Developing an HVAC Business Plan

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Company planning establishes clarity for employees and accountability for leadership, which are both necessary for lasting success.

This week, EGIA’s faculty gives you a step-by-step process to help you elevate your hvac business plan to pursue profitability and prosperity.

Plus, Weldon Long introduces the EGIA Foundation Scholarship aimed at solving an ongoing employee shortage in the trades and increasing the influx of young talent into the workforce. Learn more at alwaysindemand.com/scholarships.

Audio Transcription (in Beta Test)

On this week’s show, we’ll be continuing our new series, Plan, Measure, Perform, with part two of why you need an operating plan. Welcome to Cracking the Code, the show that helps you overcome the challenges you face everyday in contracting and keeps you on the cutting edge of emerging trends and best practices.

Are you or someone you know interested in starting a career in the HVAC industry? The EGI Foundation is now accepting applications. For its 2020 scholarship plan. This is one of the leading programs dedicated to solving an ongoing employee shortage in the trades and increasing the influx of young talent into the workforce.

The EGI foundation scholarship program gives out 20 awards of 2, 500 a piece. To students pursuing an HVAC degree or certification at an accredited community college, technical or vocational school, or approved technical institute during the 2020 2021 academic year. Applications can be submitted now through January 30th, 2020 on egiafoundation.

org slash scholarship. Well now it’s time to move from the conceptual stage of developing your business model and your plan to the actual step by step process of developing your plan. And it all starts with an accurate assessment of your company’s current state and identifying priorities based on impact to profitability.

Let’s join Gary Ellix once again, as he dives into this subject.

Now I get fired up when we talk about company planning, because I’ve been consulting and doing this, you know, um, for a living over here for about 17 years, even, you know, for about 10 years, when I worked for the manufacturer, I was doing consulting work. And so I’ve seen a lot of success and I’ve seen a lot of people struggle.

I’ve seen both sides of the equation. So one of the things I took away in my journals when I was writing down, Hey, this is the smart stuff that we’re doing and this is the stuff that I really don’t want to have happen when I’m out there and somebody gives me the keys to the store or I have my own money invested in my own companies.

One of the things that I wanted to have is I wanted to have clarity for every employee and alignment for every employee so that if I’m here doing this video and I have companies operating out there in the world, they’re doing the right things based on whatever plan we set forth. Now that takes a little bit of work at the front end and it’s one of those processes that a lot of small business owners, they, they really don’t like it that much because it creates accountability for them, but I will say this, if you want to create a business that doesn’t need you, if you want to create a business that can sustain itself past you as a business owner, your personality, your brand, your charisma, your network, it’s going to take a lot of work.

If you want to create a business that prints money, you really have to think through how the planning process gets organized so that you can teach your team how to do this without you being in front and center. So let’s take a look at what the process looks like. But first and foremost, what we want to do is we want to do a yearly situational analysis.

This is a business evaluation. And what that means is we’re going to go through and we’re going to deconstruct our business and we’re going to ask the questions. We’re going to look at the processes and I’m going to just say right now that on the business evaluation tool on the EGIA Contracting University website.

Uh, by the time you watch this video, there’s probably 200 processes out there. In totality, we know that we have about 400. So really, as we finish out the site and the technology, you may come across 400 potential questions. And they’re all asking you. to define why that particular process is important to your individual business.

So if I’m in the residential change out market, generating lead turnovers from service calls is important to me. It might be one of the highest priority things I do. So service agreements become a key element of that. If I’m a commercial company and I’m not really engaged in that, I’m interested in commercial maintenance agreements.

I could care less about residential pricing and residential flat rate and residential service agreements. It’s not relevant. So every single business inside of the EGIA premium membership platform is different. And this process respects that. What you have to do is you have to simply go through the procedures and ask the question, Why am I doing this?

And how important is it to my overall success? So when you do that process, that leads you to gaps. And the gaps are just areas where you personally have gone through the questioning process. What we call the situational analysis. And you say, well, that’s important to me, but I don’t really think I’m functioning as well as I should.

Or you say, that’s important to me, and I know I’m not doing that. So, a good, let me give you an example. So, a business metric that we know we’d love to see inside of any business is that 50 percent of all of your residential leads or changeouts should be derived from your service business. And, uh, that includes maintenance as well.

So, service and maintenance together prove 50 percent of the leads. Now, if that’s not happening, let’s say you’re at 20%. You have to look at that and say, well, why is that important? And the answer is, well, everybody knows that a service generated lead is a much better qualified lead. And I, I’ve got somebody that’s essentially ready to do a repair or replace and most likely a replace or a lead turnover.

