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Figuring your business costs (a must read)

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  • Little's
    started a topic Figuring your business costs (a must read)

    Figuring your business costs (a must read)

    I found this while on an Arborist forum. He taught landscape architecture and was a contstruction professor at Iowa State Univ. What he says here is very informative, and I think everyone should read it.
    Here it is:

    Figuring out what to charge for each guy and for each piece of equipment is a big part of the equation but there is more to consider. As lxt stated, first you need to know what your operation or overhead cost is per hour. This figure should exclude the cost of owning and operating your large equipment.

    For your overhead cost, you add up your insurance, advertising, maintenance expenses, cost of small equipment and other annual expenses then divide that by the total number of working hours you can put in in a given year (ex: 50wks x 40 = 2000 hrs). That will give you a dollar figure for your overhead per hour of operation.

    Then, you figure out your payroll operating costs including taxes, insurance, training, etc. if you haven't already figured this into overhead. Divide your payroll cost by your working hours in a year and you now know the minimum you have to charge for labor to break even on it.

    Next, figure your cost of equipment including loan principal or lease payments, interest, insurance, maintenance, reparis, depreciation, fuel etc. and anything else that you have not already figured into your overhead costs for each piece of equipment. Divide the total annual operating cost for each piece of equipment by the total number of actual hours you will put on it in a given year (typically not going to be as many hours as labor). Now you know how much it costs to operate your chipper vs your bucket truck vs your dump truck. Each should have its own hourly cost of operation.

    Add all of these together and you now know what your minimum operating expense per hour is for a three man crew running a bucket truck and chipper. Mind you, I said 'minimum' as in break even cost. Now, you have to figure in how much profit per hour you need to make for your own salary (if you're not included as an employee) and for your business to grow and prosper.

    You're still not done. Now you add the 'difficulty' factor to the bid. This is a factor that can be less or more than 100% of your base bid that is determined from your 'gut feeling' about the job. For jobs that are extremely easy with little danger or maybe during times when things are a bit slow, you might take your bid times a factor of 0.90 and end up with a final bid smaller than what you normally would charge - BUT, you at least do this knowing what you normally would charge. For difficult jobs that are going to be a major pain in the butt, you might take you bid times a factor greater than 1.0 to give you a cushion for things that might go wrong.

    Finally, don't forget mileage, hauling and disposal fees for the job. How far do you have to travel? Where will you dispose of chips, logs, stumps? Are you considering drive time for your employees and equipment?

    When you come up with your bid price, you should know exactly what your costs associated with the job will be and what your bottomline profit will be. If you can't sit down and pick out these numbers with every bid that you give then, you are just guessing at your numbers.

  • Guest's Avatar
    Guest replied
    If your customer hires you based on price, they will leave you based on price...
    Wow, what a true statement!!!! That is a phenomenal statement.

    When I was growing up my dad always said, when referring to customers in a hurry, "the worse you want it, the worse you get it".


    And here is one you guys may be able to modify for yourselves. My brother, who is also a business owner, introduced me to the saying, "We have no quarrel with our competitor's prices. They know what their product is worth!!" You guys could change that to say, "We have no quarrel with our competitor's prices. They know what their services are worth!!"

    Leave a comment:


  • b18bgone
    replied
    No plan B,

    Cluster jobs, and do large commercial contracts.

    If your customer hires you based on price, they will leave you based on price...

    Leave a comment:


  • Steve
    replied
    Very very interesting! Ok so now how do you go about combating this? How do you make a profit and still hit the price range that would be acceptable in your area? What is your plan or options?

    Leave a comment:


  • b18bgone
    replied
    Eli, thanks for the explanation I completely understand what you are saying and you are completely right, we should be factoring in cost over our life time use of the equipment.

    Steve,

    I mean if you factor in travel to and from a job, cost of equipment, overhead, etc... it would cost nearly $45 for a town house, and $90 for a decent size yard every week.

    Im thinking if it takes you 10 minutes to travel to the job, (no travel back), it takes a two man crew to cut, edge, trim, blow, round-up, trash pick-up, etc... takes 18 minutes, unloading and reloading the trailer takes 2 minutes total, you are looking at 30 minutes of cost.

    Our example would yield $81.69 per/hr to break even, I would like to ad 20% profit to that (I know its high for the industry) making our hourly rate $98.03.

    That said we would need to have a bottom line show up fee of $49.01 per/half hour. Now I see that is being mind blowing from the outside looking in because I personally would only think to pay $25 - $35 to get my grass cut.....until I owned a lawn care business. In the realm of professional services $100 per/hr is normal, whether its an electriction, plumber, bug exterminator, etc... But the perceived value of a lawn care company is typically very low.

    A lot of our lawns are 10,000 - 15,000 sqft and take near an hour to complete, I dont have an exact time (but I will shortly), that would mean we should be charging near $100 per/cut, holly crap. We use a 36" walk behind on a lot of the nicer lawns because our riders would tear the properties up.

