Running a successful HVAC or plumbing business isn't just about fixing air conditioners and unclogging pipes—it's about financial management. Understanding how cash flow, project costs, and pricing affect your bottom line can be the difference between barely scraping by and achieving sustained profit. Managing your finances effectively starts with knowing what the numbers on your Profit & Loss (P&L) statement really mean, helping you make informed decisions that drive business growth and ensure financial stability.
Why Percentages Are Key to Financial Management for Contractors
- Revenue (Top Line): This is your total income from services provided, and it’s the starting point for any financial discussion. Tracking revenue is crucial for assessing the profitability of your HVAC or plumbing business and understanding how well your pricing strategy is working.
- Cost of Goods Sold (COGS): For those in the HVAC and plumbing fields, COGS includes:
- Direct Materials: Ideally, this should be 10-20% of your revenue, covering items like plumbing tools, HVAC equipment, and refrigerant used in service calls.
- Direct Labor: This should fall between 18-22% of your revenue, accounting for the wages of your licensed plumbers, HVAC technicians, and other skilled professionals.
- Total COGS: Keeping this between 30-50% of your revenue is a sign of good financial health. It ensures you're managing your project costs and labor expenses efficiently, which is crucial for maintaining profit margins.
- Gross Profit: This is what you have left after deducting COGS from your revenue—a key indicator of how efficiently you're running your operations.
- Operating Expenses: These are the costs to keep your business running day-to-day:
- Marketing Expenses: Keeping these at 8-10% of revenue can help attract new customers without eating into profits.
- Administrative Expenses: These should be about 5-10% of your revenue.
- Total Operating Expenses: Aiming for 28-32% here ensures you're not overspending to keep the lights on.
- Net Income (Bottom Line): This is your profitability—the ultimate measure of success. It's what's left after all expenses are paid.
Practical Financial Management Tips
Here’s how you can maintain financial health for your HVAC or plumbing business:
- Check your financial statements every month. This helps you spot trends, manage cash flow, and adjust your strategies as needed. For more tips on improving your plumbing business profitability, check out this guide.
- Get in the month! Understand that your fixed costs might come due twice in a month. Plan accordingly to avoid cash flow surprises.
- Get pricing right. Your pricing should cover your costs and fund your growth. This is vital for sustaining your business over the long term. Consider using HVAC service management software to automate invoicing and ensure accuracy in your pricing strategy. Learn more in our guide on the best HVAC service management software for growing your business.
- Use the right tools. Field service management software designed for HVAC and plumbing businesses can automate routine tasks and ensure you get paid for every minute of time.
Mastering the financial side of your HVAC or plumbing business doesn’t have to be overwhelming. By understanding key percentages and closely monitoring cash flow, profit margins, and financial performance, you can make more informed decisions that boost profitability, enhance your financial stability, and optimize cost management. Tracking financial data regularly helps you avoid costly mistakes and identify opportunities for growth. Remember, knowledge isn’t just power—it’s profit.
See key percentages to monitor at a glance. Download our infographic.
