My shortest book yet (85 pages), it will teach you the right way to price jobs so you make a profit. More importantly, it will teach you what kinds of jobs to go after (and show you how to do so with a sharp competitive edge) and what kinds of jobs to avoid (sending them to your hapless competitor instead).  Designed for a contractor in ANY trade (HVAC, plumbing, electrical, cabinet making, landscaping, pool installation and maintenance, and so on), the principles taught in this book are fundamental to all contracting businesses and cut across specialty trades with equal power.

If you follow the advice of this book consistently, you could easily do 50% more sales with the same employees and overhead. This means that virtually all the gross margin on that extra work would go directly to your bottom line! Could you use THAT this year?

One drawback: your tax bill will probably go up, because you’ll experience bracket creep. But what a problem to have!

You will learn three powerful job pricing methods:  SID, COWL and DORM. You will learn that SID is the most common method (and most dangerous to a contractor’s financial health!), while COWL and DORM can help you land more material-rich low-labor jobs than contractors using SID (or SWAG for that matter).  [If you don’t know what SWAG stands for, you are not a contractor.) And the amazing thing about all of these methods is that they are based on a document you should already be getting– the income statement– and do not require the use of special nomographs, curves or mumbled incantations under a full moon.

Here is what others have said about this book:

The financial practices that Richard teaches can help any contractor improve the bottom line.  We use many of his tools in seminars with our customers, and it is pleasurable to watch the astonishment on their faces.  Put into practice the information he gives you, and watch your profits increase rapidly.

Eric Griffin
Sales Director
Mitsubishi Electric Cooling and Heating

Pricing For Profit, penned from the fertile knowledge of Richard Harshaw, is an absolute must read for every HVACR contractor.  The beginners will learn how to earn a profit from day one.  We old timers will re-learn what we have become negligent in applying.  By applying the principles of Richard’s vast knowledge and experience, success will be assured from day one. 

Aaron York, Sr.
York’s Quality Air
Indianapolis, IN

Dick has done it again. He puts mathematics into an easily readable style that will make every contractor profitable if they follow his teachings. If you can implement just one item from this book, the price is well worth it. Put this on your book shelf, right next to The E-Myth.

David S Taylor
Sales Manager
National Excelsior Company

Pricing for profit steps directly into that secret world of: do you really make the kind of profits you would like in your business?  This is a scary subject for most small business owners.  Harshaw outlines simplistic ways to assure you will know whether you are or are not making your profitability goals.   In this business climate knowing your bottom line is critical for success.  Pricing for Profit guides the reader to those sometimes shocking, always import answers.   

Mark Gaylor
Gaylor Business Services
The ACT Group Inc.

Richard Harshaw has given us another helpful and informative book.  Pricing for Profit is written in an easy to understand format to help you know how to price any job, at any time and make a profit!  Using the methods that Richard effectively explains will definitely make you wealthy & wise!
Thanks for a great book, Richard!

Natalie DeRousse
Senior Sales Training Manager
Johnson Controls, Unitary Products

Wow!  Dick taught me Pricing For Profit in a seminar over 25 years ago and he has now put it in an easy-to-follow recipe that will make anyone a master chef!

It is as true now as it was then and it really, really works. You gotta try it!

Tom Gabrilson
President, Gabrilson Indoor Climate Solutions
Davenport, IA

In my early years as a contractor manager, I learned from my mentors and accounting textbooks how to utilize and apply some of the techniques Dick has applied in Pricing for Profit. However, my competition evidently did not understand the principles of good accounting. Asking several friendly competitors how they priced their jobs surprised me. Their focus was on being the lower price and not selling the value of their company. Dick describes these flaws and explains why one should consider focusing on one’s business health and not his competitions’ pricing. This book is a must read for every business owner or manager regardless of their skill at accounting practices and sales practices.

Rhamy Morrison
Consolidated Services
Tyler, TX

You can download the book from Amazon for Kindle ($9.95), or you can order an autographed copy from me by clicking this link.

DISTRIBUTORS: This book would make an excellent gift to contractors at your annual dealer meetings. Contact Lodestar (using the “Contact Us” link on this page)  to request pricing details on bulk quantities.

