Originally Posted by TriCityLawnCareLLC
Sean, I'm in this game to win, so please feel free to correct me. I bought your book in 09' when i first started and it's been big help. I follow your fixed and variable cost structure to help me every winter in determining pricing for the upcoming season. In your example you gave, it doesn't include employee payroll or payroll taxes, so i simply put them on my "fixed income" chart. With 1 employee, an office manager and all other expenses i need to make $27.83 per billable hour to cover cost, working 250 days per season at 9 billable hours per day. Included in my fixed costs is the salary that i will start paying myself this year (first time trying it). It's very meager, only $500/week plus monthly bonus dependent on what the business profited that month. So to cover expenses (including myself and employees, I need to be making $27.83/hr with mark up to $60 and hour making profit $32.17 that goes back to the business. This, in theory should put me at $135k gross income in 2013, roughly. Am I on the right path so far?
Since this year will be my first year with a part time employee (my retired father helps out for free roughly 3 days per week, per his desire.This really helps save me money, he's a great worker too), first year paying myself a salary, does it sound like i have my billable amount per hour correct (without looking at all my number)?
Secondly, since I've calculated my salary and my employees wages and payroll tax into my fixed expenses, and I'm charging $60/man hour, if a lawn takes us 1 hr to mow should i be charging $60 or $120? I guess i don't understand "per man hour" perfectly. I get that 4 guys working at $60/hr, it takes 1 hour to complete project but total would be $240.
I hope i haven't confused you. I've put my scenario out there because I don't mind being shown if I'm wrong-I like to make progress. Thanks Sean.
Matthew - no problem at all. I will do my best to crudely show some numbers so it makes sense.
I know that early on in a busines it is difficult to create a budget and to put in stone what certain things will cost. As a few years pass you will become more and more accurate because you can look at trends and clearly "guess" what your variable expenses will be.
That being said, here is some quick math....
1.) If you have 250 working days a year and you have 9 billable hours per day to sell that means you have a total of 2,250 billable hours to sell PER MAN.
* Please understand that the definition of a billable hour is time on the client's property - not drive time, lunch time, nonsense/inefficient time which you pay out in labor often times....
2.) So let's say that you look at all of your expenses - accounting, legal, advertising, fuel, maintenance, materials, insurance, labor, etc.... (there are more than this obviously, but I am just stating a few) and you determine that you are going to spend $150,000... that means
3.) You take that $150,000 and you divide it by the total number of billable hours you have which is 2,250. Doing that math you determine that you need to charge clients NO LESS than $66.67 per hour.
4.) Now if you have 2 people doing the work in the field, you divide the $66.67 by the 2 guys and now you arrive at $33.33 per hour per man that you need to charge your clients per hour JUST TO COVER COSTS
5.) Now let's assume you want to make a 25% profit margin on each billable man hour - that means you would need to take $33.33 multiplied by 25% which gives you a billable hourly rate of $41.66 per man.
The beauty of this math is that you should be able to be very close to determining the gross revenue you can generate for the year by taking 2,250 hours and multiplying that by $83.32 (two men at $41.66 per hour), which would then total $187,470 in gross sales, which leaves you with a pre-tax profit of $37,470, which does not include your salary which is already accounted for in the expenses.
Please keep in mind this is very crude math. There are a lot of ways to determine and break down your expenses and how to recover them.
The process is this:
1.) Make a budget for the year to determine your projected expenses
2.) Determine how you will recover the costs/expenses
3.) Estimate accordingly (expense + profit)
4.) Go back and track estimates to make sure they are being done in the amount of time you projected the work to take
5.) Always tweak until you get it right