Let’s face it- running a service company (think Plumbers, HVAC companies, Pest Control, and the like) 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.
Fact: There are over 480,000 plumbers in the US.
Fact: There are over 460,000 HVAC contractors in the United States.
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.
If that doesn’t sober you up a bit, something’s wrong. Running a service company is tough and risky. But, if you’re smart, it can be incredibly profitable. This blog is about helping you learn from this mistakes of the failed companies.
The Truth About Managing A Business
Building a business is tough work. You’ve got to learn to find customers, price your service, manage your inventory, manage your time, manage your employees, manage your financials, manage your operations… You get the idea. In total, there’s roughly 20 general business concepts that any company must master to stay in business beyond 5 years. It’s a big challenge.
Unfortunately, many contractors get into ownership or management positions because they decided to leave a previous company as a technician and work for themselves, or the company was passed down to them from a parent or mentor figure. In those cases, the new owners find themselves with the technical ability to do the job of a contractor, but often lack the management insight necessary to manage their new business.
Being a great contractor is not the same thing as being a great manager.
There are literally hundreds of ways to bring a perfectly good business to its knees. Luckily for you, you don’t have to worry about all of them right out of the gate. We’ve done the research and determined the most common and most likely reasons that businesses fail, and created this list of things to do to avoid that outcome. If you only pick 5 things to focus on for your business, statistically speaking, start with this list. As you’ve mastered these things, you can move on to other areas. After all, they’re less likely to cause you huge headaches right now.
Where to Start
There’s no real right way to manage this list. Generally speaking, you have two options:
1) Pick one of the 5 areas that doesn’t seem overwhelming to you, and spend the next 6-8 weeks working to improve that one thing. As you get a better grasp of it, move on to the next item. Since you’re starting on things that seem easy to you, you’ll gain confidence early to start helping you as the steps become more complicated.
2) Pick one of the 5 areas that seems that you most want to avoid, and dedicate yourself to solve it. Chances are, that’s an area that you know you’re deficient in, and are trying to put off. If you’re one of these brave souls, start with the most challenging item first, master it, then move on to more simpler tasks. You’ll find the challenge gets easier as time goes on.
There’s no wrong option between either of those two. Whatever you do, do NOT choose option #3:
3) Read the list. Do nothing. If you do this, you’ll most likely join the statistics of failed businesses within the next 5 years.
So here we go: 5 ways to kill your business within 5 years.
#1: Don’t Pay Your Taxes.
Before you start thinking that we’re stating the obvious, know that this is one of the most common reasons businesses fail. Tax issues can quickly snowball. Things that start off as simple problems quickly escalate to holes that are sometimes impossible to recover from.
First, let me state that there’s a difference between using strategic decisions to manage away tax liability, and attempting to evade tax liability. According to the IRS , anything that is “voluntary, conscious, and intentional” is going to get you in hot water.
As a business owner, the IRS can make your life miserable. If you want to risk your home, family, or business, make sure you make one of these short-sighted decisions:
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.
#2: Don’t Manage Your Financials.
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.
While financials can give you a look at all kinds of things about your company’s operations, there are a few specific ones you really want to understand:
-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.”
You know it as well as I do, your customer is always trying to negotiate the price.
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 is seems higher. For one, it’s the 10th anniversary phone since the original iPhone was announced in 2007. For two, it’s abandoned it’s 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 it’s futuristic charm. “It’s got top-notch industrial design, and the software engineering is years ahead of it’s 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… it’s technology, it’s 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.
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.
#4: Spend Money On Ineffective Advertising.
There’s an old joke with business owners. Maybe you know it:
Half the money I spend on advertising is wasted; the trouble is I don’t know which half.
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 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 is it, 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.
#5: Don’t Plan Your Business.
There’s a terrific quote from a German military general in World War II:
“No plan survives first contact with the enemy.”
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 sale 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 “would 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.
Of the 150,000 service companies that close each and every year, nearly 46% of them closed because they didn’t address these types of issues. By solving the very common issues now, and early, you’ll be better poised to grow your company into year 6.
And look, if you’re overwhelmed, there’s help. Look to industry groups like Service Roundtable to help connect you with other contractors all across the country. There are thousands of people just like you, and they’re willing to help.
At DP Marketing Services, we focus on the ‘marketing’ piece. Sure, we can help coach you through the financials or the operational aspects. But our bread and butter? Helping companies focus their marketing dollars in effective ways.
What do you think?