Misunderstanding Low Overhead Can Cause Business Owners Serious Financial Despair
“We can charge our customers less money for our work because we are a small company with lower overhead.”
Have you heard that before? Maybe you have said that yourself.
Many contracting companies and field service business owners have had the erroneous and dangerous belief that they have low overhead. They have used this for the basis of charging less and it could be killing them.
One-person companies and other small contracting businesses believe that because they are small, they have less overhead. Less overhead, they reason, means that they can charge less and still do just fine. That is one of the biggest lies that a business owner can fall for.
This lie is one reason why many field service and installation technicians venture out on their own. They start a HVAC, plumbing, electrical or other field service business thinking if they charge more than their employer pays them, they should make at least what they are making now. After all, how expensive can it be to pay for one service truck?
Low Overhead is a Big Lie. Here is the Truth About Overhead
- Small companies do not have low overhead.
- Is $500,000 of overhead expenses a lot of money? It depends. Overhead is relative to your annual sales. It is expressed as a % of sales.
- Big companies have lower overhead as a % of sales (which is what matters).
- Big companies spread the cost of many fixed assets over a large number of people.
- Big companies have more buying power. They pay less for everything.
- Big companies pay less and enjoy better terms.
- Big companies pay their owners less than small companies do, when the compensation is expressed as a percent of revenue. Yet these owners are far better paid.
- Small companies pay more for powerful business management software because they have fewer users.
- Small companies pay more for materials, parts, and equipment.
- Small companies pay more for overhead items.
- Small companies spend more on overhead per employee or sales dollar.
- A small company’s largest overhead item is (or should be) owner’s compensation. Low overhead usually indicates an under paid owner.
Contracting Company Overhead Facts
- Small companies must charge as much as a big company does – or more.
- Failure to do so simply means that the small business owner will be underpaid!
About the Author, James R. Leichter
The Most Trusted Voice in the HVAC industry
James is a successful entrepreneur and master mechanic widely referred to as Mr. HVAC. His accomplishments include being the CEO and founder of Aptora, the President of RA Tax and Accounting, the founder of MrHVAC.com, and a partner with Pro-American Investments. He is also the creator of Flat Rate Plus®, which is hosted on this flatratesoftware.com website.
James is well known for his burning passion to help contractors and it shows in his unique speaking style. His articles have been widely published by the industry’s most popular magazines. His videos have had over one million views. James has hosted management workshops all around the United States and has conducted onsite consulting with hundreds of contractors.