Debt, Debt ratios, growth

Discussion in 'Business Operations' started by Nebraska, Jan 14, 2002.

  1. Nebraska

    Nebraska LawnSite Senior Member
    Messages: 525

    I am sure that once I post this I will be told to look in the archives...before you repy with that one let it be known that I have. I am also sure that there will be a bunch that will say they do it all without debt (good for you!)
    This post is intended to get information from those of you who are using debt to grow their business; who in the process have the responsiblities of a mortgage, kids, etc..
    What is a "normal" debt to revenue ratio for this industry (if their is such a ratio)?

    What is the "normal" debt to equity ratio?

    What do you do to get by in the winter other than drawing from a line of credit when it does not snow?

    How is your relationship with your banker?

    Thanks for your assistance in advance and by the way you convinced me stonehengebpl! John John from the other place.
  2. Stonehenge

    Stonehenge LawnSite Bronze Member
    from Midwest
    Messages: 1,276

    hello Nebraska -

    Welcome aboard. I hope it all lives up to my pitch.

    You've asked some good questions, but I don't know how helpful I can be in answering them. I am using debt to grow the business, but my wife provides such a broad safety net that some of the issues you bring up are not relevant for me.

    I know people locally that puff out their chests and say they did it without ever borrowing a dime. And while that's great, I think that can limit growth. Or at least, if you're good at managing your money (which I'm not completely sure I am), you can grow the biz faster when you have more to work with. I know...preaching to the choir, right?

    I know some of the plowers try to have winter contracts that pay regardless of snowfall, using the firefighter model - customer pays to have you there and ready.

    But I am also looking for something (I'm resisting getting into plowing) to earn $$ in the winter, that will also give my employees work for the winter.

    Sorry Nebraska - lotta words, not much info. I'm sure others will provide more help..........
  3. Nebraska

    Nebraska LawnSite Senior Member
    Messages: 525

    It definitely lacks some of the arrogance and has many more user friendly features!

    With 4 kids my wife pursues a domestic engineering career full time. (she'd like how I said that)

    Next year we are predicting that the Lawn Operations will more than carry us through the winter without dipping into the line of credit.....basically making snow the icing on the cake. We only get 7-10 snow falls here and it blows my mind all the companies who get new plows every year?

    There is a website that has sales to debt %ages but it's not specific on what an idustry norm is for Lawn Care or Landscaping...someone out there has to have some idea...
    Are my expectations of being debt free and still growing this business at 40% or more every year (last year 73%) a little too lofty?
  4. Stonehenge

    Stonehenge LawnSite Bronze Member
    from Midwest
    Messages: 1,276

    And my approach has been a little different. I'm using debt to finance eqpt, but I'm taking as much in new eqpt write-offs as the IRS will allow. This year was $24K with the stimulus put together since 9/11, and I used every penny. I've kinda been mortgaging a big tax hit, meeting with my accountant and doing whatever I have to in order to have zero or close to zero tax liability. This has meant buying some equipment before I really need it (plus, I like being ready when it's time to take the next step). I figure next year will be the year I pay the piper.

    As for growing the biz at the rates you mention, well, I don't know the size of your outfit. Of course a smaller one should be able to achieve those results easily, but the difficulty of scale would seem to imply that increases like that can't continue every year (though John Allin may beg to differ ;)). We're also hoping to add 40% to our revenue #'s this year.

    But I would think that at a certain level, to add another 40% would require such a large capital expenditure that you just couldn't bankroll it without help.
  5. paul

    paul Lawnsite Addict
    Messages: 1,625

    Growing with taking on debt is part of business. Now unless you've won the lottery or are independantly wealthy, Debt is a usefull tool for business to grow, new equipment, tax advantages, expansion, land acquistion, personal increases are all reasons for taking on debt. Your business plan should address these isusses. Growth rates are harder to set, smaller companies can use larger numbers, 40% and up, larger companies smaller # are more the norm.
  6. ScottH

    ScottH LawnSite Member
    Messages: 60


    Here's my .03.

    IMO numbers & ratios can be manipulated. Consider guy 1 who buys a new 40000 truck. he puts 10000 down and finances 30000. his debt to equity ratio is 3 -1. Guy 2 buys the same truck the same way and due to his profit level and the tax laws he's able to depreciate all the truck this year. so, by the end of the year his depreciated equipment value is 0. He still has 30000 in debt vs 0 in net assets. Who's better off? IMO things like a debt ratio are only a very basic way to compare 2 different companies. it has much more value though to look at your company through the years using it to gauge the changes in your company.

    as for the banking side of your question, it makes a lot of difference in the size bank you deal with. Smaller, local banks are more interested in what's going on and how you're doing and what your planning. If your a small company at a large bank, they tend not to pay much attention to small companies unless you start paying late or file bankruptcy. as long as your " in the box" they pass over your account. no matter which bank you're with though, it would be helpful to find out who handles your account and sit down with them for 5-10 minutes a handfull of times a year. Let them know what you're specifically trying to do,ie stay with homeowner accnts, switch to all commercial etc. Who knows they might even give you a referral. It's always better for you to be seen as a person and not just a face. Plus, you will have built a relationship for the time when you might really need a favor from the bank to keep it all together or to make a bigger purchase. Lets face it, in business we're all 30 days from bankruptcy due to business conditions or a bad decision.

