Does The Right Price Cover The Financial Constraints of Your Company? | HVAC Pricing Series Part 10
The financial constraints of your company are simple: you must cover your Direct Costs and your Overhead Costs and you must have some Profit. If you don’t do these three things you will either lose money or not make money. So let’s fill in the chart below to see if our example covers these financial constraints. First, we will enter the information that we start already know whenever we set the Right Price for any job.
Next, let’s fill in the obvious things we know by doing the simple math in our chart. First, we know that the direct costs are 62% of the Right Price. Next, we will subtract the Direct Costs from the Right Price. Finally, we will subtract the Direct Cost percentage from the Right Price percentage (which we know to be 100%).
So, let’s see if our answers make sense. First, if we multiply .62 (our Direct Cost percentage) X $3226 (our Right Price) we get $2000 (our Direct Costs in dollars.). Then, if we multiply .38 (our Gross Margin percentage) X $3226 (our Right Price) we get $1226 (our Gross Margin dollars).
Therefore, since we can multiply our percentages in the right-hand column X our Right Price and get the correct answers, it follows that we can then find our two remaining unknowns by multiplying each known percentage X the Right Price. Let’s see:
So, if we multiply .28 (our Overhead Cost percentage) X $3226 (our Right Price) we get $903 (our Overhead Cost dollars). And if we multiply .10 (our Profit percentage) X $3226 (our Right Price) we get $123 (our Profit dollars). As a further check, if we subtract $903 (our Overhead Costs in dollars) from $1226 (our Gross Margin in dollars) we get $123 (our Profit in dollars). All the math checks out.
What these examples show us is that the Right Price we set using our Right Price formula works as it should. Our Right Price covers the financial constraints of our business. It covers the Direct Costs of $2000 (62% of the Right Price). It covers the Overhead costs of $903 (28% of the Right Price). And it covers the Profit of $123 (10% of the Right Price).
cfm Distributors has created a worksheet called Calculating the Right Price that you can use to check to be sure the Right Price you calculate covers the financial constraints of your business. It is available from your TM or by calling cfm Distributors.
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