Warning: A tax advisor does NOT come with this book. But the money you make might make it worth your while to hire one!

Whether you file as an individual, a corporation, a small business owner, or are self-employed, as the end of the year draws near, you’re probably thinking ahead to tax season and filing your taxes.

Most tax provisions of course, remain the same (IRA contribution limits for example), but a few such as personal exemptions have been adjusted for inflation and others have been extended due to legislation and are set to expire at the end of 2012.

From tax credits, exemptions and deductions for individuals and Section 179 expensing for small businesses, here’s what you need to know about tax changes for 2011.

Individuals

From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on December 17, 2010.

Personal Exemptions
The personal and dependent exemption for tax year 2011 is $3,700, up $50 from 2010.

Standard Deductions
In 2011 the standard deduction for married couples filing a joint return is $11,600, up $200 from 2010 and for singles and married individuals filing separately it’s $5,800, up $100. For heads of household the deduction is $8,500, also up $100 from 2010.

The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50.

Income Tax Rates
Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000 for a married couple filing a joint return, up from $68,000 in 2010.

Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there is an exemption of $5 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. For married couples the exemption is $10 million.

Alternative Minimum Tax (AMT)
AMT exemption amounts for 2011 are slightly higher than those in 2010 at $48,450 for single and head of household fliers, $74,450 for married people filing jointly and for qualifying widows or widowers, and $37,225 for married people filing separately.

Marriage Penalty Relief
For 2011, the basic standard deduction for a married couple filing jointly is $11,600, up $200 from 2010.

Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not apply for 2011, but these are set to expire at the end of 2012.

Flexible Spending Accounts (FSA)
The Affordable Care Act, enacted in March, established a new uniform standard, effective January 1, 2011, that applies to FSAs and health reimbursement arrangements (HRAs).

Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.

The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan.

A similar rule went into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).

Long Term Capital Gains
In 2011, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.

Individuals – Tax Credits
Adoption Credit
A refundable credit of up to $13,360 for 2011 is available for qualified adoption expenses for each eligible child.

Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit
The $1,000 child tax credit has been extended through 2012. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Energy Tax Credits for Homeowners
Energy tax credits for homeowners expire at the end of 2011 and are not as generous as in previous years. In addition, a taxpayer who has claimed an amount of $500 in any previous year is not eligible for this tax credit.

Homeowners can claim an Energy Star window tax credit of up to $200 maximum as well as a water heater tax credit, which includes electric, natural gas, propane, or oil, up to a maximum of $300. The same maximum ($300) applies to air conditioners, but insulation, doors, and roof credits are capped at $500. The furnace tax credit (includes natural gas, propane, oil, or hot water) and is capped at $150 maximum and efficiency must be at 95%.

Earned Income Tax Credit (EITC)
The maximum EITC for low and moderate income workers and working families is $5,751, up from $5,666 in 2010. The maximum income limit for the EITC has increased to $49,078, up from $48,362 in 2010. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Individuals – Education Expenses

Coverdell Education Savings Account
For two more years, you can contribute up to $2,000 a year to Coverdell savings accounts. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit (Higher Education)
The expansion of the Hope Scholarship Credit by the American Opportunity Tax Credit has been extended through 2012. For 2011, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance
Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2011, the credit is fully phased out at $122,000 adjusted gross income for joint filers and $61,000 for others.

Student Loan Interest
For 2011 and 2012, the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for higher-income taxpayers.

Tuition and Related Expenses Deduction
For 2010 and 2011, there is an above-the-line deduction of up to $4,000 for qualified tuition expenses. This means that qualified tuition payments can directly reduce the amount of taxable income, and you don’t have to itemize to claim this deduction. However, this option can’t be used with other education tax breaks, such as the American Opportunity Tax Credit, and the amount available is phased out for higher-income taxpayers.

Individuals – Retirement

Roth IRA Conversions
There is no longer an income limit for taxpayers who want to convert regular IRAs into Roth IRAs. The difference is that taxpayers who convert to Roth IRAs in tax year 2011 must pay taxes on the conversion income now instead of deferring it in later years as was the case in 2010.