So 50 percent of those leads coming from there just mean I have a big enough customer base that it produces those leads for me. If my customer base is too small and I don’t have that kind of quantity coming there, the question becomes, is that important enough to me to make an adjustment in my business process?

If the answer is yes, then the question becomes, what is the priority? And so we tie that to the question of, and this is the biggest challenge that contractors face. And I’ve been doing this for 17 years and we’ve had over 1, 200 people come through that financial camp. They always ask the question, I struggle with how to prioritize.

I know I’m supposed to be doing that, but I don’t know if that one or that one is more important. So the way we catalog or prioritize. is we do it based on how it links to profitability and cash flow. I mean, why are we in business in the first place? I mean, EGIA is a non profit organization, so everything we do is designed to feed back to our membership.

That’s designed. So, we’re not interested in looking at improving profitability. We’re looking at interested, we’re interested in improving the quality of the product and the service to you, our members. But if I’m in contracting, which I am, and I’m a for profit entity, I’m interested in improving the customer experience, the employee experience, and the company’s overall profitability, because I need that three legged stool.

So I’m always going to look at profit and cash flow as the discussion point on whether or not this is a priority or not. If you have trouble with that, you know, send a question to the ask, the expert or ask the consultant, and we’ll be happy to help out. I answered a question today about service agreements.

A company in Iowa was struggling with the idea of how many service agreements that they really should be thinking about. And the answer to that is, well, 50 percent of your customer base ought to be locked down on a service agreement. That’s the first standard that you want to hit. If you’re not there, then you’re probably not producing enough leads that are coming from your service and maintenance business, which enhances your profitability because we all know we close.

Better with existing customers who trust us and we sell 67 percent more revenue to a client that already has a relationship. So it’s not hard math, even a Buckeye like me can figure out that that’s going to produce more profit. So, and that helps cash flow. So one of the things we’re doing is we’re asking those questions to prioritize.

Which, you know, I don’t really know how many of these are going to be gaps for you, but let’s assume that there are I had a company, my first company I ever bought, there were 371 items on the list that weren’t mapped out well. We said, well, that’s a big, overwhelming, you know, giant elephant. How do we eat the elephant?

One bite at a time, right? It’s the old cliche. So, what we did is we took the 371, or in our example for our video today, 75. And we’re going to say, well, both of those are overwhelming, so how do I do that? Well, I’m going to look up here, and I’m going to say, well, how does this relate? And we’re going to prioritize that into the 1 through 5 must do items, the 6 through 15 need to do, and the 16 plus.

So every single idea, meaning that 371 minus 5 is 366, minus another 9, you know, we’ll call that 357. So 357 items are going to show up on the 16 I don’t really care about these right now. They’re issues, that’s real. But these are the ones that are going to make the most difference inside of the employee, the customer, and the business condition.

And then when I fix one of these, I’m going to move one of these in, and I’m allowed to move one of these in here. And so this is an ongoing process. And you say, well, I don’t really know if I have time to do that. And my answer is, if you don’t have time to do that, then you don’t have time to increase your profitability to 20%, because this is the process that you use.

There’s no getting around the business of business. When you look at a business transaction in terms of how you run a service call, you would most assuredly look at it as a job cost and say, did we make money on it? If you didn’t make money on it, You would probably look at the technician and look at the service ticket and how do I correct that behavior?

Well, if a business isn’t performing to a 15 to 20 percent level, it’s the same process. We simply look at the business and say, Why are we not performing to the standard that we want? And so, that, it’s okay if you’re at 10 percent and you say, I don’t really care, I don’t want to do this, this is too much work.

That’s fine. If you’re satisfied with that, there’s no issue. But if you’re looking to improve your profitability, then you have to benchmark yourself against the standards and say, well, how does that work? So what we’re going to do is we’re going to order the 1 through 5. We’re going to order the 6 through 15.

We’re going to go 16 plus. And we’re going to do that based on the gap analysis towards profitability and cash flow.

Now that we’ve identified the gaps and have prioritized which areas in the business we need to work on, Let’s go about seeing how we develop an actual operating plan.

So the one page strategic plan is designed to make sure that we have one thing happening, and that’s that the goals are identified for this position. So I need you to write that down, that the goals for each position are identified. So this service manager now has a role description and expectation metrics that are specific to his one page strategic plan.

They align 100%. with what the service manager function is supposed to be doing. So that brings us over to this discussion. What is a Ops Plan? And the answer is, it’s all the key activities. Whatever it is that’s associated with that position. Doesn’t matter what the position is. Sales Manager, Operations Manager, Installation Manager, Plumbing Manager, uh, Service Manager, Service Technician, Customer Service, Bookkeeping Function.

