A busy month and a profitable month aren’t the same thing. Plenty of plumbing, heating, and HVAC owners have looked at a month full of calls and wondered why there was so little left.
The answer is usually in two numbers: what you spent on materials and on labor to do the work. When the books keep those apart from everything else, the profit and loss starts to explain itself.
Cost of goods sold, for a service company
Cost of goods sold sounds like something for stores, but service companies have it too. It’s what it costs to do the work you bill for:
- Materials and parts bought for jobs.
- Direct labor: your technicians’ wages for time on jobs, plus the employer payroll taxes that go with them.
- Subcontractors you bring in for part of a job.
- Job-specific costs like permits and disposal fees.
Everything else, such as office wages, rent, insurance, and advertising, is overhead.
Gross profit, in one line
Gross profit is your income minus your cost of goods sold. Divide it by income and you have your gross margin, as a percentage.
For example, if a month brings in $100,000 and materials, labor, and subcontractors cost $60,000, gross profit is $40,000, a 40% gross margin. That $40,000 is what’s left to pay the overhead and leave a profit.
The example is round on purpose. What matters is your own number, month after month.
What it tells you each month
- When gross margin drops, something about the work changed: a price that didn’t keep up with material costs, a job that ran long, overtime, or a few jobs priced too low.
- When income rises but gross profit doesn’t, you’re working harder for the same money.
- When you split income by type of work, you can see whether installs, service calls, or maintenance carry the most margin.
Why it depends on how the books are set up
None of this works if materials land in “Supplies,” technician wages sit in the same account as the office manager’s, and every sale goes to one income account. That’s why the setup comes first: income split by type of work, and materials and direct labor in cost of goods sold.
With that in place, and every transaction checked and every account reconciled each month, the monthly review can focus on what the numbers mean: which work paid, what it cost, and what to change.
Frequently asked questions
Time on jobs belongs in cost of goods sold. Office and admin wages belong in overhead. Many companies use one payroll provider and split the entries when payroll is recorded.
Most companies keep trucks in overhead, since a truck costs about the same whether it’s a busy week or not. Some track fuel by job; either works if it’s consistent.
It depends on your mix of installs, service, and maintenance, and on your market. The most useful comparison is your own margin, month to month and year to year.
Start with a conversation
If your profit and loss can’t tell you what last month really earned, request a free consultation. Prefer to call? 781-924-1489.