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Discussion in 'Business Operations' started by wolfpacklawn, Dec 9, 2001.
Only 2 know mine;
Man your a smart-one, I would not post that on a public forum.
Gross Income $70,000.
In a Corporation this is called Revenues.
Your expenses are $35,000.
Your (pre-tax) net income is $35,000
THIS IS NOT THE SAME AS PROFITS.
Profits are a Corporate term which comes AFTER paying everybody INCLUDING yourself.
Let's say your pay costs are $30,000 per year,
Your net profit is $ 5,000 or 7%. (Which is typical of a lawn maintenance business.)
It really is important to know what your net profits are regardless of whether you are a 1 man operation or a large corporation. And yes that means you have to calculate your salary as an expense. Using your example a 2 man operation ( you, the owner being one of the two) bringings in $70,000 per year in revenue. And after paying all your expenses you're left with $35,000 (by the way, does that include overhead and equipment costs?). Not so, since you're not considering your efferts as an expense your figure is incorrect. Lets say you want to double your business next year and you set up another 2 man crew that brings in another $70,000 in revenue. What will your net be from that crew?
Far less than the $35,000 you figured you made from the first becouse now you are accurately calculating all your costs including that 2nd crew member. Well, hope it makes sense, It did to me before I started typing!
agree with you 100% that profit I call retained earning. Retained earning should equal your bank balance plus your accounts recievable. your personal salary should be in a separate account don't try and use one bank account for both. Retained earning plus assets(equipment) minus long term debt (loans)and short term debt (current bills)equals Owners Equity
For what it's worth, I agree with Kent and Ric....
A high retained earnings ratio (or owners equity) is key to making sure that no-one can take your business from you (events, creditors, banks, etc.).
I believe it is the astute business person that realizes this fact and begins to work their business 'by the numbers'.
When setting up budgets in this business, there are a ton of different formats. A lot of confusion arises when a solo operator works a lot in the field and a smaller amount of time in administrative and sales work. As the business grows beyond the one man opertion, the format for budgeting hours and field production labor changes.
Overheads are constants, something that is going to be there and has to be paid no matter if you turn wheel one tomorrow.
Vehicle and equipment payments, insurances, shop rents all things like that.
Direct and indirect labor cost will not be there if you don't work tomorrow, but overhead will.
As a solo operator you have X amount of hours to work in a given year. You should base that on a 40 hour work week to be realistic. After you guys hit about 35-38 years old, you will know what I mean. And when you expand beyond one person, you need to cap all labor at 40 hours per week, because overtime is a profit stealer.
You have X amount of hours to work in the field and X amount of hours to support that labor in the field. Shop times, sales times, office times etc.
Your going to pay taxes on you salary you take out and any retained earnings or net profits, unless you put that money back into the company, which a lot of business do, but fail to establish a cash reerve or service debt,as John mentioned, both factors that will allow you to survive a short or medium downward trend in business, which is not that unfeasible. It looks something like this
Gross Revenues minus Direct and Indirect Labor Costs equals gross margin.
Gross Margin minus all overhead costs ( which includes owners salary) equals net profit or retained earnings.
If you are taking all sales and revenues minus expenses before paying yourself, that is not profit. That is rolling the dice and hoping you have enough to pay yourself and family after you pay everyone else. How can you set a budget not knowing what all your true expenses are and need to be recovered in an hour of work ??
Build your budget around hours, recover everything in those hours including net profit and budget everything in hours and then convert those hours into dollars in the financial statements.
And as far as the finanical statemetns go, it's like this:
1 for the bank
1 for the IRS
1 for you - (accurate one), har, har, har....
Originally posted by turfman99
1 for the bank
1 for the IRS
1 for you - (accurate one), har, har, har....
Looks to me like I'm not the only one.
I suppose you could term vehicle direct expense if you want to, but trying to correctly cost that out on a per job basis and equal to the use would be an accounting nightmare.
If your going to apply the cost of a production vehicle to direct expense it's still going to affect your hourly rate computations. You will have to set up per crew rates, job rates and the like. A
very common thing in companies that utilize the MORS system.
If business goes soft and you sell unused or excess equipment, then you would need to adjust your hourly rate to reflect that reduction, if you don't you will realize more profit, but hten why reduce ??
I am not saying your way is wrong and mine right or vice versa, both of us simply use different methods to recover our costs.
What are we selling in this business?? We are re selling hours we buy from our employees, we add value to those hours in the form of equipment, vehicles, labor skills and knowledge and produce a product for our client. Hours, hours, hours.
Everything has to be recovered off labor hours, because that is the unit we are dealing with in preparing our estimates and proposals to our clients. We need to have an accurate hourly rate that covers all labor(direct expenses) labor burden ( indirect expenses) and overhead. We account for our time in hours, we require our employees to report their production times in hours, and we pay them in hours. Therefore every cost needs to be recovered off hours.
I understand exactly how you are doing your calculations HBF, and thats fine if it works for you. You probably have a real good line on your costs and if it works fine. In training COMPASS around the country, I see a lot of financial statements and balance sheets. I have yet to see two that were alike. Accountants are the worst ones for making the accounting processs a lot more cumbersome that it needs to be, wonder why ???
I have seen different definitions of indirect labor, overhead and all, but I have yet to see a company that inculded vehicle payments or cost charges in direct labor. I deal with companies mostly from 200K to 4 million, it may be different with larger companies, and different in markets and a bazillion other local or regional factors.
In our system and in my company it's all about the hours, that's all I have to sell, and that's where I will get everything back, including my built in net profti that I can track every day. It really dosn't matter where you calculate the vehicle cost at, because either way its there or its not there , right ??
It's great to get differing opinions and angles on this subject.
Put 5 landscapers in a room and ask them for a way of doing something and you will get 7 different answers.....