you owe.
It should look something like this: Net Income = Total Revenue – Business Expenses – Tax
4. Obtain your net profit margin
To calculate your HVAC business profit margins, you need to divide the net income by the total revenue and multiply the result by 100 to obtain a percentage.
For example, it could look something like this:
- Total revenue = $200,000
- Total costs = $150,000
- Taxes = $10,000
- Net income = $40,000.
Net income ($40,000) / Total revenue ($200,000) = 0.2
Your HVAC business profit margin is: 0.2 x 100 = 20% which falls in the middle of the industry standard, meaning you’re doing quite well for yourself. However, don’t take this as the limit. If you are in a situation where you feel like you can comfortably raise prices (to increase total revenue) or decrease costs by making processes more efficient, then don’t let a number stop you. As a business owner, you are in control of your profit
One main reason so many businesses fail every year, according to ACHR News, is because they don’t take the time to do these basic calculations (or they get the wrong result because they don’t have an accurate view of their costs). If your profit margin comes out negative, you’re basically spending money to work. How can that happen? We’ll detail a few reasons why you might not be breaking even below.
5. Other financial terms: gross margin and gross profit
Other financial terms you’ll encounter when managing your hvac business are gross margin and gross profit. Gross margin refers to a profitability measure that looks at a company’s gross profit compared to its revenue or sales. A company’s gross margin is expressed as a percentage.
Gross profit (dollars) is determined by calculating gross sales. The higher the gross margin, the more capital a company retains, which it can then use to pay other costs or satisfy debt obligations.
Why are you earning less than the industry standard margin?
1. Focusing on the wrong HVAC business metrics
Let’s start with a slightly different question:
What makes your business better than the field service competition? If you answered with things like:
- number of technicians
- years of experience
- new tools
- quality workmanship (we know how it sounds but just keep reading and you’ll see why!)
Then you’ve got one reason right there for your bottom line being less than the industry standard profit margin. Your answers are perfectly logical and do contribute to what makes you stand out from the crowd, but they’re not the most important thing and they shouldn’t be your only goal.
Solution: Do you know what makes clients choose an HVAC business over another for both residential jobs and commercial contracts?? Price would be the natural answer but, according to a Forbes article, that’s still not it. Rather, the key decision factor is something you should’ve seen coming miles away: customer experience.
So, the right question to ask yourself when you see your HVAC business profit margins slipping, is how does the experience you offer differ from what your competitors can do? How does it outperform theirs?
A premium customer experience is what allows you to set prices that will make your business thrive, not simply survive.
Understanding your potential customers and anticipating their needs is a lot more valuable than simply fixing their issue. More often than not, customers won’t be able to tell apart an excellent HVAC install from an average one, but they’ll definitely remember the company that sent them service reminders exactly when their filters were getting grimy.
2. Underestimating your own business costs and overestimating HVAC profit margins
Since we’re on the topic of prices: most business owners, regardless of experience, engage in a fight to the bottom when it comes to what they should charge for their HVAC services. This stems from not having an accurate overview of their overheads and what these include (it’s not just labor costs and spare parts) and from the fact that they’re not aware of which parts of the business are bleeding money.
Not all jobs are the same. You might be doing more service work than replacement or specialize in industrial fittings with the occasional residential work but it’s rare that all types of jobs bring in the same amount of profit.
Your customers should also inform your decisions when it comes to ordering stock, hiring, marketing, and other business-related activities. There’s no point in setting prices to match the competitor’s; you don’t know the price of their materials or what they pay their techs, just like you don’t know how much they’re winning or losing.
Solution: Compartmentalizing your business will help you calculate exactly how much each type of service costs you, then decide how much your profit should be (the industry standard profit margin for HVAC is approx. 10%).
Add that to obtain the final price, you’ll always end up in the green and the customers that will pay for your service are the ones worth keeping around.
Listen to Ruth King, HVAC expert, explain this in more depth below.
She explains how growing your revenue is highly dependent on who your customers are, who your customers could be, and how accurate your financial statements are.
3. Inefficient use of resources
Imagine an HVAC technician goes to a repair job, diagnoses the issues, then realizes they don’t have the spare part they need in the truck. They call the operations office where someone checks a spreadsheet (or worse, a paper list) and lets them know that they don’t have it in the warehouse either but that they’ll place a purchase order and have it in 2-3 business days.
The tech informs the customer, and they’re not happy. But what can they do (except call another HVAC company in those 2-3 business days)? Then the tech goes back to the office only to find that the part they needed was in fact in stock but someone had forgotten to write it down.