Businesses

Standard Mileage Rates
The standard mileage rate increases to 51 cents per business mile driven (19 cents per mile driven for medical or moving purposes and 14 cents per mile driven in service of charitable organizations) for the first half of 2011. From July 1, 2011 to December 31, 2011 however, the rate increases to 55.5 cents per business mile. This increase is a special adjustment by the IRS and reflects higher gasoline prices.

Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.

Section 179 Expensing
In 2011 (as well as 2010), the maximum Section 179 expense deduction for equipment purchases is $500,000 ($535,000 for qualified enterprise zone property) of the first $2 million of certain business property placed in service during the year. The bonus depreciation increases to 100% for qualified property. If the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2 million, the $500,000 amount is reduced, but not below zero.

Please contact your accountant if you need help understanding which deductions and tax credits you are entitled to. I am sure they would be delighted to assist you.

For more information, contact my accountant, Professional Accounting Services, at www.paskc.com .

I subscribe to a service performed by The Risk Management Association (formerly the Robert Morris and Associates organization). Every year, this group publishes financial data on hundreds of business types in the United States, including in particular the HVAC sector. So I pay a few hundred dollars every year to get 2 pages of data, but it is well worth it. In this blog, I want to report some of the new data I received and the trends it shows.

So let’s peel the HVAC onion. Here’s a snapshot of the data I got. This data is current as of April 30, 2011 and is being compared to the data over the last five years.

• Cash is up 31%. Surprising, but the next few facts explain why this is so.
• Accounts receivable as a percentage of sales is flat compared to prior years.
• Inventories are down 35%! (Having been turned to cash, thus feeding fact #1.)
• Net fixed assets are down 27%. (We are letting things wear out and not replacing them for now.)
• Notes payable are down a whopping 31%! (We are getting rid of debt as fast as possible, getting light on our feet so we can be nimble if another downturn comes along.)
• Current portion of long-term debt is down 22%. (See previous fact.)
• Long-term debt is down 35%! (See previous fact.)
• Total liabilities are down to 24%. (Ditto.)
• Equity up 12%. (Consequence of less liability in the face of nearly constant assets.)

• Gross margin is down 20%! (Prices are taking a nose dive.)
• Overhead is down 24%. (We have cut out a lot of fat!)
• Operating profit is up 7%. (But at a high price to the health of our businesses.)

• Current ratio is flat. (That’s good news, actually. Although we have not grown more solvent, we have not gotten worse either, and this in a terrible economy.)
• Quick ratio is down a little. (Cause for concern, but not alarm.)
• Sales to receivables is down 7%. (With A/R being down to begin with, this suggests that those jobs that ARE being financed are bigger than the past.)
• Inventory turns are up 140%!! (We are using our suppliers as our barns.)
• Working capital is flat but still under 10%. (Always a concern; when WC is under 15% of sales, cash flow problems arise.)
• Owner compensation as a percentage of sales is down a whopping 37%. (This makes me want to cry; for all the hard work contractors do, to take such a huge cut to survive is repulsive. But I understand their thinking: it’s that or go out of business.)

There is much to be mined from this data.

1. Dealers have converted inventory into cash.
2. Assets are not being replaced as they age.
3. Dealers are reining in debt.
4. Pricing is taking a nosedive.  (But we already knew that!)
5. Dealers are squeezing their overhead for every ounce of fat.
6. As a result, the lower profits are actually higher in percentages.
7. Dealers are using their suppliers to manage daily inventories.
8. Owners are taking huge pay cuts to keep the business financially healthy.  In the long run, this will be a disaster. At some point, you have to ask  yourself if the lower pay is worth all the crap. Atlas may yet shrug!

The good news is that the recession has knocked a lot of the fluff out of our trade, both in terms of flea bag contractors and in waste in the surviving legitimate shops. The bad news is that this economic nightmare is not over and the signs over the horizon don’t look encouraging.

So if you are a contractor reading this blog, congratulate yourself. You are a survivor! But not get complacent. Stay vigilant. The second shoe has not dropped yet.

