May 15, 2010
It’s all about overhead
By Mark Bradley
In our previous article, Dan, a struggling landscape contractor, and Bill, his long-time friend and mentor, discussed Dan’s equipment budget, why it’s not a good idea to use a competitor’s rates, and how to budget for a return on investment on personally-owned equipment.
In this month’s article, Dan and Bill discuss Dan’s overhead budget and overhead cost recovery.
Dan and Bill met over breakfast to review Dan’s overhead budget.
“This morning we’ll work on your overhead budget, which covers overhead expenses such as advertising, office salaries, utilities, etc., that are not part of billable work. Your overhead budget is probably the easiest to forecast, because most of your overhead expenses do not go up and down with sales,” said Bill.
“But my overhead costs don’t really affect my crews at all. My accountant deals with those,” questioned Dan. “And, like you said, they don’t change very much, despite what my sales are, so there’s little I can even do about them.”
“Dan, I’ve seen a lot of landscape contractors go under. They didn’t fail because of a shortage of customers, or from making bad estimates. No, most went under because they didn’t know how to price their work to cover their job costs, their overhead costs, and their profit. As their business grew and changed, things started to unravel and quickly. If you don’t know how changes in overhead affect your pricing and your sales goals, you’re unnecessarily risking your company, your efforts, and your time and passion,” said Bill.
“Agreed, but you don’t price overhead specifically in your jobs, so how do you know if you’re covered? When I look at what I pay my guys and what I bill my clients for those hours, there seems to be lots of money left over to cover my overhead costs,” said Dan.
“Well, I make sure we’re not overspending,” objected Dan.
“But how could you be sure if you don’t have a plan for your overhead spending?” asked Bill.
Dan sat silent, staring at his paper.
Bill broke the silence with another question. “Dan, how long would you keep an estimator who guessed at job requirements, based on their gut feel, and whose projects never turned a profit?”
“Not long…” muttered Dan.
“But you’re OK with guessing that your overhead costs are covered somewhere in your pricing, where the dollars at stake are in the hundreds of thousands? There isn’t much mystery about it, Dan. If you don’t plan your overhead and price your work accordingly, you’re either losing money or losing business,” said Bill.
“But I can’t raise my prices at all. I’ll lose work to my competition!” insisted Dan.
“Unrelated!” challenged Bill. “I charge my clients significantly more than you charge yours, and yet we rarely lose a job on price. Besides, what good is keeping a customer at rates that are slowly starving your company? Dan, even if you convinced me that you had to charge those rates, then you still need to set up a budget to ensure that your company is going to turn a profit with them. Without a budget, a plan, how could you possibly know?”
“You’ve struck a nerve, Bill,” said Dan. “When you work your tail off all year for nothing, you start to question yourself, your business, everything; it’s very stressful.”
Bill continued, “There are a couple different methods you can use to recover overhead – each one has strengths and weaknesses. The point is that you need a method. And with a method, your job as an owner becomes much simpler. Your goals are defined by numbers and you need to:
Make these three things happen and you’ll be reasonably sure to have covered your overhead expenses and turned a profit. But you can’t do any of those three without a plan – your operating budget. After all, how can you manage what you don’t know?”
Bill’s candid advice took a weight off Dan’s shoulders. “So what are we waiting for?” he asked. “Let’s get on it.”
To be continued next issue.
Wish you knew a Bill to help steer your company in the right direction? Join LMN and Landscape Ontario for the Seize Control: Your Operating Budget workshop series. Bring your company’s numbers and leave with an operating budget and pricing system built specifically for your company. For more information go to www.landscapemanagementnetwork.com, email workshop@landscapemanagementnetwork.com, or call 1-888-347-9864.
Mark Bradley is the president of The Beach Gardener and the Landscape Management Network.
In our previous article, Dan, a struggling landscape contractor, and Bill, his long-time friend and mentor, discussed Dan’s equipment budget, why it’s not a good idea to use a competitor’s rates, and how to budget for a return on investment on personally-owned equipment.In this month’s article, Dan and Bill discuss Dan’s overhead budget and overhead cost recovery.
Dan and Bill met over breakfast to review Dan’s overhead budget.
