Line Item or Overhead Operating Expense?

Discussion in 'Business Management' started by U.S Lawn Enforcement, Jul 8, 2018.

  1. U.S Lawn Enforcement

    U.S Lawn Enforcement LawnSite Member
    Male, from Kyle
    Messages: 5

    So I got really bored really late one night and decided to figure out what my exact costs of doing business...per service...is and it dons on me...at some point a client expects you to have your own equipment. I cant charge rental rates for the use of my mowers, trimmers, blowers, etc. Those are what I believe are tools that clients expect you to already own yourself...plus it lowers my service rate dramatically obviously for not charging them what it would cost them to go rent lets say...all the equipment to do their own lawn. How do I figure in the cost over time to purchase a new one in the years to come? Is that something that comes out of your markups and profit or do some of you guys have a way of passing that expense onto the client and never dipping into company profits? Of course I could always pay out of pocket but thats my own capital/profit...I've recouped my startup capitol and id like to change up my companies financial structure/setup so that its systematically buying new equipment to replace the old preferably before the original equipment is out of service or depreciated so far down that its just rolling junk that may or may not still run. I know some or most of you smart guys like to sell your equipment before the depreciation says its now a piece of junk...I figure 1000 hours on a piece of equipment probably has a decent resale value in the used equipment market but how have some of you figured out to pass the purchase of new equipment on the your clients without jacking your hourly rate sky high? Maybe im just way over thinking this or missing something...perhaps my understanding of depreciation is incorrect and im missing the figures of depreciation...is that where it fits in to the equation? Is that what i need to figure into my hourly rate to help cover future purchases. What tools are we generally expected to own ourselves out right and not bill for them as if we rented them...typical mowers, trimmers, blowers i would say are some the common tools we should own outright....but chippers, aerators, top dressers, specialty bed edgers...push blowers...or anything needed that you dont use day to day? Is there a rule of thumb any of yall know of to help with this? Any suggestions, comments, complaints, and concerns would be really appreciated. Thanks and God Bless.
     
  2. mitchgo

    mitchgo LawnSite Gold Member
    Messages: 3,346

    That's how a good business owner should do it- separate out your own pay and company profit.

    How about Maintenance of the equipment vs the mindset that it just needs to be replaced?

    How often do you use your uncommon equipment? Once a year, 6 months,every 2 weeks? Just re-word it, Instead of rental fee call it equipment maintenance fee.

    In my opinion Renting should be only for equipment that is out of the scope of your work. IE- When I find water leak on the service line under the driveway- I go and rent a cement saw to cut a small section out of the cement and then pass the rental fee on to the customer. I don't own one because I only rent one 1-2 times a year.

    Equipment is expensive and vital to the survival of your company . Maintenance fee's should be there. Either you incorporate into your regular service fee ( Ie Add $5 to your service charge and always have that $5 set into it's own dedicate maintenance/ replacement account Or have a separate charge for equipment use.
     
  3. Outlawn

    Outlawn LawnSite Senior Member
    Messages: 995

    I’m not really following what you’re asking, I don’t guess......
    I looked at it like this:
    I buy a new Shindaiwa T242 trimmer for $260. I’m now $260 in the red. It may take me 2.5 lawns (after taxes/fuel) to make up this difference afterwhich im back in the black. After that point, it’s profit. Obviously, there are other factors to account such as insurance, fuel, etc, etc. If you’re having to change blades more frequently due to one or two accounts in particular, then change your rate for those accounts accordingly.
    As far as rental equipment and renting vs buying: You have to decide whether it fits YOUR business to own or rent a particular piece of equipment. If you do rent, that cost gets passed along to the customer UNLESS it is some piece of equipment that you should have in the line of work that you do. It would be silly to be an irrigator and have to rent a trencher for every install and pass that cost along to the customer. Something like that becomes part of your overhead and is absorbed in the cost of jobs, etc.
     
  4. magna111

    magna111 LawnSite Senior Member
    from NJ
    Messages: 386

    Unless you only use the trencher 2 or 3 times a year ... we have one but only use it maybe once or twice a year, I think we end up spending more time getting it running every year than we actually use trenching with it ...
     