Stewart Docter August 10, 2011 Stewart Docter, 85, of DeWitt (New York), died Wednesday, August 10, 2011 at Crouse Hospital after a short illness. He was a life resident of Syracuse. Stewart was a graduate of Syracuse University, where he received his bachelor’s, master’s and doctorate degrees. He was employed by General Electric as a technical writer in the heavy military department. He later served as manager of the Dealer Development Department of Carrier Air Conditioning. Upon retirement, Stewart formed Management Options Group. He was member of Temple Adath Yeshurun and DeWitt Rotary. Predeceased by his wife, Marian Jacobs Docter, in 1999. Survived by his son, David (Jan); daughter, Karen Docter Johnson (George); sister, Betty Ruth Raines; and five grandchildren. Funeral services will be held at Birnbaum Funeral Chapel, 1909 East Fayette Street, at 1:30 p.m. Friends may call from 12:30 to 1:30 p.m. Friday at the funeral chapel. Burial will be at Woodlawn Cemetery. Contributions may be made to Temple Adath Yeshurun. Birnbaum Funeral Service, Inc.

Stew was my personal mentor for a few years in the 1980′s, teaching me much of what I continue to pass on to my clients.  (Some might say that I have done  Stew a disservice.  If that is the perception, I apologize to Stew.) Stew had the ability to take difficult and complex financial principals and make them understandable to contractors.  Stew did his work in the days before the personal computer and as a result his business management workshops took quite a bit of time and a lot of labor on the part of the participants (who had to bring calculators to the workshop). When Stew stepped down from the lecture circuit, I picked up his mantle and transferred his tools and techniques to spreadsheets. This made it possible to teach the wonderful principles that Stew expounded in shorter time, allowing the participants to explore multiple scenarios.

Farewell, Stew.  You will always have a secure place in my heart and I thank you for all you poured into me.

I am talking about my powerful Excel-based business tool, The Financial Management Control Center (or FMCC), a suite of workbooks that cooperate to help you understand your business from a financial vantage point like never before.

Those of you who are Carrier dealers (or know any that I may have taught in the 1990’s) may remember the old “Financial Management” software program I developed and taught for Carrier in the 1990’s. I have letters in my file cabinet from “graduates” of those courses that testify how the software changed their businesses for the better. (One letter even said that the banker was so impressed that the bank agreed to up the dealer’s line of credit and lower his interest rate!)

FMCC is light years beyond where the old Financial Management program could ever go.

With FMCC, you enter data from you latest year-end financial statements into a file called the VAULT. You then activate the VAULT for use to analyze your business.

Three main program groups tap into the VAULT when they run. These groups are:

1. Where We Have Been
2. Where We Are
3. Where We Are Going

In turn, each group drills down into the details using 40 different spreadsheets to explore such things as your financial statements and a detailed ratios analysis (with advice and commentary) to setting a solid labor rate (both installation and service) to service agreement pricing (residential and light commercial) to forecasting and growth planning.

For a full treatment of this powerful new suite of programs and how to obtain a copy for yourself, click this link.  I promise you that you will be amazed and excited by what FMCC can do for you!

The first twenty to order the program can get a discount of 10% off the published price. To get the discount code (needed when you fill out the order form), contact Lodestar (use the “Contact Us” link on this page).

And HVAC distributors– contact Lodestar about quantity discounts for acquiring the program for your Territory Managers!

Caricature by Jerry Dowling

The news has been abuzz this week with snippets of our Community-Organizer-In-Chief (COIC) bloviating about those “wascalwy Wepubwicans” endangering the country’s safety by insisting on no tax increases as an agreement (whatever that means in Washington any more) is reached on our debt ceiling before the August 2 bewitching hour. He went on for almost 45 minutes about fat cats with corporate jets and oil company tax subsidies and that the wascalwy Wepubwicans will have to give some ground on these “vital” loopholes to bring resolution to our national crisis. And if they don’t, they’ll ruin the lives of countless children and threaten the lives of good seniors everywhere.

Let me see… General Electric posted BILLIONS in profit last year and paid $0.00 in Federal income taxes. And guess who has a corporate jet?