    Leave a comment:


  • Steve
    replied
    It still blows my mind to this very day on what it should actually cost to cut a residential lawn.
    What do you mean by this? Do you mean figuring your total hourly expenses? Or so you mean what you should charge?

    Leave a comment:


  • Guest's Avatar
    Guest replied
    I was wondering how you came up with the lower rates on the equipment, is that from depreciation?

    First congrats on buying the business. Something that I was always told is "big jobs, big profits." "small jobs, small profits". One reason is you are not constantly stopping, storing your equipment to go to the next job, etc. When you can start working on a job and just continue working rather than stopping and loading the equipment every 20 minutes you get a lot more done.

    As far the lower cost, I figured it this way:

    For example, you valued the mower at $8500. I consisdered that the purchase price. By figuring it the way you did you had to absorb the entire $8500 for that year and then the next year it would have cost you next to nothing since the $8500 was paid for in the first year. does that makes sense or am I speaking all jumbled (its been a long day).

    So for example, with the mower it would look something like this:

    $8500 divided by 2 (because you are splitting the cost up in 2 years with the intent of buy a new mower every 2 years. If you intend to replace the equipment every 3 years divid by 3, etc.) = $4250.

    $4250 + $1520 in gas + $960 maintance = $6,730.

    0.29% X 2000working hours = 580 operating hours per year.

    $6730 / 580 = $11.60.

    Now if you end up getting 3 years out of the mower without a great increase in maintenance costs your actual cost per hour would be:

    $1520 + $960 / 580 hours = $4.27 per hour. However, due to normal wear and tear, I would anticipate your maintenance costs to be higher the 3rd year (and each consecutive year) than it was the previous year. That is when your will more likely see bearings go out of the deck, belts go bad, etc.

    Hope that helps.

    Eli

    Leave a comment:


  • justin_time
    replied

    Jan = how many cuts?
    Feb = ?
    Mar = ?
    Apr = ?
    May = ?
    Jun = ?
    July = ?
    Aug = ?
    Sep = ?
    Oct = ?
    Nov = ?
    Dec = ?
    This kind of sucks for me, I only get about 6 months of actually grass cutting.. the rest is winter or fall.

    If the summer is good like last year, I usually start mid May and finish 1st week of October. Then I could promote fall cleanup for the rest of Oct. then Nov, Dec, Jan, Feb, and March is winter so yeah.

    I am trying to get myself a bigger truck so I can do some plowing in the winter time so I can afford to pay for school and other bills

    Leave a comment:


  • b18bgone
    replied
    Hey Eli,

    Thanks for taking the time to look this thread over. We have since purchased this company, and have been focused on turning it around over the past 6 months. We have been able to lower some cost, and increase our marketing dollars. We have increased the company's revenue 30% over the winter by renegociating contracts, and getting new commercial contracts. It still blows my mind to this very day on what it should actually cost to cut a residential lawn. We have recently brought on a landscape designer to help sell some larger jobs, which will bring in chunks of money.

    We were getting the maintenance cost from our local dealer. The maintenance of all of the equipment was a HUGE white elephant in the room when we took everything over, stuff was breaking left and right (honestly may have been better off buying all new equipment).

    We have noted that the most profitable part of the company is the full landscape installs and fertilization / chemical aps.

    I was wondering how you came up with the lower rates on the equipment, is that from depreciation?

    Again thanks for taking the time.

    Leave a comment:


  • Steve
    replied
    Here is a nugget for you. I find it takes about 2 times as long and costs about 2 times as much to service a ZTR as it does a tractor type mower. Kinda strange but that is the way it seems to work.
    Oh that is fascinating! Why is that the case?

    Leave a comment:


  • Guest's Avatar
    Guest replied
    What do you think the average annual maintenance fee would be for such a mower?
    Average? Consisderably less than that. I, personally, would be happy to service it probably at least 2-3 times for that price. I know it greatly depends what needs to be done and what the specific piece of equipment is.

    Here is a nugget for you. I find it takes about 2 times as long and costs about 2 times as much to service a ZTR as it does a tractor type mower. Kinda strange but that is the way it seems to work.

    Eli

    Leave a comment:


  • Steve
    replied
    Can you tell me where the $960 in maintenance comes from? Is the equipment tuned up several times per year because of the amount of hours run?
    What do you think the average annual maintenance fee would be for such a mower?

    Leave a comment:


  • Guest's Avatar
    Guest replied
    Ok, I crunched the numbers and here is what I found. I noticed that you figured the full price of the equipment. I recall seeing someone else say in this thread or another thread where the person said they replace their mower every 2 years. If we plan to replace the 3 mentioned pieces of equipment every other year you save about $4600 ($4250 for the mower, $150 for the Edgers, and $200 for the blower).

    Here are the differences this makes:

    1. $8500 zmower + $1520 in gas + $960 maintance = $10,980 / (.29%)(2000working/hours) = $18.93 per/hr
    $4250 zmower + $1520 in gas + $960 maintance = $6,730 / (.29%)(2000working/hours) = $11.60 per/hr

    Can you tell me where the $960 in maintenance comes from? Is the equipment tuned up several times per year because of the amount of hours run?