    Jack Hammer and Outlawn like this.
  5. Fvstringpicker

    Fvstringpicker LawnSite Fanatic
    Messages: 7,680

    You're making it way too complicated. Divide your cost into three categories; direct labor, direct materials and overhead. Direct materials are limited to what goes into that particular job, i.e. fertilizer and the like. Direct labor includes that labor that works on the job. Hence, "indirect" labor, the receptionist/secretary is not included.

    Now for overhead. Its divided into two categories; variable and fixed. Fixed overhead are items that do not vary regardless of your volume (within a reasonable range). These will include property taxes, licenses, insurance and the like. Get these and other cost you cannot directly trace to a job out of the equation until you deal with the direct cost and variable overhead. You're on the right track using estimated machine life hours. It simplifies the process because it ties to direct labor hours.

    Now calculate you variable overhead by taking the annual estimated direct labor hours and divide that number into your total estimated variable overhead cost for an overhead rate per direct labor hour.

    You can do the same with fixed overhead (total fixed overhead/dir labor hrs). Bang the two together and you have a total OH rate you can charge by DLH.

    "Why don't I just dump all the overhead in one bucket instead of separating fixed and variable", you may ask. Because you have more managerial data regarding job cost by keeping fixed and variable overhead separated. Suppose your asked to do a job for $10,000 dollars that you estimate will take 200 hours. Your cost breakdown is as follows:

    Direct labor@ $20/hr ($4000), Direct materials ($1500), Variable Overhead @$10/hr ,

    Fixed Overhead @ $12

    How much will the job increase you profits?

    Billing for job = $10,000 less $4000 for labor, $1,500 for materials and $2,000 for variable overhead. Fixed overhead wouldn't factor in because fixed cost is going to be incurred whether or not you do the job.
     
  6. CAPT Stream Rotar

    CAPT Stream Rotar LawnSite Fanatic
    Messages: 6,347

    Here is how I did it.

    I bought a few integral pieces of equipment before I left my old company. Ditchwitch/ Compressor /Trailer.

    Waited until I started business full time did I buy insurance bigger trailer.
    Now I have so much stuff I prob don't need half of it.

    When I started my prices were low. I needed work. Badly. It was cause I needed to get volume. Jobs I used to do for 40$ now I'm going to be at a 75$ minimum. If they like great. If not bu bye.

    I pay off all my costs and expenses before I pay myself every year. That means last years tax returns, Liability/ Comp, and next year in 4-5 months I'm going to pay off my new truck completely. I keep a break even of 30K$ in the companies bank account.Meaning I treat 30K =0$. I ran and operated my business for 4 straight years with not having any overhead. You get a bill you pay it. You need material you buy it. You need a new compressor buy it.

    While your buying new and bigger insurance/ equipment/ trucks slowly raise your prices. All new work in 2018 I increased prices right off the bat. The old 50$ blow out is now 65$. Next spring that same turn on is going to cost 75$. As distance increases then's you begin your increases on price.

    This March 1 2019, I'm going to for the first time send a services "quote" for the year. The homeowner can check off what boxes and services they want. They also have time to get someone else if they aren't in agreement of the price. There is a great tech and businessman named Dana Mac that used to post a ton before he sold his business. He was very clear about how much happier he was when he raised his prices to XYZ% lost X amount of clients and made much more money @ less of a headache.

    Thats the path I'm trying to follow for my future in business.
    I also keep a naughty/nice list of clients. Slow pays low pays forgot to pays, always waits until last minute, people who can't seem to unlock a door requiring a return trip. That stuff factors directly into my pricing because when my time is wasted I don't get it back. Compensation is required.

    In a nutshell you should always be raising prices on new work and slowly increase the old work. Most of the time people don't even complain. They understand that new mower costs money. The cheap ones either need to pay up or get out.

    Good luck man.
     
    mitchgo likes this.
  7. kinneberg lawn service

    kinneberg lawn service LawnSite Member
    Messages: 194

    Fvstringpicker is indeed correct, simple cost accounting. It is a relatively simple process just difficult to get costs strait initially. My suggestion find an old cost accounting book to assist. Had a professor in my undergrad used old texts if i remember correctly costs more to ship book than the book itself
     

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