Lessons Learned is an educational series of webinars on financial management for your solar business presented by Leslie Shiner of The ShinerGroup and Annie Kendrick of Kendrick Business Services, LLC. The stories are fictional, and are used for illustration purposes only. They do not depict any actual person, company or event.
Dave started his solar business, My Sun Solar, after working for another contractor for several years. He found out that his boss was charging the customers $85 for his labor when he only made $30 per hour. Dave complained to his co-workers, “Wow, he’s making a fortune off of us and we are doing all the work. I’m going to start my own business so I can keep the $55 per hour profit for myself and be my own boss.”
Since Dave had worked on many solar jobs in the past, he had a good idea of how many hours it took to perform each job – information he was able to use when giving estimates. He also hired five installers and paid them $32 per hour so they could “share in the profits”. He wanted to start picking up jobs immediately, so he used $70 per hour as the billing rate for customers so he could be sure to get the jobs. He thought: “If I bill them $70 per hour and pay the installers $32 per hour, that’s still $38 per hour profit for me! I don’t need to be greedy so I will make sure the customers don’t have to pay too much. My old boss would have kept that money for himself or bought a big truck.”
Since Dave didn’t know how to do the paperwork for paychecks, he signed up to use a well-known payroll company. They promised him he would receive reports on the gross payroll by job for job costing, and this sounded perfect. His sister helped him add the paychecks to his accounting software, and as promised, the gross payroll was posted to each job. Dave was now able to look at job profitability reports, and he came to the conclusion that his theory was correct: The jobs were really profitable!
Dave was so confident with his job profitability reports that he went out and purchased new vans for his installers, along with the best tools. He decided he could afford to pay the full cost of employees’ health insurance, instead of making them pay for most of their own costs, as his old boss had unfairly done with his employees. He also promised them two weeks paid time off and 10 paid holidays per year, in addition to a bonus based on gross sales at the end of the year.
Dave’s accountant prepared financial reports for him to review each month and Dave would take a quick glance at the bottom line. Seeing a negative number, he figured it was just his accountant moving numbers around so he didn’t have to pay a lot of taxes at the end of the year. He knew his jobs were profitable so he wasn’t worried.
Eventually, the start-up money Dave had put into the business was almost gone and Dave couldn’t figure out why. “What’s going on,” he wondered? My jobs are all really profitable and my customers pay me what I am owed. Where is all that cash my old boss was making? What’s going on here?
This story is an extreme example of Lessons Learned, however the lack of understanding of fully burdened labor costs and correct bill rates can cause companies to underprice jobs, leading to financial hardship. To learn more about labor costs, productivity and efficiency, view the pre-recorded webinar online.
You can find out more about the financial management program for Solar trade allies and other business development opportunities for your company online.