The Price Is Right. PHCC National Convention Minneapolis, MN September 24, 2011

Transcription

1 The Price Is Right Calculating YOUR Costs, Profit, Pricing PHCC National Convention Minneapolis, MN September 24, 2011 Michael A. Bohinc, CPA Brookfield Drive Auburn Township, Ohio (440) (O) The information contained in this presentation is intended to provide general information concerning these specialized topics and to enable you to identify areas of potential improvement in your business. This information is not intended to be comprehensive. Competent accounting, management and tax assistance should be obtained as specific issues arise in your business. It s important to note that our discussion will center on proper pricing strategies and not on specific prices to charge or use. That is price-fixing and is an illegal practice. This discussion is not a discussion of prices but rather, of pricing strategies and how to properly calculate the selling price for an hour of labor. No portion of this presentation or handouts may be recorded, copied or distributed without the prior written permission of the authors Keeping Score, Inc. All rights reserved. 1

2 Overview of Break Even Properly figuring your break even cost and establishing a proper selling price is a fundamental calculation that all contractors need to understand. It s the financial foundation of the company. If it s done improperly, anything built upon it will be unstable and may collapse just like a house with a weak foundation. With a firm understanding of the concept of break even and calculating proper selling prices, contractors will help dramatically improve the industry s pathetic 3% average net profit margin. Without question, the biggest accounting mistake contractors make is in calculating their true break even cost per billable hour and, correspondingly, their proper selling prices. As a business owner, you need to know how to read, understand and make business decisions based on your company s financial information. You don t need to have an accounting degree or be a CPA in order to have a basic knowledge of your financial data. It is your responsibility as a business owner to know how your business is performing and to be able to make any necessary adjustments to the business and pricing based upon the information gathered. This presentation today will review some of the basic financial information that is invaluable to a business owner in making the necessary decisions in your business. Steps Required To Calculate Your Breakeven Point 1) Determine your company s billable percentage. 2) Calculate your company s direct labor cost per billable hour. 3) Calculate your company s overhead cost per billable hour. 4) Add your direct labor cost per billable hour and overhead cost per billable hour to get to the company s break even cost per billable hour. 5) Establish a profit goal for the company. 6) Calculate your selling price per billable hour of labor for the company Keeping Score, Inc. All rights reserved. 2

3 Billable Hours: Standard Hours Available To Work (52 weeks x 40 hours/week) Less: Holidays ( days) Vacation ( days) Other Paid Time Off (PTO) ( days) Hours Left Available To Work Projected: Billable hours per employee Unbillable hours per employee Billable Hour Percentage Direct Labor Cost: $ Wages Hourly Wage x 2,080 hours Social Security Tax X 6.2% [employer portion max. $106,800] Medicare Tax X 1.45% [employer portion NO max.] Federal Unemployment Tax 1st $7,000 earned X.8% [employer paid] State Unemployment Tax 1st $11,000 earned X % (company rating) Workers' Compensation (hourly wage) X % (company rating) Health/Life Insurance Vision/Dental Insurance Uniforms Retirement Plan $ /month X 12 months $ /month X 12 months $ /week X 52 weeks % of wages Total Direct Labor Cost 2011 Keeping Score, Inc. All rights reserved. 3

4 Overhead Expenses $ Notes/Comments Owner's Salary Total Overhead Expenses Total Overhead Expenses Billable hours for the company Overhead cost per billable hour 2011 Keeping Score, Inc. All rights reserved. 4

5 Break Even Calculation: Direct labor cost per billable hour Overhead cost per billable hour Direct Labor Cost / Billable Hours Overhead Costs / Billable Hours Break Even cost per billable hour Selling Price Calculation: Break Even cost per billable hour Profit Goal Selling Price per billable hour BE Cost per BH / (1 profit goal %) The Whole Pie i.e. 100% Selling Price 2011 Keeping Score, Inc. All rights reserved. 5