This class-warfare-mongering COIC thinks wise Americans will side with him and demand an end to all “corporate welfare”. Even Ben Stein, a fiscally conservative Republican, agrees with him.  Ben said that he was all in favor of soaking the rich, because that would generate some $900 billion in additional revenues. This in the face of a $3 Trillion PLUS Obama budget? And national debt of over $14 trillion (click here). Is Ben serious?

We don’t have a tax problem. We have a spending problem. And I for one am for relieving ALL of the current residents of the Capitol Building of their duties in 2012 (including the occupant of the White House).

What most Americans don’t understand is that NO CORPORATION PAYS INCOME TAXES! Suppose the Congress caves and takes away the deduction for corporate jets (not including, of course, Air Force One). Gee, do you think GE (or an insurance company or Shell Oil) will eat that hit on the bottom line?

OF COURSE NOT. They’ll factor that into the price of the product and pass it on to their customers. Likewise if Congress takes away tax loopholes for oil exploration, or oil leases, or securities transactions, and so on.

So by blaming those wascalway Wepubwicans and those mean big businesses, the COIC convinces the American people that we can heal our economy with minimal tax increases (with everyone going “Hoo ray!”).

Then they’ll wake up next week and wonder why gasoline went up 50 cents a gallon, or why their insurance deductible just rose by $1,000 or why their bread costs a quarter more per loaf.

Remember, people. Corporations don’t pay taxes. The consumer ALWAYS pays ALL taxes.

Period. Do you understand?

The first book will go into editing and production in April. (It takes about 60-90 days for this process to be completed.) The working title (and this may change) is The Power of Throughput. This is a book for contractors and territory managers that explains how to improve daily procedures so that more work can be done with the same (or fewer) people. It will be over 100 pages long and contain 70+ sure-fire and simple (and best of all, inexpensive) things that can be done to get more done with the resources a contractor has. This book should be ready for release sometime around July1.

Throughput has to do with how fast a process can be completed (and completed well). It is a non-financial measurement, although it does utilize data from the Profit and Loss Statement. The book will contain about a dozen benchmarks for high-throughput companies and explain how to calculate each one. Then, if you find your numbers are not where you want them, you will be presented with a checklist of things you can do (most of them at no cost) to improve the procedures. As I point out in the book, better procedures mean better numbers on the P&L.

It will be released in two formats– an ebook format (which you can download to a Kindle or other ebook reader) and a CD-ROM format. If you order the ebook version, it will cost less, but not include an Excel workbook I created to accompany the book. The ebook will have a page in the front that tells you how to get the software from my website at half price. If you order the CD-ROM format, the software will be on the CD along with a PDF copy of the book.

The second book (which should go into editing and production in July, with a release around October 1) has a working title of You Priced That Job HOW??? It is a book version of the popular workshop I teach on how to price jobs. As I do this workshop (and now probably 5,000 contractors have been through it), I always give out a job to bid early in the workshop. Consistently, 95% of the group gets it wrong! That should scare the daylights out of you! The book will explain a simple method of job pricing– and a method that is wrong and fatally flawed. (Many contractors use this method and do not realize how much they are hurting their businesses!) I will then explain two simple methods to price jobs that result in you getting the high material jobs and losing the high labor ones. (And it is not complex or convoluted like many you may have seen.)

The pricing book will also be released in an ebook format with the option to buy the CD-ROM version. Again, the book has associated Excel workbooks that come on the CD but must be ordered from my website (for half price) if you order the ebook version.

Stay tuned! Should be an exciting year for all of us!

——————————————————–

In 1996, futurist Ian Morrison published a ground-breaking (albeit difficult to read) book titled The Second Curve: Managing the Velocity of Change. I read the book the year it came out and was spellbound by it.

A review on Amazon states it well:  “This thoughtful work advances one simple yet striking concept: business leaders must stop focusing on the short-term and start planning for the long run. Making the most of current profits is the first curve in business, Morrison writes; shifts in technology and the marketplace signify the second. Understanding how these critical changes develop and knowing what they mean, he contends, will help business leaders make the necessary leap from one to the other.” Another reviewer adds, “It is based on an organization’s ability to change, particularly as related to technology, consumer behavior, and geography. Traditional methods of change (i.e., the first curve) are no longer sufficient to succeed in the ever-fluctuating and highly demanding markets of today and tomorrow.”

