Business

Profit Benchmarking for Plumbers

How does your business stack up?

Written by Mick Renton, Founding Partner and CEO of Xact Accounting

Ever wondered how your profit compares with other businesses in your industry? I get to see the books of lots of plumbers – after years of seeing the numbers I now have a clear picture of what a good set of books looks like – and the KPIs you can use to see if a business is operating in what we call the profit sweet spot.

Market Dynamics and Profit

In the white-hot market, we’ve had for building and trades in Queensland over the last few years, plenty of businesses have seen a significant increase in top line revenue – but how many businesses can say that profit has followed the same path? Given how much demand has been in the market it’s a real shame more operators haven’t been able to benefit.

Sure, you can say that materials, labour, and operating expenses have increased in this time, but the real failing here is the inability of businesses to A) properly track their margins and B) use this feedback to adjust pricing, ensuring they maintain what I would call the profit sweet spot.

In fact, when it comes to your take home profit, which after all should be what we’re all chasing, I see time and again operators who are able to turn a significantly higher profit from much lower revenue than other businesses – all by following a strict approach to defending margins – and you’ll see this in the numbers following in this article.

So, What Is the Profit Sweet Spot?

This varies depending on the nature of work a business takes on. For the purpose of this article, I’m focussing on domestic maintenance plumbing.

For these businesses, it’s critical that Gross Profit (GP) is in a range between 40% to 45%, ideally as close to 40% OR BETTER if you can get it! That is, for every dollar of revenue you generate, you’ll be left with between 40 to 45 cents of gross profit after accounting for materials, labour, and any other Cost of Goods (COGS) items used in producing the revenue for a specific job.

I have to stress, I’m referring to an average GP%, meaning that, on larger items like hot water systems you’ll have to wear thinner margins but then make it up on smaller items like consumables, aiming for 200% to 500% mark-ups in some cases on these very small dollar value items.

From the figures below you can see how defending GP can result in the same dollar amount off a much smaller top line number. In FY 22 Plumber B generated almost exactly the same GP (approx. $300,000) from only $780,000 in revenue compared with Plumber A’s $1.3 million in revenue… I bet you can guess who’s got more time on their hand for the family and fishing...

Remember, increased revenues without healthy margins just means you’re busier, not wealthier!

Plumber A FY 2021 Plumber B FY 2021 Plumber A FY 2022 Plumber B FY 2022

Sales

Cost of Goods Sold 749,287 393,030 1,333,716 780,107

497,085 262,294 1,024,801 477,172

Gross Profit 252,202 130,736 308,915 302,935

Gross Profit % 34% 33% 23% 39%

How a Fixed Price Approach to Pricing Guarantees Margin

Whilst it’s been around for a number of years, fixed pricing is being taken up by more and more operators as a solution for driving higher margins.

And when you look at the numbers, the benefit to the business owner is undeniable. Not only does it build efficiencies into the sales process,

resulting in increased revenue and shorter quote-to-cash times, fixed pricing systematically locks in your margins, taking out the guesswork.

Based on four plumbers using fixed pricing that were consulted for this article, hourly rates ranged from $203 inc GST to $610 in GST, with the average across the four being $422.75 – a compelling argument for a fixed price approach.

An early adopter of fixed pricing and a client of ours, Joseph Egan, shared with me that it’s not as simple as just updating your price book, there is a range of operational changes that need to be made to realise the benefits.

A good example of this is carrying stock on hand so that when on a call out for a common repair, you can offer on-the-spot additional services, saving the customer time and energy of a future call out.

“We carry a range of popular product lines in our vans, rather than just replace one set of faulty flexi-hoses we can replace the remaining four sets for a client who wants to take advantage of having a plumber on hand,” says Egan.

“We don’t need to make multiple visits or go back to the office to put a quote together, the customer makes a decision on the spot, knows exactly what the job will cost before the work commences and because the price is fixed, they aren’t watching the clock to get the work finished in a quick time frame”.

Benchmarking Operating Expenses and Net Profit

The next item to stay on top of is operating expenses because every dollar you spend on “keeping the lights on” will eat into your gross profit and leave you with a lacklustre take home profit.

The KPI we use to benchmark operating expenses is overhead percentage i.e. Overhead : Revenue as a percentage. The sweet spot we’re looking for here is less than 10% if you’re operating out of home and under 15% for those with a separate commercial shed.

Continuing the example from above, this time adding in our overhead figures to determine actual take home profit, Plumber A has some serious work to do to reign in overheads – not a great place to be after all that effort! Sales

Plumber A FY 2021 Plumber B FY 2021 Plumber A FY 2022 Plumber B FY 2022

749,287 393,030 1,333,716 780,107

Overheads 197,866 38,641 347,426 49,827

Overheads % 26% 10% 26% 6%

Net Profit 54,336 92,095 -38,511 253,108

Net Profit % 7% 23% -3% 32%

Owners Wages 60,000 88,000 79,000 88,000

Owners Total Profit 114,336 180,095 40,489 341,108

Name of the Game: Take Home Profit

So, in summary, if you’re a domestic maintenance plumber you should be aiming for 30%-40% GP and keeping your Operating Expenses less than 10% of Revenue. The impact on your take home profit of hitting this sweet spot is VERY REAL! In the examples given above, a disciplined approach to gross margin and containing overheads saw Plumber B buck the trend, in the face of rising costs, and increase their profit.