Every position in the company has the Ops Plan. It is THE Ops Plan. And that Ops Plan says whatever activities that you’re doing, whatever you do in your role description, whatever you do on a daily basis, your thrust has to be organized to achieve those objectives. Which means that commercial maintenance, call center process, more service agreements, and updating pricing, if those are the key issues for that business, then everybody else has to align with those activities.

Now, you can have more than this, of course, this is just an example of a company that’s recent. So, the thrusts that are going on inside of that business are based in principle on what we want each role to be doing in order to achieve those objectives. If these were the correct objectives based on profitability, then when we get through the year we’re going to have the profit and the cash flow that we’re looking for.

By the way, we don’t always function exactly the way we’re supposed to, which means sometimes we’re going to have to adjust. But one thing we have is we have milestones. The Ops Plan has a milestone attached to it. Every single one of those has a milestone. And we’re going to look at those milestones weekly.

So we’re going to have a conversation weekly about, Hey, what happened? We’re going to have a monthly review of the financial statement, which we talked about in the earlier communication model. And I believe Ellen has also got some material on the site that talks about communicating with employees and developing that.

Uh, standard of how we get people bought in. And then quarterly, we’re going to review that process. So these are not absolutes, they’re suggestions. So weekly, we look at leads, we look at sales, we look at lead turnovers, we look at labor, we look at financials. Monthly, we look at the company performance and quarterly, we look at the milestones.

What were our milestones quarterly? So if you look at service agreements and you were at 700 and you wanted to get to 2000. You’re going to have to have the first quarter milestone. So I’m just going to make believe that his first quarter milestone was 1100. So we need 400 service agreements in that first three month period.

Well, we’d be able to look at the activities and focus the technicians and the individuals, including the customer service and call center process around the increase in service agreements. We’re looking for 400. Well, 400 for the quarter means that we need to have about 133 per month, or thereabouts. If we have 133 per month, we better have somewhere around, if it’s a four week month, we’re going to say about 40, we’ll just call it 35 per week, and we break that down under four technicians, you know, that’s basically about, we’ll call it nine per tech.

So every technician has an ops plan. You owe me nine service agreements for the week, for four straight weeks, for the 16 weeks in the quarter, or whatever it ends. I think it’s actually more like 13 weeks in the quarter, sorry. So when we look at those milestones, what we’re saying is every single individual in the company has an activity and a thrust towards this particular idea, and that’s broken down.

And then we’re going to review it. We’re going to communicate how well we’re doing, and if we’re doing well, we’re going to pat some people on the back, and we’re going to keep talking about how we might want to get better. And if we’re not doing well, we’re going to adjust, and we’re going to figure out what the action plan needs to be that’s different.

So, I can only tell you how I’ve done it in the past. I can tell you how other people have done it as well. When we have this ops plan, and we run through this process, We have a weekly call that’s a management debriefing system around this particular plan. We have a monthly call that reviews this same process, but we also integrate the financials, so that we’re looking at what did we sell on the income statement, where was the mix, you know, what were the gross profit dollars, the margin percentages, what was the profit structure.

We look at the balance sheet, what’s the AR, the account receivable. What’s the cash flow? You know, cash flow being positive is a good thing, negative is bad. What’s going on on inventory if you have any? I mean, we’re just going through the processes of looking at the financials attached to the regular operating hvac business plan.

And so what that does is that gives us clarity of purpose as it relates back to the original question which is, we are a for profit enterprise so we are interested in increasing the profitability based on some hvac business plan targeting. So, the situational analysis brought us to this. This brings us to the priorities.

The priorities are chosen. That doesn’t necessarily mean they’re perfect. It just means those are the ones we wanted. We move that into an hvac business plan. The plan then gets worked weekly, monthly, quarterly. And then what we do is we measure that stuff. Whatever we’re talking about down here, we measure. So this is where your role descriptions, your KPIs, and your overall metrics come into play.

There’s a book. It’s not necessarily a great read, but it’s an interesting read as it relates to KPIs. It’s called The Walmart Effect. And it’s about how Walmart essentially took over the retail industry, including the grocery business, by essentially using This type of a process to evaluate how they were actually looking at any one given business segment.

So, the benefit of that particular book for me was that Walmart not only had KPIs, but they had sub metrics or sub KPIs. So they had the big picture KPI, which was, hey, what are we doing here on service agreements? 400 service agreements additional for the quarter. That’s the big KPI. But then Walmart had a sub KPI and they said the sub KPI is well we want every one of those service agreements to produce X amount of dollars in terms of accessories, X amount of dollars in terms of indoor air quality, X amount of dollars in terms of lead turnovers, X amount of dollars in terms of service calls, you know, basic maintenance sales.