A curve can be defined as the evolutionary track taken by any product or service. Some curves are very short and don’t get very high—product launch failures. Others become huge and dominate the business environment for a long, long time (Coca Cola, Ford, IBM, Wal-Mart). A new business idea begins small and starts to grow. Given the right timing and marketing, the idea can take hold and build to tremendous momentum, generating huge profits for all on the upward climb side of the curve. But once a product or service reaches market maturity (which can be a long and relatively flat spot on top of the curve), it eventually settles into decline (and loss of profitability) as a new product or idea on a second curve begins to take hold and dominate the market once dominated by the old curve.

Let me add to the idea of product life cycles. Here is a simple graphic of the concept:

A product life cycle begins small and if lucky, starts to grow. (Indeed, many products are aborted early in this phase of the cycle.) If it makes it past the Introduction Phase (and this can last a decade or longer), it enters the Growth Phase, where it becomes quickly accepted by the consuming culture and spins off immense profits to its innovators and those courageous enough to jump onto this curve when there was no promise of success. During this phase, the riders of the curve must invest in growth and infrastructure and build awareness through innovative and aggressive marketing.

After a time (and this varies from product to product), the product enters its Maturity Phase. Here, the game changes as now the focus must be on maintaining the share and momentum already gained, and this will eventually be a losing effort. Costs must be contained to milk ever diminishing margins from the profit pool. The product has a great danger at this point of becoming a commodity.

The death spiral begins with the Decline Phase, which can last decades or take as little as a few weeks to endure. Products in this phase of their cycle are characterized by “fire sale” prices and declining sales.

Now lets’ return to Morrison. Morrison states that a company can remain viable and healthy over many product life cycles if it becomes adept at identifying emerging second curves and identifies the right one(s) to leap to at the right moment, thus using the high margin Growth Phase of the new curve to offset the low or even negative margin drain of the old product’s Decline Phase. But there are two keys to this act on the flying trapeze— identifying a genuine second curve, and timing the jump. If a company jumps too early, it gives up margins from its mature product before the second curve product becomes profitable, and if it jumps too late, it will never again be a market leader. As Morrison puts it, “Welcome to the world according to two curves. It’s a world in which the present is hard, but the future is doubly difficult— and the only certainty is change… You must understand the sources of the second curve, a phenomenon that is fueled by massive forces of change over which you have no control: new technology, new consumers, and new markets… To survive … you have to learn to anticipate these changes.”

Heck of a quandary, isn’t it?

Has the American HVAC landscape seen the emergence of a new curve? Are our traditional ways of doing home comfort about to be upset by a new emerging trend? Is it time to take a hard look at the new curve and start timing a jump?

I think it is, and in the next few articles in this column, I will be addressing that. Stay tuned and be prepared for a shock!

At any rate, only their avian descendants, the birds, survived the disaster. The tiny mammals alive at the time of the great extinction emerged as the dominant life forms. The dinosaurs— the longest-reigning class of animals in the history of the planet— are gone because they could not adapt to changes fast enough to survive.

I have lived in Arizona now for over three years and have come to deeply appreciate and truly love the incredible diversity and complexity of desert life and appreciate how life has adapted to such a brutal environment, an environment where a false calculation can result in horrible and painful death. Not only does life survive here— it thrives!

As I ponder the tenacity of life in the Sonoran Desert, I see seven crucial lessons for small business in America during this time of rapid change, this extinction-threatening event we are witnessing. Let me share each lesson by citing a desert life example and making the connections for you.

(1) Most desert animals have tough skins— armor scales, thick skin, leathery foot pads, and the like. These traits, out of place in a milder ecosystem like a temperate forest, evolved over millions of years to give the creatures that live here a fighting chance of survival. These tough skins make it difficult for thorns (which all the plants have, it seems) to pierce skin, or for teeth and fangs to do any serious damage. They make for some ugly creatures. The horned toad of the desert is uglier even than some members of Congress! But the horned toad is a beautifully adapted creature for surviving the harsh realities of competing in the desert for the right to reproduce. Lesson: if you are going to survive our current economic desert, you will have to be come hard and crusty, armor plated! I am not saying you must become a heartless, cruel monster, but you must develop a hard survivor’s mindset if you are to get through this economic crisis.