“This morning we’ll work on your overhead budget, which covers overhead expenses such as advertising, office salaries, utilities, etc., that are not part of billable work. Your overhead budget is probably the easiest to forecast, because most of your overhead expenses do not go up and down with sales,” said Bill.
“But my overhead costs don’t really affect my crews at all. My accountant deals with those,” questioned Dan. “And, like you said, they don’t change very much, despite what my sales are, so there’s little I can even do about them.”
“Dan, I’ve seen a lot of landscape contractors go under. They didn’t fail because of a shortage of customers, or from making bad estimates. No, most went under because they didn’t know how to price their work to cover their job costs, their overhead costs, and their profit. As their business grew and changed, things started to unravel and quickly. If you don’t know how changes in overhead affect your pricing and your sales goals, you’re unnecessarily risking your company, your efforts, and your time and passion,” said Bill.
“Agreed, but you don’t price overhead specifically in your jobs, so how do you know if you’re covered? When I look at what I pay my guys and what I bill my clients for those hours, there seems to be lots of money left over to cover my overhead costs,” said Dan.
Can’t live with uncertainty
“I couldn’t run my business if I wasn’t using a plan and didn’t know for certain if I was covering those costs. I’d lie awake at night every time my bank balance dipped. I don’t know how most small business owners live with that level of uncertainty…. especially, when it’s completely unnecessary,” said Bill. “Dan, you are spending hundreds of thousands of dollars on overhead expenses, without knowing exactly where, and whether they’re covered in your pricing. It doesn’t make sense.”“Well, I make sure we’re not overspending,” objected Dan.
“But how could you be sure if you don’t have a plan for your overhead spending?” asked Bill.
Dan sat silent, staring at his paper.
Bill broke the silence with another question. “Dan, how long would you keep an estimator who guessed at job requirements, based on their gut feel, and whose projects never turned a profit?”
“Not long…” muttered Dan.
“But you’re OK with guessing that your overhead costs are covered somewhere in your pricing, where the dollars at stake are in the hundreds of thousands? There isn’t much mystery about it, Dan. If you don’t plan your overhead and price your work accordingly, you’re either losing money or losing business,” said Bill.
“But I can’t raise my prices at all. I’ll lose work to my competition!” insisted Dan.
“Unrelated!” challenged Bill. “I charge my clients significantly more than you charge yours, and yet we rarely lose a job on price. Besides, what good is keeping a customer at rates that are slowly starving your company? Dan, even if you convinced me that you had to charge those rates, then you still need to set up a budget to ensure that your company is going to turn a profit with them. Without a budget, a plan, how could you possibly know?”
“You’ve struck a nerve, Bill,” said Dan. “When you work your tail off all year for nothing, you start to question yourself, your business, everything; it’s very stressful.”
Create budget in one day
Bill had heard that many times before. “But it doesn’t have to be that way. You can build a budget in less than a day. Dedicate one single day each year to setting up a budget – it becomes your plan for profit. Part of that plan is your overhead expenses. Start every year with a plan for your sales, your field expenses, and your overhead expenses and a fair profit. Then, using your plan, it’s simple to calculate the prices you need to charge to make that plan a reality.”Bill continued, “There are a couple different methods you can use to recover overhead – each one has strengths and weaknesses. The point is that you need a method. And with a method, your job as an owner becomes much simpler. Your goals are defined by numbers and you need to:
- Drive enough sales to meet your sales goals
- Keep your field expenses within limits
- Control your overhead spending according to your budget
Make these three things happen and you’ll be reasonably sure to have covered your overhead expenses and turned a profit. But you can’t do any of those three without a plan – your operating budget. After all, how can you manage what you don’t know?”
Bill’s candid advice took a weight off Dan’s shoulders. “So what are we waiting for?” he asked. “Let’s get on it.”
To be continued next issue.
Wish you knew a Bill to help steer your company in the right direction? Join LMN and Landscape Ontario for the Seize Control: Your Operating Budget workshop series. Bring your company’s numbers and leave with an operating budget and pricing system built specifically for your company. For more information go to www.landscapemanagementnetwork.com, email workshop@landscapemanagementnetwork.com, or call 1-888-347-9864.
Mark Bradley is the president of The Beach Gardener and the Landscape Management Network.