Is financing like a dirty word to you because you do not like to finance things yourself? Can you separate your thoughts on money, versus their thoughts on money, when you are working with customers? Why do we feel the need to lessen our price to build false value for our customers? Have you ever gone to the grocery store and asked them for a cash price? Can you go to some of the big box stores and ask for a cash price? Then why is it acceptable for people to ask for a cash price when buying larger ticket items? Because we have all been trained that it is acceptable. I am not saying you should not do it, but you must account for it when you set up your price book. Your sales team must understand what the limits are if they need to offer a discount to get the job and the consequences if they exceed that agreed upon discount level. Why would I charge a financing fee if I am not financing this job? Why would I charge a credit card fee if I am not using a credit card? Should I give a cash discount or not? All of these are good questions and should be taken into consideration when you are setting up your pricing. The key here is that you figure out what is best for you and your business. Some people believe that much like the grocery store that they shop at, the price is the price, whether I use cash, credit card, or financing. But what does it look like if I add a finance charge to each of my sales tickets? If you use financing, it can cost you upwards of 18%. That is a lot to add to a proposal, but you must cover your costs. If you do not, then you are losing money on that job. That does not make good financial sense for you and your business. There are programs out there that you can use that do not cost you a dime to finance, and they carry a higher rate for the customer.
Some people have learned the art of the blended finance rate. That means that every proposal that they write has a small percentage, somewhere between 4-7%, that gets added and does not get removed whether they are using the financing or not. How do I know what a good, blended rate would be for me and my company? If you have good bookkeeping for your company, you will have an idea of what you are spending on financing costs every year. If you know what that overall cost is per year you can break that down to a percentage of sales and see what your financing percentage is per year. Then you charge that or a little more than that to cover your financing on every job. If you have annual sales of $1,500,000 and you spent $85,000 in financing costs that works out to be 5.66% of your total sales. I would then use a 6% financing rate to add to all my installation jobs to cover that for the year. Adding it to the overall cost of the job and not allowing my sales team to remove that percentage or they lose part of their commission. It is not mean to hold the salespeople responsible for charging the proper amount for the jobs they sell so that your company can be profitable before and after you pay them. That is part of their job. Using a blended rate can mean more profits and is a cost of doing business with some companies.
If you are not charging the proper amount on your install tickets, then your business can be suffering or just getting by. If you do not have a plan for making profits, then you will struggle to succeed or not be around very long. Also, if you want to grow or have to replace old worn-out equipment, then you need to make money regularly. You cannot expect to just make money when you need it, like on a rainy day. How profitable are you or do you want to be? Is it unreasonable to expect to make 8-12% net margin? I do not know one person that got into HVAC, Plumbing or the Electrical business as a charitable organization. If you have questions on how your business can be more profitable, reach out to us today to discuss how we can help you and your business.