(2) Most of the plants have thorns, bristles, briers or stickers. The cacti, of course, come to mind, but even many of the trees are thorny. It’s as if nature here says, “Keep your distance! Respect my space!” Lesson: learn to protect your business from all forms of encroachment. When times get bad, people often do bad things. Be on the alert for fraud. Make sure that the person who keeps your checking account is not the one who reconciles statements every month! If possible, have accounts payable and accounts receivable handled by two different people (unless the one person is one you can trust with your life).

(3) The Palo Verde tree (Spanish for “green wood”) even has green bark. It’s an amazing thing to see! Tiny fern-like leaves and bark just as green as the leaves.  Even the bark is used in photosynthesis (the process of extracting carbon dioxide from the air to build complex sugars the plant lives on while releasing “waste” oxygen in the process).  Lesson: you must become stunningly efficient, doing more work with fewer resources and fewer people. You must learn to produce revenue even while idling.

(4) All of the trees here have small leaves. I mean really small—like the size of a grain of rice or a small bean. This means they evaporate less water in the hot afternoon, and the sudden and sometimes fierce desert winds won’t push on the tree so much that it gets uprooted (like a broadleaf tree might do in some of our haboob winds). Lesson: get rid of the little things that lead to the loss of cash. Learn to buy smarter and buy only what you need. Learn to cut waste. Learn to make every little asset you have do its part to bring in the dollar bills.

(5) The animal hunters hunker down in their dens and burrows and come out to hunt at night. That’s when it is coolest. Even our state’s official snake, the Western Diamondback Rattlesnake, is wise to this. It can reach 120^o F in the shade in the desert, and up to 160^o F on the desert floor. Hunters don’t waste energy or try to beat the heat by being active at day. They come out at night, whether they be rattlesnakes, coyotes, or pack rats. Lesson: learn to pace yourself so you don’t get overwhelmed by the extreme economic heat you face day to day. Don’t buy anything unless you absolutely positively have to have it. Don’t advertise at a time of year when no one is buying. And for that matter, be careful where you advertise and how. A pack rat scratching in the gravel for a nut to eat gives out vibrations that rattlesnakes can detect yards away.

(6) Pit vipers hunt by sensing the heat of their prey. The rattlesnake is a pit viper, so-called because they have two small pits near their nostrils. These pits contain heat sensors, like an infra-red camera. (A rattlesnake does not actually “see” in infrared, but it can pick up temperature differences between prey and the ground of less than 1^o F!) During the day, the ground is hotter than the prey, so the snake’s pits would sense a uniformly hot background and not be able to pick out the prey from the hot rocks and dirt. But at night, a 100^o F rat is hotter than a 95^o F rock, and the snake senses that , and strikes with accuracy. Lesson: learn how to find clients in the most effective way. If you have never done an analysis of your advertising efforts tied them to successes, now is the time to start. Find the best medium and the best message, and combine the two at the best time of year.

(7) The Saguaro cactus can hold over 3,000 pounds of water. These stately cacti—known for their stately “uplifted arms” like a bank robber surrendering to the sheriff— have corrugated skins. This is caused by the long, slender “ribs” that grow vertically to give them their rigidity and strength. The inner pulp of the Saguaro is spongy. When we have our rainy seasons (two a year), the Saguaro, whose roots are not deep but spread out over a wide area, siphons up every bit of water it can and stores it in that internal sponge. The body bloats and the skin becomes smoother. A well-rounded Saguaro is a water-rich Saguaro! As the dry season returns, the Saguaro lives by stingily doling out is water resources, contracting as it does (meaning the ribs become more pronounced). Like a starving orphan from an African war news video, a ribby Saguaro is a dry one. These stately oaks of the desert can store over 3,000 pounds of water at the end of the rainy season!  Lesson: Build up cash when you can and don’t spend it unless you absolutely have to. With luck, and these seven lessons, you’ll survive the worst that our economic asteroid impact can throw at you.