    Back to the debt issue, most companies will need to borrow to be able to aquire enough equipment to really be able to grow. And, prudent borrowing is justified if you can make more with a new piece of equipment than it will cost you. Dont forget to consider increases in efficiency due to the better/newer equipment. Maybe you'll be able to get one or two additional jobs done per day with the same amount of labor. also consider reduction of downtime and repairs expenses if the piece being replaced is really bad off.
  7. Nebraska

    Nebraska LawnSite Senior Member
    Messages: 525

    Thanks for the informative input!

    Paul, haven't won the lottery but I do have a rich Grandma..that doesn't count cause she's still kick'n!

    I enjoy the snow plowing.....We get more accounts every year, only as a byproduct of the Lawn Care operations. We will not purchase vehicle just to do plowing though...that vehicle will be with us for our core business first. Not to mention the money is great (in excess of $250hr)! But year to year it fluctuates drastically because of weather variances.

    Stonehenge, I am aquaintances with a guy who has 6 large retail stores on that kind of program...He is the only one in town that is rolling in the dough this winter here in Omaha. John Allin, you can pay me for the lead...:}
    Enough about snow.......

    I like the advice of budgeting 40-42 weeks....Al, who is doing it, please go more in depth on how you are doing it. It kind of seems like fuzzy math? Keep in mind I have degree in English and Criminal Justice.

    I guess the final bottom line question that I have is: Is it unrealistic to be debt free and still have growth goals in excess of 40% in our early years? What's the best way to handle the mental aspect of the load?
  8. Stonehenge

    Stonehenge LawnSite Bronze Member
    from Midwest
    Messages: 1,276

    Can you explain what you mean about the mental aspect?

    And I don't know why I didn't think of this before (talking about MENTAL aspects), but you can do a fair amount of growing just by renting vehicles/eqpt. It's debt free growth, though it is more expensive than owning, but I worked for a guy that did pretty well growing a business that way.

    As for budgeting, some creditors/lenders (even the yellow pages) will let you set up payments where you pay every month, only during the const season, and don't have any payments during the winter. Of course the payments are higher, but then come cold weather you don't have to worry about whether you can make the payments.

    I've been either too lazy or too busy to check into that myself, but I know it's an option with some institutions.
  9. Nebraska

    Nebraska LawnSite Senior Member
    Messages: 525


    Coming from a guy who has degrees in English and Criminal Justice yet has maintained excellent credit what is a "reasonable amount of debt"?

    The budgeting by 40 weeks is similar to what we have done here but we only have about 32 weeks sometimes less...To figure my "burden" I figured everything; phone, trimmer costs divided by 4 years of life divided by 32 weeks, mower costs, fuel, trailers, trucks, shop....have broken it down so far as to know per hour rate it actually costs (using a conservative 6.5 hours of production per day) then added a % for "risk", plus employee cost including FICA, FUTA, SUTA, Workers Comp...then add what % of profit that I want to make (200% of course:D )

    I have never heard that I can amoritize any type of loan over a specified period in the year? I guess it wouldn't hurt to ask. If they would not do it I could set a separate account to put the extra payment into, earn a little interest, and pay as it comes due during the "off season"..

    Thanks for the ideas.

    Stonehenge: What I mean by the mental aspect is: see a shrink?
    Go to Church? Drive your wife nuts? Drink? My point is if you think about it, it can look rather "overwhelming" when you add the principal together in one lump sum.
  10. HBFOXJr

    HBFOXJr LawnSite Bronze Member
    Messages: 1,712

    Unless your gonna put out significant cash for something, taking a huge write off in year one can leave you with huge tax bills later on.

    You may still have payments over 36-60 months on something and little to no depreciation available to off set the money you must lay out to make the payments. Things can get uncomfortable.

    I may play with it a little once in a while on a large purchase depending on the year we had and what we're expecting in the next one. We are on an accrual basis for tax and accounting purposes so a little delay in a late season billing and a little extra depreciation in the current year may swing the taxes our way. Take 2002 which might be a little soft the extra dip on depreciation in 2001 might be OK. But you still have to remember years after that.

    One ratio I like is cash assets (cash & receivables) vs payables. If during the busy part of the season you have or are owed 1.5x to 2x what you owe in current bills, not loans, your pretty safe. Just gotta watch that your not real low on cash compared to receivables.

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