Figureing your true cost

Discussion in 'Business Operations' started by muddstopper, Dec 20, 2004.

  1. muddstopper

    muddstopper LawnSite Silver Member
    Posts: 2,342

    I am starting this thread in hopes that others more quailified persons than myself will jump in and help explain how the true cost of business is determined. Often I see post that start with my cost for this job is x amonut of $$$ and how much should I mark this up for my profit. The cost given is usually just the cost of materials and wages for the operator or the laborers doing the job. Some people just dont realize that after they complete the job and get paid that they worked for nothing. They made $50 on a job and then stop on the way home and put $25 worth of gas in the truck. Run over a nail and have to buy a new tire. Time to change the oil in the mower or equipment they used on the job. Payment is due on that same mower. Hidden cost? Nope, just not reconized as a cost of doing business. These expenses can be figured into each and every job and should be in order to make a true profit. How about a little help here explaing the overhead that every business owner has and how this overhead is figured into a pricing structure that will insure the business owner makes a profit on every job he takes on.
     
  2. muddstopper

    muddstopper LawnSite Silver Member
    Posts: 2,342

    Overhead= All business expenses, other than cost of goods or merchandise. required to operate a business. Such as payroll,(including SS tax, medicare, workercomp, unemployment insurance) rent, utilities, insurance, fuel, for truck and mower, regular and unexpected maintenance of equipment, license fees, business permits, replacement cost of equipment or depreciation, property taxes, finance charges and equipment payments. ect, ect.

    Lots of people overlook certain cost just because an item is paid for. My truck is paid for or my mower is paid for ect. Even tho these items might be paid for, what happens when they wear out and must be replaced. Your business doesnt just stop because you need a new mower. You have to figure in a replacement cost of that mower for when it does wear out. This is overhead that is often overlooked. The business owner thinks he is making a good profit and then one day he realizes he doesnt have the money to replace that worn out mower that made him that so called profit. If one is to stay in business these cost must be reconized and included in the markup of every job the business does.

    This cost can be figure different ways but the easiest is a straight line method. For instance, A New mower costs $5000 including tax and delivery. The mower is expected to have a life spand of 5 years or 5 seasons or x number of hours. To figure this into your cost you would divide the $5000 by five years and end up with a cost or overhead of $1000 per year. You could then break this down to $1000 divided by 12 months and end up with a cost of $83.33 a month. If you work less than 12 months the cost would go up. Lets say you do a total of 50 lawns a month, you would divide the 83.33 by 50 and get$1.67 per mow of overhead for your mower. If you are chargeing $25 per lawn your net profit just went down by $1.67 and you really only made $23.33. Now do the same thing for the paid for truck and see how much more the net will be reduced. Adding the $1.67 into your price and then placing the money into a replacement fund will insure you have the money in five years to replace that worn out mower and have another mower that is paid for. Business goes on. Do the same type of math for the other expenses and see how you make out for profit on those same 50 mowings that month. The point here is to make sure you are actually making money and to have funds available to keep your business profitable. Not thinking you are making money and 5 years down the road not have anything to show for your hard work.
     
  3. Ecobjs

    Ecobjs LawnSite Member
    Posts: 55

    Ok I will give it a shot, but its a tall order. First to determine are true cost we track everything and I mean everything. We also develop a yearly budget. And while budgets are just sophisticated guesses, the more years you track where everything goes the better guess you can make. First start, with developing a detailed list of categories and then start filling in the blanks. I will be happy to send anyone that wants it, a list of our budget categories. If you fill in everything on the budget you can’t miss anything. Then you will at least know where the money is going. This is also important for tax reasons.
    The second step we do is use our budget to determine what our “Overhead” will be for the year. Our Overhead is basically all the cost we will incur over the year just to be in business and that does NOT relate to actually doing a job. Kind of like fixed cost that don’t change based on the type of work you are doing (e.g. rent, office supplies, yearly business license, internet fee, marketing material, phone, etc.) The second cost we figure is “job cost”, or things that change or get used up while working on a job (fuel, truck note, oil, shovels,) and then “labor” (wages, insurance, taxes etc.). Every job must pay for a little bit of the overhead expense. We also factor in replacement tools and repairs as a small portion of every job in the job cost. SO the bigger the job the larger the share of overhead and repairs that must be factored in. If the overhead is not factored in this is where you get hit later. Those are my initial thoughts.