Sometimes it’s overstock (which takes up pricey storage space) or understock (which annoys customers to no end) or even damaged stock that rattles around in a truck for weeks, but the end result of this scenario is familiar to any owner or manager and one of the reasons they’re not making anything close to the standard profit margin for HVAC specialists like them.
It’s the same situation with jobs that are scheduled whenever there’s an available tech instead of using a digital tool to judge which route is more efficient when it comes to fuel consumption and time spent on the road (since that time is a billable resource).
Solution: Traditional methods of managing a service business can and often lead to a lack of efficiency. Software is the natural solution, but even then you need to make sure it’s set up properly. Otherwise the general consensus is that more often than not, it’s the little costs you brush away under the rug that will hammer the final nail in your business.
4. Hiring more admin instead of more HVAC contractors
And the truth of the matter is that you don’t even have a choice about it. You might be thinking it’s a sign of high demand and a growing business that you need to keep hiring admin and office staff, but if office staff are outnumbering your techs, that’s not growth.
Your technicians are the ones who put tangible money in the bank. Your sales team, too.
Office staff are vital, of course: they make sure the technicians have their schedules full, customers are happy and kept up-to-date, and the business is fully stocked when it comes to parts and tools.
This is a valuable service but if you want to make anything close to the industry standard profit margin for HVAC, you’ll want to have a ratio of 1 admin for every 5 techs – if the admin is fairly new to the job. As they get more experienced, 1:7 would be a recipe for success. But the only way to do this is with the help of digital tools and a solid customer database, connected to a schedule dispatch software.
Hire with the right mindset:
On the same topic of hiring the wrong people is a follow-up to our first point on offering the best customer experience: you need to hire with this value in mind.
You can teach an employee skills but you can’t teach them personality.
Solution: Hiring with soft skills in mind is just as important – if not more – than experience.
At the end of the day, no HVAC installation will ever be good enough to make up for a rude technician, as well as poor customer service on the phone.
Automating a business with an HVAC software can sound easy enough, but there are some challenges you should be aware of.
The practical guide to automation will detail some of these and how to overcome them!
5. Inefficient business processes
A lot of HVAC business owners and managers have either worked their way up from technicians or started their business after being in the field. This means they know the industry in and out, they know how to manage other techs, and are experienced in dealing with customers.
No one would blame them for having little patience to sit down every quarter and audit the business from top to bottom for their average HVAC profit margin, starting with every sheet of paper bought and paid for with company funds and down to every truck. Then list every customer, the type of service provided, the cost, the profit, the time it took to get it done, and so on and so forth. Every 3 months.
This is what running your own HVAC business means. There’s rarely a lot of time left for anything else and it’s simply part of the entrepreneurial journey. You don’t need an MBA to know that if you can’t measure it, you can’t manage it.
Solution: If you don’t know your business processes in and out, with the exact numbers, how can you hope to improve them? Understand your numbers first, perfect the way in which your employees record them in the first place, then sit down (either on your own or with a business consultant) and start writing out potential improvements.
For example, if you looked at your database and separated your new customers from your returning customers in the last quarter and realized that the latter makes up only 5% of your business, you’d deduce that you need to improve your customer retention rate.
A good manager will always know that acquiring new customers can be 5 times more expensive than retaining existing ones then they’ll act on it with the confidence solid data offers.
6. Unstable HVAC business cashflow
Cash flow is a fickle thing and if you have to keep the jobs coming constantly just to make sure you can pay your own bills, then you don’t have a healthy one and your HVAC business profit margins may not be the best. This can be due to any number of things, from the aforementioned misunderstanding of overheads and profit numbers, to inventory management errors, to the very way you’re invoicing.
Solution: Late invoices mean late payments and there are plenty of customers who like to pretend that they’ve “forgotten” about paying, much like you did about requesting payment. If this is a common problem your business is running into, check out these tips on sending invoices via email.
However, sometimes errors happen and payments get delayed (or completely neglected) for other reasons. Not to mention mistakes on invoices can occur because the tech didn’t write down the parts they used, and we haven’t even started on the customers who simply refuse to pay for whatever reason.
These are all taking a bite out of your profit margins as you have to cover the costs somehow, and more often than not, it’s from your own pocket. So not only do you end up missing profit targets, but you’re in debt too.
All this happens while customers keep calling which can make you think that things will get better with time – you’re working so money must come in at some point – but, as the business grows more chaotically, it will only get worse.
How to take your HVAC profit margins to the next level
All in all, identifying the problem is only half of the job, but if you know why you’re not making the industry-standard profit margin for HVAC companies, you can get started on fixing the underlying issues.
Setting the right price is the first step towards a thriving business, instead of a struggling one. From there, you can learn to sell more confidently, too.
This is why we’ve put together a practical guide to help you price your service for a profit. Download your free guide below!