    1. $300 Edger + $190 gas + $60 edge it + $50 maintance + $10 string = $630 / (.36)(2000 w/h) = $.85 per/hr
    $150 Edger + $190 gas + $60 edge it + $50 maintance + $10 string = $630 / (.36)(2000 w/h) = $.64 per/hr

    1. $400 Blower + 190 gas + 100 maintance = $690 / (.20%)(2000 w/h) = $1.73 per/hr
    $200 Blower + 190 gas + 100 maintance = $690 / (.20%)(2000 w/h) = $1.23 per/hr

    [*]$6720 Truck & Trailer(annual payments) 2006 truck/trailer + $650 taxes + $70 tags + $1800 insurance + $1200 maintance + $12,000 fuel (not sure if this should be here) = $22,440 / (2000w/h) = $11.22 per/hr[/LIST]
    I made no changes in this section.

    Do they really go through $1000 per month in fuel average? I think the insurance is kinda high as well. What kind of maintenance is being done for the $1200?

    The companys over head for building rent, office manager, phones, workers comp insurance, professional licences, computers, internet, etc... breaks down to $25 per/hr or $50,000 per/year.
    Have you checked to see if all these costs are needed? What is the owner doing? is this something the owner could do to avoid needing a full time Office staff? Is there more than one computer? if so, is more than one needed?

    Do the workers have cell phones. If so, could they use a CB radio to communicate with the office if needed? Is more than one cell phone needed?

    All overhead above = $64.73per/hr + $25per/hr admin = $89.73per/hr (to show up)
    All overhead above = $56.69 per hour + $25 per hour admin = $81.69 per hour (to show up).

    This is only a difference of about 8 bucks an hour but that is some difference.

    Now what Im seeing (and please correct me if Im wrong) is that without taking into account airating/seeding/fertilizing/employee taxes this account is lossing money hand over fist... 34minutes/60minutes = .56% x $89.73 = $50.25 to break even on this job.
    I contend that this account costs you $46.29 per mowing, still only making less than $2 per mowing, without figuring in the cost of aerating, seeding, fertlizing, yada, yada, yada... Btw, who provides the seed and fertilizer, you or the customer?

    At 40 cuts annually this contract is bringing in $47.72per/cut or lossing $2.53per/cut not to mention its actually much more factoring in all other cost and potential profit for the company.
    At the new figures this account costs you at least $1851.60 per year plus other costs mentioned above. This job is making you only $57.36 per year. If (for the sake of easier figuring) you make the same amount on each account for the year you have now made a grand total of $3785.76 profit for yourself. This is about the right amount for one month with the above mentioned investment and headache.

    Did they happen to show you last year's total figures (total expense, total income, etc)?

    Leave a comment:


  • OrganicGreen
    replied
    Hey bud,

    You are smart to crunch the numbers like this & complete a proper due diligence prior to buying this business. Sounds to me like they may have a bit more overhead than the can afford for one? Hard to say without knowing the specific details....

    I currently run a 3 man crew (myself & 2 helpers). One truck, one trailer, 2 zt's, 3 trimmers, 3 blowers, edgers etc....

    Typically on a 10,000 sf residential lot, we pull up, one man on each of the 2 mowers, one does front & one side, other does rear & other side. 3rd guy line trims & edges. 1st 2 guys done blow off while the 3rd closes up the trailer.

    We are in & out in 10-12 minutes, 15 including drive time (yes clustering the jobs together & tightening your route helps the bottom line a ton, but this takes time dude!)

    I average 28-30 properties a day, currently running 4 full days (9-10 hours per day) if all goes well with no breakdowns, snags, or rain delays.
    If you are doing 30 properties a day ??? How many Clients do you have for the month? how much are you charging each client a day for your service? How many properties a month?

    I currently work part time cutting,edging,blowing,debris removal. I make $800 a month With 5 clients. I work 5 days a week, But i only work 3 hours a day max. I charge a flat rate per client once a week, 4 times a month. 5 clients, 5 days a week, $40 for 2 hours of work a day. If you do the math correctly it's $800 a month. Pretty good for working 2 hours a day 5 days a week. Then i have my normal job.

    Leave a comment:


  • Steve
    replied
    Ok now lets check out a chart with the data you provided. You will see how by charging a flat rate for the entire season you would actually have a strong profit start. It would gradually decrease until November and December came to give you more of a boost.



    This all can get a little complicated. I am going based on your expenses of $40 per cut. To really make this chart accurate you would need to know your fixed costs each month and then variable additional costs such as if you pay your staff on an as needed basis or not. That would allow you to chart your month to month income and expenses.


    I would think (I dont know), that it would be better to run the billing on a 9mo or whatever the cutting time schedual is, so you actually make money cutting any thoughts on that?
    Well it seems to me there is only one month when you wouldn't be cutting and that is February.

    Leave a comment:

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