    Additional questions might help, this is a really large topic, but necessary. Thanks for starting this Muddstopper.
     
  4. Soupy

    Soupy LawnSite Gold Member
    Posts: 3,125

    Good post. I think manufacturers should have a cost per hour listed for every piece of equipment they sell. They already list production. All they have to do is subtract the MSRP by the life expectancy then add the cost of MSRP parts for maintenance by hours. Gas would be the only hard thing, but if they use a average price (and state the price used) and also include consumption amount per hour. Then it would get everyone a whole lot closer to understanding their cost. The problem is, some manufacturers are more expensive when it comes to replacement parts that their not going to ever list these numbers.

    I'm going to start some threads in the sponsor forums and see what kind of response I get.
     
  5. Ecobjs

    Ecobjs LawnSite Member
    Posts: 55

    I was workng on my response when muddstopper posted his second point. The equipment cost calulations we figure and then those go into our "job cost" Also if you track your equipment you will figure out how much fuel it uses, how many new belts a year for the mower etc. and then figure that into the yearly cost. Anyway that is what we do.
     
  6. Ecobjs

    Ecobjs LawnSite Member
    Posts: 55

    I like Soupy's suggestion on the manufacturers providing at least some additional information on the hourly cost of using an item. We did buy some books and asked the people selling the equipment and it was a good start. Keeping your own records takes tons of time, but in my opinion is still needed.
     
  7. Soupy

    Soupy LawnSite Gold Member
    Posts: 3,125

    Thank You, I think we all know how to come up with these figures. But when you buy a piece of equipment it would be nice to know and compare. Home appliances do this (I think it might be a law for them). Sure I can ask what the life expectancy is, get a price list on parts and track fuel usage for the first couple of tanks to get this info. But It would be so much easier for the manufacturer to give you something to work from. At least list the info needed and let us to our own math.
     
  8. muddstopper

    muddstopper LawnSite Silver Member
    Posts: 2,342

    I think Ecobjs is on the right track that i am wanting this discussion to go.
    Making a list of all long term liabilities and factoring in there cost. Then listing persihables, such as gas, oil filters, ect. A lot of these costs are obvious alto sometimes they dont get figured in to the job cost. Then you have the little cost such as cellphone bill, light bill, inspection sticker on the truck ect.

    On life expectancy of equipment, I think there is such a list somewhere. Of course the better you take care of it the longer it will last. On most equipment I think the life expectancy is based on hours and not years. At least it is for depreciation for tax purposes. Again this is depending on the method used. You also have to figure in the residual or scrap value when depreciating. IRS thinks everything has some type of residual value, even if you cant give it away.

    Lets here what you consider overhead
     
  9. muddstopper

    muddstopper LawnSite Silver Member
    Posts: 2,342

    I think you are wrong here Soupy, thats the reason I started this thread because a lot of people dont know how to come up with these figures. Post a list of some of the things you consider overhead. not the actual dollars but actual items.
     
  10. Soupy

    Soupy LawnSite Gold Member
    Posts: 3,125

    I worded that wrong. I meant that I know it is easy to come up with a hourly cost per equipment but it would be nice if the manufacturers gave us something to start with.

    Your question is easily answered. Anything that you need or can not do without to operate your business is a expense. There are also things that you might buy without the business but those can be used as expenses to or as I like to call them deductions. Items like that might be deductions for office space (most people don't use anymore room in their house for this then someone with a computer) or even the garage. But like my accountant puts it. In our business we have to have a garage so it counts as a deduction even though tons of americans have garages anyway. There are other examples but those are the two most used.

    Off the top of my head here is a list.

    marketing material (includes design, reproduction and distribution), printing office supplies (paper, paper clips, staples, stamps, envelopes, printer ink,etc.) bank fees, computer (includes repairs and upgrades), phone (both land line and cell), Auto (including all maintenance and depreciation), utilities, labor, equipment (including repairs, depreciation and maintenance), insurance (business, auto, and health) Health is excluded if covered under wifes work plan. equipment rental, gas & oil, tools, mortgage (if at home then just a %), finance charges, interest, professional fees (accounting, legal, planning etc.), Taxes (fed, local, state, property, etc.)

    Man you can go on and on, a lot of stuff gets put in sub sections were a long list of things can fit in that class of expense. Some mention above like office supplies etc. I know I am missing a lot more but I have to do something else but I will try to compile more items later.
     

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