So the sub metric here is they’re measuring the big picture item, but they’re also measuring the underneath layer of it. So they have complete clarity if they want to adjust. If they’re not hitting their metrics, then they can talk about that. And if we talk about the adjustment, 99 out of 100 times, I trust that you will absolutely make the right decision, as long as you have the right information.

It’s when we don’t have the right information that we begin using only intuition. And intuition is a valuable tool, but it’s only 50 percent of the business equation. The other 50 percent is data and information. I would contend that if you marry both your quality of intuition and your experience along with the data, those two things paired together make you an exceptional business person.

So that’s really all we’re doing here is we’re saying that simplicity wins. Let’s put in a process that organizes around the questioning and answer session, the prioritization discussion. We can’t do all of this stuff. So we’ve got to narrow it down into the ideas that create the maximum profit or cash flow or whatever your goals are.

We move that down to this list. We create the operating hvac business plan that sets up, which basically says, remember, it’s marketing, it’s finance, it’s production, it’s operations. Those four work together. We have that conversation about action plans. Where we’re going to adjust, how we’re going to set the milestones, and what it is you want your people to do.

So, what do you want your dispatcher to do? What do you want your customer service representative to do? What do you want your bookkeeper to do? What do you want your, uh, field service technician to do? What do you want your installers to do? What do you want in terms of your processes? So we measure that, and we rinse and repeat once a year.

And by doing that process, what you’re building is you’re building a culture. And that culture will create alignment. And when you have alignment You have one of the most powerful tools in business, which means that you have all the people in the right seats on the bus, and you have the right people on the bus.

Again, Jim Collins.

Now if you’re interested in learning more about operating plans, I want to encourage you to sign up for a free 30 day trial by clicking join at the top of this page. That’s all you gotta do. Join and you’re in. Now, this is just a small piece of the process, but you need the whole thing to make it all work.

We have a lot more content from Gary Ellix on company planning, including scaling up, using action plans, suppliers funding, month in financial reviews, entering new verticals and management communications. For example, the 10 minutes of video that we pulled today for content, it’s a 40 minute video on the EGIA contract university platform that goes into all the details of creating your company hvac business plan and aligning your people with that hvac business plan.

Gary also includes PDF documents and spreadsheet tools to help you implement all of this in your company. So give the 30 day free trial a go and check out all the content for yourself. In case you’re not aware, we’ve launched a new video podcast called Unfiltered. You can view the full episode at EGA.

org slash unfiltered. I want to run a short clip from a recent episode of Unfiltered where I talk about going from a homeless shelter to my career in the HVAC industry and really what that meant to me in my life. Uh, 16, 17 years ago living in a homeless shelter. I read this ad that Drew, I didn’t know Drew at the time, but Drew had put this ad in the local newspaper, the sports section.

And it was like a, not a quarter page, I want to say maybe an eighth, eighth of a page ad, big ad though. Big ad. And didn’t say anything about HVAC, but like, are you motivated? Can you sell? Can you talk to people? Blah, blah, blah, blah, blah. Six figure opportunity, company vehicle, blah, blah, blah, vehicle allowance.

benefits, blah, blah, blah, blah, blah. I’m like, man, I could use something like that. I’ve been, I’ve been in a, I’ve been in a shelter for six months trying to find a job. And, uh, it’s really interesting cause I went in there and interviewed. I completely straight with drew about my record and everything.

Didn’t try to hide it from him. And it turns out I was number three on their list, but they were only hiring two guys. Uh, it turns out the number two guy had also been in some trouble and wasn’t really honest with him about it. So when they called him to hire Winston, Winston did his love to death. He’s like a brother, Winston couldn’t take the job because he hadn’t been truthful about that.

So after Winston didn’t return the call after a couple of weeks, they called me back. I was their third choice, but I got the opportunity and, uh, never looked back, man. And a lot of appreciation for this guy right here and, uh, gave me that shot. And it’s like you say, everything in my life I have is because this industry has been very generous to me, very, uh, forgiving.

You’re like, you’re like Tom Brady. You were the third choice. He was the sixth round draft pick, but you’re both Hall of Famers. That’s me. You’re in the Hall of Fame. I am. Aw. Well folks, that’s our show this week. Be sure and join us next week. We’re going to be talking about KPIs, key performance indicators, what you need to track and how you need to track that.

We’ll see you then next week on Cracking the Code. Until then, bye bye for now.