Departmentalization and HVAC KPIs: Utilizing Both to Improve Operations

When I work with distributors and TMs, I often get asked the question, “What is the one thing I can do to help my dealer become more profitable?” Although there are many answers to this question, the answer that I always give first is to help your dealer departmentalize their company. What I mean by “departmentalize” is to separate the individual business units to see which ones are making money and which ones are not. Examples of business units inside of an HVAC company may include add-on replacement, residential service, residential maintenance, commercial replacement, commercial service, and residential new construction among others.

The reason I give the answer of departmentalization is because there are many companies that look at their income statement as one lump-sum company. That does not give the owner visibility to what departments are performing versus those that are underperforming. For example, in many residential companies, the residential replacement department may be very profitable but the service department is losing money which can make the entire company’s profitability look bad. If the owner does not know what part of the company is losing money, he or she will not know what steps to take to solve the problem. Labor drives overhead. Service is a much higher labor-driven department than replacement. Therefore, the cost structures are different. The analogy that I use with this scenario is like flying an airplane blind. You may be moving forward but without the use of the instruments, you will not be able to navigate turbulence or dangers ahead.

Another reason why departmentalization is so important is the connection to key performance indicators (KPIs). KPIs are a great mechanism to see how your various departments stack up against other companies that consistently recognize 15-20% consistent yearly net profit. Section 4.3 on the Contractor University website lists out recommended KPIs for each department in an HVAC company.

Departmentalizing “Above The GP Line”

There are two major areas to consider when departmentalizing. The starting point is getting the proper chart of accounts in order. This is also known as organizing the cost of goods sold (COGS) accounts. The second step is allocating overhead by department, which we will address in next month’s newsletter. So, for now, we will focus on the COGS accounts. These are all of the costs that we can apply directly to a job. In other words, if we do a replacement job or a service call we identify all the costs that can be connected to that job. Here is a list and description of each of those for the residential replacement department:

• Equipment — Anything with a serial number such as a furnace, coil, A/C unit, etc.

• Parts and materials — Copper, supplies, disconnects, pads, etc.

• Direct labor — What it costs us to send a crew or a tech to a job

• Fringe benefits — Costs associated with direct labor such as FICA, FUTA, SUTA, vacation pay, 401k, medical benefits, etc.

• Subcontracts — If we have to hire another company such as an electrician to help complete the job

• Permits — This can be city, county, or local jurisdiction to start the job

• Extended warranties — Parts and labor warranties bought from a supplier or manufacturer

• Finance costs — The portion of financing a job that the dealer incurs

• Rebates — The portion of a consumer rebate that the dealer pays for

• Labor warranty — An amount kept in reserve in case the dealer needs to cover a callback

• Sales commissions — An amount that is paid to a salesperson or technician for selling a job

Splitting the sales revenue by department and tracking these costs and rolling them up to the department is a key component and a first step to helping your dealer become departmentalized. Once these costs are analyzed by department, your dealer can then start getting visibility to the departments that are meeting goals and start making corrections to those that are not meeting those goals. The entire list of these charts of accounts can be found in Section 4.5 in the Budgeting Tool for Planning section.

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