6 Once you ve calculated your break even cost per billable hour, what do you do with it now? Well, that s the last step and a very important one. It s the process of calculating your selling price for a billable hour of labor. You need to determine the price that you re going to charge for a billable hour of labor. Now, before we talk specifically about that, I d like to define a couple of terms and briefly discuss an issue related to the calculation of the selling price of labor. Mark up vs. Margin: Profit must be calculated as a percentage of the selling price, not direct cost. Business owners often use these terms interchangeably thinking they mean the same thing and they don t. Mark-up is calculated based on cost. Margin is calculated based on the selling price. Do not use the term mark up or the mark up method. When you use the markup method improperly, you reduce or eliminate any potential profits on the project. It s most often used improperly. Use the margin method. It is simple and always accurate. By the way, do you wonder why builders, general contractors and others like contractors using the markup method? Well, the method short changes the contractors. I think many people use the wrong method because it s easier for them to multiply than it is to divide. It is crucial that contractors understand these math principles and apply them in their businesses. When you see the sale ads in the Sunday paper, they advertise prices based on a percentage off of the normal selling price. They don t base it on a percentage of the COST of the product or service. For example, a business suit is advertised at 25% off its regular price of $400 (i.e. 25% off of $400 regular price OR price you pay is $400 *.75 = $300). This same principle applies to the PHC industry as well. NOTES FOR FOLLOW-UP: 2011 Keeping Score, Inc. All rights reserved. 6

7 Expenses of a Business Materials Cost - IGNORE FOR PURPOSES OF THIS PROGRAM S CALCULATIONS Direct Labor w/taxes & benefits: Hourly Wage Social Security - Employer-Portion Medicare - Employer-Portion FUTA SUTA Workers' Compensation Health/Life Insurance Dental/Vision Insurance Uniforms Retirement Other Benefits Overhead Expenses: Bonuses-Office Employees Education & Training-Owner(s) Education & Training-Office Staff Education & Training-Technicians Human Resource Management-Testing/Hiring Subcontractors Building Maintenance & Repairs Large Tools Small Tools Shop Supplies Equipment Leases Equipment Maintenance & Repairs Building Property Taxes Rent/Mortgage - Office Utilities-Power Utilities-Water Utilities-Gas/Heat Utilities-Phone/Internet Cell Phones Other Utilities 2011 Keeping Score, Inc. All rights reserved. 7

8 Yellow Pages Direct Mail Newspapers/Magazines/Other TV/Radio Special Events - Sponsorships Internet/Web site Other Marketing Bad Debt & Collections Bank Charges Credit Card Charges/Fees Computer Expenses Contributions Dues - PHCC Dues & Subscriptions-other Entertainment, Holiday Party, Etc. Equipment Rental-Office Freight & Trucking Interest Accounting Fees Legal Fees Other Consultants Office Supplies Postage Travel Miscellaneous Expenses Insurance-Business Owner Insurance-Property Insurance-General Liability Insurance-Umbrella Policy Insurance-Vehicle Insurance - Other Licenses/Bonds/Permits State & Local Income Taxes Personal Property Taxes Fuel/Gas Vehicle Leases Vehicle Maintenance & Repairs Vehicle Licenses & Registration Depreciation - Buildings Depreciation - Equipment Depreciation - Vehicles Amortization - Goodwill Other Expenses Capital Expenditures - (New vehicles, equipment, etc.) 2011 Keeping Score, Inc. All rights reserved. 8

9 Overhead & Profit Calculator The PHCC Educational Foundation is proud to present the PHCC Overhead & Profit Calculator. This excellent tool helps users to determine a selling price that covers all their costs of doing business and provides the net profit percentage they desire. The CD comes loaded with Excel spreadsheets that take users through the steps of calculating their Labor Costs, Overhead Costs, Break-Even Rate, Profitable Selling Price, Monthly & Annual Net Profit, and Target Revenue & Profit Goals. Extra tools on the CD include a Lost Time to Dollars productivity calculator and a Financial Ratios calculator to help you analyze & compare your financials against industry averages. You can watch a free seminar on understanding your costs and pricing at the PHCC Educational Foundation s online Contractor Resource Center: ORDER USING THIS FORM OR ONLINE AT Please clearly print the following information and fax this sheet to or return this sheet with your payment (checks made payable to the PHCC Educational Foundation), 180 S. Washington St., P.O. Box 6808, Falls Church, VA Call with questions (800) Thank you! Name: PHCC ID: Date: Company: Phone: Address: City/State/Zip: QUANTITY DESCRIPTION UNIT PRICE TOTAL Item #9330, Overhead & Profit Calculator CD, PHCC Member Price $ Item #9330, Overhead & Profit Calculator CD, Non-Member Price $ SPECIAL SEMINAR DISCOUNT Discount Offer Expires January 31, 2012 Shipping & Processing Note: Virginia sales tax will be added for VA based customers. TOTAL DUE 25% Off FREE Amount & Method: Bill Me (PHCC Members Only) Cash Check Charge: MC Visa Amex Card #: Exp. Date: Signature: Please fax this sheet to , or mail with your payment.

