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Let’s face it- running a service company can be hard work. You’ve got long hours, cranky customers, competitors who aggressively price-cut you at every corner… it’s exhausting. On top of that, it’s a tough industry.
UGLY FACT: Plumbing & HVAC Companies have the worst failure rate in the United States after 5 years. That means 20% of all services companies will go out of business THIS YEAR.
- Under report your income
All business income must be reported. This includes income from barter transactions and cash transactions. Another common way businesses under-report income is to avoid reporting large cash transactions by keeping deposits under $10,000. Deposits of $10,000 or more are required to be reported to the IRS.Some businesses try to avoid issues with payroll taxes by paying employees in cash. Paying in cash usually means no withholding for income taxes and FICA (Social Security and Medicare) taxes are paid.
- Over report your expenses
Some of the most common ways businesses over-report expenses are reporting personal travel expenses as business expenses, (such as taking a spouse on a business trip and claiming the spouse’s expenses as business expenses, or claiming personal miles as business miles); taking an unjustified deduction for home office space, or claiming other personal expenses as business expenses.
- Do not report your taxes
The most common instances of failing to report taxes are failure to report sales taxes and payroll taxes. These taxes are called “trust fund” taxes, because they are collected from others (customers, in the case of sales taxes; and employees, in the case of payroll taxes) and held in trust by the business, to be reported and paid to the appropriate taxing authority. Willfully using these taxes to fund a business instead of reporting the collection and paying when due is tax fraud.
If the IRS does get involved, things can get complicated quickly . They’re allowed to add extra late fees (up to 25%), have social security earnings seized, and even have vehicles, buildings, and sometimes homes seized.
If you want the best way to avoid #1, find a qualified CPA near you. As with most things, it’s far easier (and far cheaper) to solve these tax issues before they become a problem, and not after the IRS is keeping you awake at night.
Since we’re already talking about money, let’s keep at it. Managing financials, for some people, is like a trip to the doctor. You’re afraid of what you might hear, and you’re uncomfortable sitting on a cold table with people all up in your business. And yet- doctors have the ability to detect major problems- like cancer- that stand a better chance of treatment if treated early. In some ways, managing your financials gives you the ability to know when there’s a problem before it becomes unsolvable, or prevent the issue from happening to begin with.
- Properly plan & budget
- Receive (& understand) monthly financial statements
- Learn financial control & discipline
- Understand income statements & your financial ratios
- Understand profits & cash flow
- Understand your balance sheet
We won’t turn this blog into an online account course. Instead, if you learn one thing, learn this: understanding your financials (especially certain ratios) is like understanding your pulse, your blood pressure, and your weight. If you’re motivated, there are some great online resources to learn some of these things without having to go to college. If you have a CPA, ask them to explain ones that are important for you. Or, the SBA provides a resource called the Small Business Development Center, and it’s available for free one-on-one counseling in every state in the US. You can find a location near you here .
In any event, the more you understand your financials, the more your business will thrive. The less you know, the more likely your business will fail.
#3: Don’t Use A Smart Pricing Strategy.
In our experience, more often than not, companies don’t have a real clue on how to price their services. (In part, it’s because they don’t understand their financials from #2.) On any given day, most companies probably hear things like this from their customers:
- “That’s too much.”
- “I want a fair price.”
- “I want it fixed right the first time.”
- “Your competitor quoted less.”
But, do you want to know the secret? Your customer isn’t actually worried about the price. The problem is that they don’t understand your value.
Let me explain it this way:
Apple recently released a new iPhone (iPhone X). While there is record demand for the new phones nearly every year, this year, the demand seems higher. For one, it’s the 10th anniversary phone since the original iPhone was announced in 2007. For two, it has abandoned its familiar “home” button, and with a slew of sensors, your face is now your secure password. In other words, it’s fancy schmancy.
By all accounts, the iPhone X marks a shift toward more futuristic uses of technology. There’s fancy camera sensors on the back that help take pictures with multiple focus depths. There’s an infrared camera that helps detect the depth of your face so that a photo of you won’t hack your phone. Better display, better battery, better technology. It’s a device to behold.
But, it costs a cool $1,000.
So, let’s pretend I have an iPhone X in my hand, and we’re talking over coffee. “Look how cool it is” , I say, trying to convince you of its futuristic charm. “It’s got top-notch industrial design, and the software engineering is years ahead of its time.”
Sounds good, right?
So now, let’s say I want to try to sell it to you:
“I mean, new, this is a thousand bucks. But I’ll sell it to you for $20.”
Ok, what’s your reaction?
- What’s the catch?
My money says that you just chose “what’s the catch” . Why? Because it’s not about the money, it’s about the value. In my description, I built the value of the iPhone X… its technology, its UX/UI, and cool features. But for $20, it seemed like something was wrong. The price didn’t match the value.
