Can A Small Shop Owner Earn A Decent Living?
I've bemoaned for years the sad statistics showing that PHC contractors are woefully underpaid, earning on average around $45,000 a year based on industry statistics. But you know the old adage about averages - one foot in a bucket of ice, the other in boiling water, and on average you feel quite comfortable. I know hundreds of contractors who make upwards of $100,000 a year - especially those who have "taken the medicine" and started operating like businessmen rather than plumbers.
This means that for every one of them earning $100,000, two contractors must earn merely $17,500 in a year to blend into that $45,000 a year average. Or, if only one out of 10 contractors earns $100,000 in a year, the other nine would average $38,889 in income. Considering that some bring in upwards of $200,000 a year or more, it means our industry teems with contractors who barely earn enough to make ends meet.
I have met many of these poor souls at my seminars. At the beginning I ask contractors to fill out a form stating their annual compensation as reported on the previous year's W-2 form. I am astounded, and saddened, at how many I see reporting less than $20,000 a year or just a little more. By and large these are small contractors, most of them one-man shops with the wife chipping in to handle office functions without compensation. They typically work even longer hours than the big contractors, because they have nobody else to rely on. Yet, they have little to show for it because they don't have a clue as to how much their services are
worth, or how to price their services in line with the value provided.
Enjoy The CakeMany of them cherish their independence, and think low income is the price they must pay for being their own boss. I have news for them.
You can have your cake and eat it, too!
Small service contractors are the backbone of this industry. There are more of them out there than there are multi-vehicle operations. Many choose to remain tiny, and there is much to be said for that way of life. You don't have the headaches associated with hiring and managing people, you eliminate much paperwork and government rigmarole, and you can run your business without anyone looking over your shoulder. God bless you if you choose to remain a one-man shop. Sometimes I envy you.
But you don't have to take a vow of poverty to work alone. You can earn a decent living based on the same principles I preach to sizable contractors, namely:
- Offer Decent Pay. Pay yourself and your spouse or anyone else working in the business a decent income. For the example that we'll detail next month, we've chosen an annual salary of $75,000 for the owner and $40,000 for the spouse who keeps the books. Don't fall into the foolish trap of treating your wife as slave labor. Her time is valuable, too, and she could be out earning money working for someone else if she wasn't tied up in your mom-and-pop business.
It's important to understand that these salaries are in addition to whatever profit you might generate from the business. Many small contractors don't pay themselves a thing. They simple keep whatever is left over after they pay their bills.
Because few of them know how to crunch numbers and price their services, they usually find out there is little or nothing left. So they take very little out of the business, cut every possible corner when it comes to business expenses (which reduces their ability to properly serve customers), and stiff their suppliers in order to survive.
You'll need both an income and profits to properly run your business. Take a cue from the real world of business. For example, Amazon.com, one of the most highly valued Internet companies worth many billions of dollars, has lost hundreds of millions of dollars year after year. But CEO Jeff Bezos and his employees still get paid handsome salaries. Profits, if and when they come, will be funneled back into the business and used to reward Bezos and others with hefty bonuses. But they don't starve while waiting for that day to come.
- Know Your Costs. Owner and spouse compensation must get factored into overhead, along with every other business expense. Keep track of every business expense and crunch the numbers to derive a dollar-per-hour overhead figure telling you how much it costs to deliver each billable hour of service.
Add this hourly overhead figure to your direct job costs (labor, materials, permits, any sub work) to determine your breakeven point, i.e., the amount you need to charge just to cover your direct and overhead costs. Then factor in a reasonable level of profit, which I believe should be at least 15 percent, preferably more. This will provide you with your hourly billing rate for service.
- Crunch Your Numbers. If you do all this correctly, you will inevitably find that you must charge far more than the going rate in your market. You'll discover that whereas most competitors are charging $50 an hour or less on a time and material basis, you need to charge two or three times that amount just to break even.
This will shock you, and you'll think you made a mistake. So go ahead and crunch the numbers over and over. Do it as many times as it takes to convince yourself that you are right, and they are wrong in their pricing policies.
Sadly, I've met many contractors who refuse to believe the evidence before their eyes. They simply cannot accept that it could cost them that much to be in the PHC business, so they revert to charging the "going rate" even though they know better. They are like lemmings who follow their leaders right off a cliff.
- Move To Flat Rate. Once you determine that the numbers don't lie, you'll need to start implementing a flat rate marketing strategy that emphasizes value rather than price. This will take some work upfront, but it will be a giant step on the way to success in the PHC service business.
Next month I'll continue this theme with a look at a sample P&L statement, and show how a contractor can derive this much income from a mom-and-pop business with merely $353,700 in annual sales.