And if you don’t— well, the desert is full of bleached bones.

I then decided it was time to go ahead and get a new laptop as well, so I got the latest Lenovo Think Pad.  The thing is so fast and powerful, it can launch and guide a rocket to Alpha Centauri!

Both have Windows 7 (in my opinion, a VAST improvement over XP and a huge improvement over Vista).  However, there is no upgrade path from XP to W7 (there is from Vista to W7), so I had to install all my software again, etc, and that took a few weeks.

Anyway, I’m back for the year, and ready to go.

So here’s my first blog post for 2010.  You ready for this?

Normal???

When you were a little kid, did you ever wonder if you were “normal” compared to your classmates?  Maybe some were taller than you—a lot taller.  Or smarter. Or better looking.  Or better athletes. Most kids, at some point, wonder how they compare to everyone else. It’s normal.

We never outgrow that tendency.  Even as adults, we wonder, “Am I normal?”  We look at others, the houses they have, the cars they drive, their appearance, and we wonder, “Is that the way it is ‘spozed to be?  ‘Cause I ain’t that!”

Every five years, the US Department of Commerce, in cooperation with the Census Bureau, undertakes a massive study of business in the United States.  They look at dozens of industries, including Plumbing and HVAC. The last survey was done in 2007, and the data just recently became available. I will report to you what the data showed for the average US HVAC contractor in 2007 (adjusting for inflation since 2007) so you can see if you are “normal.”  (By the way, being normal is not necessarily a good thing.  How much would people jeer at you if you put on the side of your trucks, “ABC Heating— Man, Are We NORMAL!”

The average HVAC shop had 10.64 employees in 2007.  (I wonder what 0.64 people looks like?)  Half the shops are bigger than that, half are smaller.  (And we are talking about roughly 100,000 shops.)  A breakdown by size shows this:  1-4 people (58,039 shops); 5-9 people (19,295 shops); 10-19 people (12,242 shops); 20-49 people (7,638 shops), and over 50 people, all the rest (3,255 shops).  There are a ton of small shops out there, and only a relative handful of “mega houses.”  If we graphed this data, we’d have a sharply dropping line that ran from a high on the left to a low on the right.

Yet the sales data is completely different. If we look at the total sales racked up by each size bucket, we find that the curve would have a hump in it, like a camel’s back.  The 1-4 man shops account for only 10.5% of the sales (but are 58% of the shops), while the 4-9 man shops account for 13%; the 10-19 man shops rack up 17% of the sales; the 20-49 man shops tally 23% of the sales; and the rest of the family brings in 36.5%.

The average payroll per shop was $495,293 (which amounts to about $46,550 per employee).  Of that, 69% went to direct labor.  Fringe benefits came to $148,158 per shop (30% of pay).

The average shop in 2007 had $1,737,275 in sales.  This amounts to a throughput average of $163,247, a marked increase over 2002 (which one would expect considering the 2006 change to 13 SEER as the minimum efficiency standard).  Equipment and material ate up 37% of this and subs about 9%.  The average shop spent $60,488 per employee at the supply house to get equipment and materials.

Gross margins averaged around 46% in 2007.  (So if the average dealer wanted to make 12% net profit, he’d need to divide costs by 0.42.)

Sadly, the average shop only spent about $11,105 on advertising (less than 1% of sales!).  The data did not indicate whether this was before or after co-op dollars, so I’ll assume it was net (after co-op).  Even at that, there is not enough going towards advertising to sustain the average shop’s hunger for leads.

I don’t have the net profit figure for 2007, as the way the Government reported the data made it very murky to extract, but I would imagine that if it followed historical trends, it was below 3%.

Now here is what worries me— this data was all compiled before the Great Recession of 2008-2010 hit.  I suspect the numbers have gone south across the board, but we won’t know for a while.

Make sure your tray tables are in their upright and locked positions, that your seat backs are fully up, and that you have securely fastened your seatbelts. I think 2010 may be a very turbulent year for the economy in general and our trade in particular.

One thing is certain— the definition of “normal” is going to change, and those who are below normal will probably become fossils in the bedrock of our industry.  Does that make you sit up and start to want to manage your operation better?