Mick Renton is Founding Partner and CEO of Xact Accounting, Queensland’s leading building and construction accounting firm. You can find more articles and resources on their website: https://xactaccounting.com.au/building-and-construction-accounting/

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2022-2023 FEDERAL BUDGET

Jim Chalmers, the Federal Treasurer, handed down the federal budget on Tuesday 25 October 2022.

It is Labor’s first budget in a decade, and it hasn’t delivered too many surprises. Labor has set a target of one million new homes to be delivered over the next five years from mid-2024 when capacity constraints are expected to ease. It includes 20,000 affordable homes, with an additional 30,000 affordable and social homes to be delivered via housing Australia future fund returns. Some 10,000 first home buyers in the regions will also be eligible to buy a home with a federal government guarantee of up to 15% of the purchase price.

There are a number of savings where the razor has been taken to some of the previous government’s programs and bodies it set up, including the abolition of the Australian Building and Construction Commission (ABCC). The Registered Organisations Commission (the regulator for unions and some employer associations) loses nearly $27 million, which has been diverted to the Fair Work Commission for various programs.

Most of the funding for VET is unsurprisingly focussed on TAFE, but we have been advocating for industry not-for-profit RTOs like MPAQ/PICAC training to also get a share and this message has been featured in media interviews by our partner the Australian Chamber of Commerce and Industry (ACCI).

In terms of taxation, there are no changes to the planned Stage 3 personal tax cuts in the Budget, which lowers the 32% tax rate to 30%, abolishes the 37% tax rate, and increases the 42% tax threshold from $180,000 to $200,000, effectively applying a 30% tax rate to all employees.

Key Announcements

• New housing accord – one million new homes over five years from 2024. • 30,000 new social and affordable homes within five years. • The Government will establish the Regional First Home Buyers Guarantee to support eligible citizens and permanent residents who have lived in a regional location for more than 12 months to purchase their first home in that location with a minimum five per cent deposit, with 10,000 places per year to 30 June 2026. • Stage 3 tax cuts remain • $120,000 to $180,000 bracket abolished • Top rate to start at $200,000

• Marginal rate for $45,000 to $200,000 cut from 32.5% to 30% • The Paid Parental Leave Scheme will become more flexible for families: • Both birth and non-birth parents are allowed to receive the payment if they meet the eligibility criteria (to take effect from 1 July 2023). • Parents will also be able to claim weeks of the payment concurrently so they can take leave at the same time. • From 1 July 2024, the Government will start expanding the scheme by two additional weeks a year until it reaches a full 26 weeks from 1 July 2026. • Both parents will be able to share the leave entitlement, with a proportion maintained on a “use it or lose it” basis, to encourage and facilitate both parents to access the scheme and to share the caring responsibilities more equally. Sole parents will be able to access the full 26 weeks. • $1 billion in fee-free TAFE and vocational education resulting in 180,000 places in 2023 for priority areas. • No funding for Hells Gates Dam, Urannah Dam. • Net overseas migration increase to be around 235,000 this financial year. • New Energy Apprenticeships program providing 10,000 apprentices with up to $10,000 in a support payment ($2,000 on commencement, $2,000 per year for up to three years and $2,000 on completion), focused on clean energy trades. • Unlimited instant asset write-off finishes from July 2023 returning to the original form (small businesses with a turnover of up to $10 million limited to writing off assets worth up to $1,000). • Almost $70 million over four years for Fair Work Ombudsman to take on

ABCC’s regulatory role with changes to the scope. • Australian Skills Guarantee sees one in 10 workers on major Government projects as an apprentice, trainee, or paid cadet. Targets for women also being considered.

Visit www.budget.gov.au to find out more.

Written by Glen Chatterton – Manager, Industry Engagement and Strategic Projects, Services Trades College

COULD YOU SAVE ON FEES AND CHARGES?

One in five people hold a second superannuation account they lost touch with when they changed jobs or moved house¹. If you’re one of these people that additional account is costing you money – money you could save.

If you have multiple super accounts, you’re paying multiple amounts of fees and charges. You may also be paying additional insurance premiums as super funds generally provide default insurance for members, with premiums deducted from the super account.

Over time the money you have in any additional super accounts will be eroded by these costs and you’ll have less money in super to spend when you retire.

Start Saving on These Costs

Right now, it’s more important than ever to save money where you can.

It’s easy to find out if you have additional super accounts and start saving on fees and charges by rolling them into one account. As a BUSSQ member, you can do a simple super search online to find other accounts you might have and roll any funds you find into your BUSSQ account.

If you’re not a BUSSQ member you can complete a super search online through the ATO.

Before Rolling Over

to review your insurance and with BUSSQ you may be able to transfer your existing insurance.

If you’d like to know more, BUSSQ is here to help you. Call Troy Wolter on 0417 702 822 or visit bussq.com.au/supersearch.

1. https://www.ato.gov.au/about-ato/research-and-statistics/in-detail/super-statistics/ super-accounts-data/multiple-super-accounts-data/. This is general information only and does not take into account your personal financial situation or needs. Before acting, review the PDS to ensure you have all the information about the BUSSQ product and consider the appropriateness of the information to your needs or obtain financial advice tailored for your personal circumstances. See BUSSQ’s PDSs and TMDs at bussq.com.au. Issued by BUSS(Queensland) Pty Ltd ABN 15 065 081 281 AFSL 237860, Trustee of Building Unions Superannuation Scheme (Queensland) (BUSSQ) ABN 85 571 332 201. Article supplied by BUSSQ