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11 2011 Invest in Your Future Campaign Matching Contributions Provided by: Support the Industry that Supports You Invest in Your Future! Please clearly print the following information and fax this sheet to or return this sheet with your contribution (checks made payable to the PHCC Educational Foundation), 180 S. Washington St., P.O. Box 6808, Falls Church, VA The PHCC Educational Foundation is a 501 (c)(3) non-profit organization and gifts are tax deductible to the fullest extent allowed by law. You will receive a letter confirming your contribution for your tax records. Call with questions (800) Thank you! Name: Date: Company: Phone: Address: City/State/Zip: Please list my donor name in publications as: I wish to remain anonymous. This is a special gift: On Behalf of: In Recognition of: In Memory of: Amount & Method: Bill Me Cash Check Charge: MC Visa Amex $50 Foundation Sustaining Donor $500 Foundation Chairman s Circle $100 $250 Foundation Century Club $1,000 Foundation Fellow Other: $ Donation Options: Please tell us how to handle your contribution total indicated above: Charge the total amount above now. Charge the total amount above on this date: Split into 4 installments over remainder of the year Equal monthly installments Card #: Exp. Date: Signature: Please fax this sheet to , or mail with your contribution. Details online at Thank You!_

12 PUTTING YOUR GIFTS TO WORK! SCHOLARSHIPS AWARDED Because of donor gifts, the Foundation awards over $35,000 in scholarships to students each year. Gifts to this campaign help the PHCC National Auxiliary award over $30,000 in scholarships to students each year. SEMINARS, WEBINARS AND COURSES Working with PHCC chapters, the Foundation will bring great seminars to over 1,600 contractors and their employees around the country this year, co-sponsoring many of these events with Kohler Co. The Foundation is also conducting free semi-monthly webinars. The Foundation conducts a four-day Essentials of Project Management course for project managers and the Plumbing & HVACR Instructor Workshop for apprentice program and other instructors. EXPANDED ELECTRONIC OFFERINGS The Foundation s free HR Personnel e.bulletin helps over 4,500 industry leaders each month with their HR questions. The Foundation s Overhead & Profit Calculator software helps contractors calculate their costs and price their work. Over 40,000 visitors will access information from our free online Contractor Resource Center at foundation.phccweb.org this year. 1. Give Back to Pay it Forward If you are a member of PHCC, chances are you or your employees have benefitted from a Foundation program whether you knew it or not! By giving back, you help to keep the educational offerings coming for you and the next generation of contractors. 2. $50,000+ in Scholarships Your contribution helps the PHCC Educational Foundation and PHCC National Auxiliary award $50,000 or more in scholarships to students each year. You can help a student become a future leader in our industry with your gift. 3. Take a Tax Deduction The PHCC Educational Foundation is a 501 (c)(3) nonprofit and you re your contributions are tax deductible to the fullest extent allowed by law. Please use the contribution form on the reverse on this page or call (800) to make your gift today. Thank you! APPRENTICE TRAINING & CONTESTS The Foundation puts the industry s best plumbing and HVACR textbooks into the hands of thousands of students each year and continuously works to update & improve these texts. The Foundation runs the national Skills USA Plumbing Competition and conducts the National Plumbing Apprentice Contest at the PHCC Natl. Convention. The Foundation also assists PHCC chapters with getting apprentice contests running in their states and helps others in their efforts to get apprentice training accredited for college credits. WE COULD NOT HAVE DONE ALL THESE THINGS (& MUCH MORE) WITHOUT YOUR SUPPORT LAST YEAR. PLEASE DO YOUR PART BY MAKING A CONTRIBUTION TODAY! Top Five Reasons to Give 4. Your Dollars Make an Impact for Lifetimes Your gift supports scholarships and education that make a permanent difference in people s knowledge and skill levels. Your gift now pays dividends over entire lifetimes for those you are helping. 5. Matching Contributions InSinkErator provides $25,000 and Ferguson provides $10,000 in matching contributions to this fundraising campaign each year. Your gift demonstrates to InSinkErator, Ferguson and other industry donors that education is a priority issue to PHCC members and worthy of their matching support. The Bottom Line: Your gift of any size really does make a difference. Please, do your part and ensure that great educational programs and scholarships continue to benefit contractors, their employees and families into the future.