Profit margins

[ThreeWide]

This is for those of you who are exclusively in the fert business...

Just spent some time with the books over the past few days and discovered numbers that were surprising. All of the pricing structures I had in place accounting for proper overhead and expenses turned out to be incorrect when looking at real life data. This is when you realize overhead is more than meets the eye.

My speculative numbers showed an anticipated profit margin of around 40%. Now this is for an owner-operator situation where there are no actual labor costs involved. There are placeholders for labor the pricing model, but at this point my company is not generating enough revenue to justify payroll. This past year was really my first complete season, so overall revenue is just getting started.

Suffice to say that my profit margin was less than anticipated due to many unforseen miscellaneous costs. Office supplies as an example, things add up quickly.

In any event, I would think an owner-operator with no labor cost should have no problem making a 40% net profit margin. That will certainly decrease when labor costs get involved. Material costs do not appear to be an issue. The problem seems to be that operating expenses are just too high, as my pricing is not on the cheap side. From truck payments, mobile phones, and storage facilities, expenses are always going to be a challenge. To be exact, my overhead expenses are about 40% of revenue. Since most of these expenses are fixed, that percentage will continue to go down as revenue increases. I'm certainly no accountant, but cannot afford to hire one either.

Just wondering what net profit you see on a yearly basis from both owner-operators and those with any amount of employees.

I found that the margin you expect is not always the one you actually receive.

 

[Landscape25]

I think my overhead percentage is worse than that. This was my first full year. 44.1% after subtracting DJC. I included a Christmas gift and a side job I did (not related to the field but wanted to pay taxes on it and the business needs all the money possible) in the gross. I just hope to get paid more than a few personal things here and there next year. So don't feel bad. The hardest part is knowing what to charge because you can't really base your price on your current overhead because you would not get any jobs or you make no profit. I do design, installation and maintenance not straight fert. but I feel a little better knowing I am not the only one in this boat. Not to make you feel worse. We are starting a new year so things are bound to get better. Also being on your own and doing the labor makes for a lot of taxes out of the net. I know you were talking about fert. but it is the same idea, lot's of getting situated costs and not enough business.

 

[teeca]

hey turf,
don't sell yourself short. by saying this i mean that weather your an owner opp or an owner that has 100+ employees, YOUR labor is still VERY important. if your the owner and drawing a check, that IS labor and needs to be counted. their was a very good write-up in turf mag about this, i wish i could tell you the issue it was in. it talked about how an owner thought he was making all this money and at the end of the year he failed to count himself in the company and drasticly effected his financial bottom line. i have always considerd that from the minute you wake up and untill you get home for the eveing is you work day and all those hours should count. i even considerd this when i worked for a company. i made $24hr working for a contractor, sounds good? well after a month of driving to the job site(s) 1hr each way (somrtimes 2-3hrs) lunch away from home, gas, vehicle, etc.. that $24hr was more like $12hr and was killing me! now that gas is so unstable going from $2.15-$3.00 per gal, who knows what it would come down to? and also the family time that was missed (to me that is the most important).

 

[ThreeWide]

hey turf,
don't sell yourself short. by saying this i mean that weather your an owner opp or an owner that has 100+ employees, YOUR labor is still VERY important. if your the owner and drawing a check, that IS labor and needs to be counted. their was a very good write-up in turf mag about this, i wish i could tell you the issue it was in. it talked about how an owner thought he was making all this money and at the end of the year he failed to count himself in the company and drasticly effected his financial bottom line. i have always considerd that from the minute you wake up and untill you get home for the eveing is you work day and all those hours should count. i even considerd this when i worked for a company. i made $24hr working for a contractor, sounds good? well after a month of driving to the job site(s) 1hr each way (somrtimes 2-3hrs) lunch away from home, gas, vehicle, etc.. that $24hr was more like $12hr and was killing me! now that gas is so unstable going from $2.15-$3.00 per gal, who knows what it would come down to? and also the family time that was missed (to me that is the most important).

Point well taken.

Although I'm fully aware of the need to pay myself, the revenues are not high enough to support that just yet. I chose to contribute my own labor without payment as a means to grow the business. Without that, the bottom line would have been a complete disaster.

This business was financed with my own money. Some of the profits now are basically paying back that debt, so that was the only form of income I saw this year. Until that debt is paid off, I don't see paying myself for labor or salary.

I'm fortunate enough to have a wife that understands it takes a few years of pain to create something that will be stable in the long term.

 

[GreenUtah]

part of the good news is that as your business grows to more of a full time model, many of those overhead costs will not grow by the same percentage. Your business license will still be the same, your phone will probably need more minutes and you may outgrow a storage shed, but your truck payment should remain static, etc. etc. thereby reducing your overall overhead costs as a percentage. I think not paying yourself labor is a mistake, regardless of the other liabilities of the company. This sets up a pattern that will be hard to break out of and actually meet labor costs when you need it to, ie when you need an employee. If your pricing stucture cannot cover costs and the volume of work is not available, then you need to look hard at what changes need to be made to cover costs or increase the volume and put all your efforts there. Otherwise, you'll just bleed yourself off until there is nothing left. You need an accountant as a small business owner, probably more so than anyone else in the business world. If you don't have the cash for one, then trade it out, that's a very common practice and there is a multitude of reasons why it's favorable for both parties, a subject for another thread. Best of luck.