Your customer is no different.
Generally speaking, there are two common ways of pricing in the service industry:
- Cost plus (or time & material) , where you basically calculate your hours, your materials, and add a bit of profit.
- Price matching , where you base your price on your competitor’s price.
But, here’s the problem: both of these pricing strategies will cause you to lose money.
We can walk through the nuances of the cons of both strategies in future blogs, but for this instance, let me just say this: when you do Cost Plus, you’re losing money, and making your customers unhappy at the same time. When you’re price matching, you’re letting another company’s operational margins justify your profits. In both instances, they don’t make sense for you.Instead, we’re a proponent of Flat Rate pricing . This accounts for all of your key financial ratios, labor, materials, and customer experience in one, flat quote. In most cases, contractors who use this model not only increase their margins by as much as 20%, but also make customers happier, too. Here’s a great source to start considering Flat Rate pricing for your company. Or, for you DIYers, you can follow our step-by-step guide here: https://www.dpmarketing.services/make-more-profit-with-your-hvac-or-plumbing-company-using-flat-rate…
Did you catch that? Flat Rate helps you charge more, and have happier customers. Why? Because you’re focused on value, not activity.
When you learn how to smartly price your jobs, you’ll instantly become more profitable.
Look, there’s a LOT to understand about marketing your business. Maybe I’m a bit biased since I’m a marketer, but while it’s easily as important to your business as financial knowledge, it’s typically far less complicated.
And, while it’s not rocket science, there’s a lot to know. From starting out with concepts like the conversion funnel , to understanding how to optimize things like AdWords or start leveraging the power of SEO , it’s important to not only understand how to market, but how to know if you’re doing it correctly.
One of the most common issues I see with service companies is that they blindly build their marketing plan by duplicating their competitors’, or by taking the advice of every Tom, Dick, or Harry who has an opinion. Don’t believe me? Find a phone book from 5 years ago, and open it to either a Plumbing, HVAC, or Pest Control section. Got it? Ok, now look at the companies who bought ads of any size. How many of them are still in business? Chances are somewhere less than half .
If you’ve never really focused on marketing your company (or at least, given it much thought), here’s what I recommend you do.:
- Evaluate your customers. Who are they? Are they price sensitive? Do they focus on quality? What motivates them to make a decision? Become an amateur psychologist and figure out what makes your customers tick.
- Evaluate your competition. What do they do well? How do they market their companies? What are their weaknesses that you can find a way to exploit?
- What’s your niche? Most companies fail when they try to be everything for everyone. What do you do well? If you specialize in leak detection, go for it! Or maybe it’s commercial refrigeration. Whatever it is, know what you do better than anyone else, and focus on it.
- Know the best paths to your customer. Maybe it’s Facebook or Yelp. Or maybe it’s a phonebook. But if your target customer is school construction projects, spending much effort on Pay Per Click or Social Media may not return well for you. Know your paths. Stay on your paths. Only branch out once you’ve dominated your channel.
- Measure results. You want know know exactly how much it costs you to acquire a customer. (This is called the Cost of Acquisition, or Cost of Sales.) Paying $100 per lead from a lead generation company may be a great idea… until you find out that you’re only booking service calls for $187. You want to be able to measure the results of all of your efforts to make sure you’re spending money on only things that bring you results, and not spending any money on things that aren’t.
If you want to guarantee you’ll be out of business, then spend your marketing dollars everywhere. If you want to grow your company, think smarter than your competition.
I can’t tell you how many times I’ve seen contractors run a business without actually planning on running their business. Or, said another way, they’re only working in the business, but they never stop to work on the business.
There are literally hundreds of things that your company could plan now so that you’re more prepared when you need to know them. Things like:
- How to hire employees
- How to fire employees
- What does your company need to solve as it grows?
- How to sell your company or pass to a family member
- How will you diversify your business as it grows?
- How will you manage risks?
Let me be clear- these are not luxury decisions. These are not types of questions where “wouldn’t it be great if…” was the point. These, instead, are the types of intentional planning that helps make a 1-man shop a 10-man shop, or turns a $2MM a year company into a $10MM a year company. There is no such thing as accidental growth. Your growth efforts should be planned, calculated, evaluated, and adjusted. The future of your company depends directly on your ability to plan.
In many ways, these are questions that are typically addressed initially during a business planning process. There are plenty of ways that you can do a good business plan, but if you’d like help, there are always wonderful free resources like the Small Business Development Center network. They’ll have plenty of tools to help you navigate the types of questions you’ll want to face, and learn how to plan for them in advance.
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Posted In: Sales & Marketing
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