Operating costs as percentages?

Discussion in 'Business Operations' started by JeffW0011, Jan 5, 2008.

  1. JeffW0011

    JeffW0011 LawnSite Member
    Posts: 179

    I have searched this site and have been unable to find an answer to this question. What is an optimum breakdown on the cost of business as a percent. What percents of total revenue should variable cost, fixed costs, labor and profit each comprise?

    Would a breakdwon of:
    25% V/C
    25% F/C
    40% labor
    10% profit
    be reasonable?
    How do you guys consider these factors. And what is your target percentage goal for each of these?

    Thanks
     
  2. cpel2004

    cpel2004 LawnSite Bronze Member
    Posts: 1,415

    Yes I have asked the more exp guys but I have never rec an answer.
     
  3. dutchhook

    dutchhook LawnSite Member
    Posts: 93

    Would a goal of
    25% V/C
    25% F/C
    40% labor
    10% profit

    be reasonable?

    Jeff,
    the reason you don't see much on this is because it isn't understood by hardly anybody.
    lets go to what's good

    If you have questions, please reply or email back and I'll attempt to help further.

    You USUALLY CAN use percentages to figure labor and profit. You USUALLY CANNOT use percentages for Fixed Costs and "Variable Overhead Costs".

    That's what makes bidding and management so difficult, because those fixed costs always make your decisions on a sliding scale. You have $100k in fixed costs and sales of 1 million. Your fixed costs are obviously 10%. But what happens when you add 400K in sales? If they're true fixed costs, then you're costs are now 7%. That number will always slide up and down, so it's hard to pinpoint a number.
    You sound like you have financials. The way to look at your income statement is this: For Cost of Sales items, manage by the percentages, not the dollars. This way, if you sell a landscape job at 3 times materials, or labor at $40 per hour, that important part of your financial should closely follow suit. Your bidding and budgeting should be very close

    For Overhead, FORGET the percentages, focus on the DOLLARS. In other words, if you have $1 million in sales, and $20,000 in rent, then that $20K will have to be recovered. It doesn't MATTER what the percentage is. Because rent isn't dependent on sales and sales isn't dependent on rent!

    I hope that helps. There are 2 other things that might help you. PLANET or at least ALCA use to release an annual operating cost survey that had a wonderful breakdown of all of the numbers you're looking for. Even if they don't have a current one, try to find one that's 5 years old, it'll be worth it!

    It'll really open your eyes, and also surprise many people about how getting bigger means being LESS profitable (as a percentage!)

    The second thing is something called Variable Overhead Recovery, It's really hard to explain, and it's been championed by Charles VanDerKooi out of Colorado. He's a consultant, and a member of PLANET, but this will clear up the V/C which I assume you mean variable costs and how to recover these dollars.
    As a matter of fact, hold on while I look under my night stand. (What a nerd!) I have a publication called Pricing for the Green Industry 2nd Edition by PLANET and written by Frank Ross, who is SO GREAT. There was also a $2 winning lottery ticket in there, so I'm glad I looked. I guess it pays to help others.

    By the way, one other change in perspective you might find beneficial is to turn your goals upside down. Decide NOW, in JANUARY, that your profit will be 10 or 15% and put that at the TOP of your spreadsheet financials, instead of at the bottom. It's just a mental picture that helps you remember why you're going through all of this in the first place!

    Hope this helps,

    Steve Hoogenakker
    Steve@Landscape.Pro

    Would a goal of
    25% V/C
    25% F/C
    40% labor
    10% profit

    be reasonable?
     
  4. zz4guy

    zz4guy LawnSite Senior Member
    Posts: 901

    Where do you pay yourself? Is that part of the labor? If so how do you split that up? A manager of a company must get paid more than a lawn monkey.
     
  5. landscaper22

    landscaper22 LawnSite Senior Member
    Posts: 829

    Oh no....Don't ask questions about numbers. I did that once! You will get so many different opinions and responses that your head will spin.
     
  6. dutchhook

    dutchhook LawnSite Member
    Posts: 93

    Landscaper22's right, there's a ton of ways to figure it out.

    Well, I'll just give you a couple of answers. and NO, an owner doesn't always make more than a lawn monkey! There were at least 3 years where I didn't take out pay for at least 3 months at a time even though the business was doing at least 2 mil per year. (grew too fast)Of course, every one of my "lawn monkeys" got paid every Friday.
    OK,
    Because of the story above, whether you get paid or not and how much depends on how much cash you have. "Cash is King!"
    The following is irresponsible but very true: As long as you have enough cash to cover expenses and some future expenses, you can pay yourself whatever's left. It's kinda like the stupid saying I used to hear my guys say:
    "Well, I have checks, so I must have some money!"
    As for the financials, if you don't share financials with employees, you can do your financials a couple of ways:
    Put all of your salary under "Officer salary"in overhead since you'd be an officer of the company.
    To get more accurate financials for your review, you could split some of your pay into labor, say $600 per week into "cost of sales" labor, and any remainder under Officer salary.
    What will happen is that at the end of the year, if you've recognized the time you had to spend mowing, you'll know exactly how much per hour you're making. Divide mowing labor by mowing income. If you don't do this, your numbers might make you feel a little too secure.
    I usually shared my financials with my employees, so my officer salary was always dumped into secretarial or managerial wages under overhead.
    There, that wasn't too painful!?!

    Steve Hoogenakker
    Steve@Landscape.Pro
     
  7. hoyboy

    hoyboy LawnSite Senior Member
    from Chicago
    Posts: 346

    Labor IS a variable cost...if by labor you mean the crew guys.
     
  8. cpel2004

    cpel2004 LawnSite Bronze Member
    Posts: 1,415

    You know I wish we had a section on this form that would address and educate companies on the basic operations of a service business etc. Most guys starting and many of the experienced LCO dont even know these cost. This form has the largest amount of green industry members in the country and it would be an excellent idea if we could have paid speakers and classes on how to manage the operations side of the business. Personally I would love to have the top industry professionals come in and offer classes on these subjects.
     
  9. dutchhook

    dutchhook LawnSite Member
    Posts: 93

    I've been asked to consult companies, and have really thought about it. I enjoy digging into others businesses and using my good and bad experiences to help others while making a decent living. But until then, we'll just have to help each other out as stuff comes up!
     

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