Equipment Notebook: July 1999, A Balancing Act

This past winter brought days of up to 18 inches of snow to Ann Arbor, Mich.

For Mike Kowalski, chief executive officer, Great Outdoors, a division of Huron Lawn Service, the extra precipitation meant additional profit for his company. It also meant additional stress on his equipment, especially his snowplowing trucks.

In November, Kowalski had just paid off a 1994 Ford truck. Soon after, the transmission went out – a $2,200 repair, Kowalski said.

“Now the truck is in the shop again because it needs some front end work done, which will cost another $2,500,” he added. “If I would have bought a new truck like I usually do after about five years of use, I would have saved on the repairs and downtime.”

According to Kowalski, this is a classic example of how a contractor can lose money when planning and budgeting for equipment purchases. By being prepared – whether it's by having employees keep ongoing maintenance logs and purchasing equipment on an as-needed basis or tracking long-term trends in equipment life to predict failure before it occurs – and by budgeting sufficiently, landscape contractors can get more profitability out of their equipment.

STARTING OFF RIGHT. Preparing his company for the busy spring, Kowalski starts planning his equipment purchasing in January so he can order new equipment by February.

“We try to figure out our sales goals for each separate division and what equipment we need to reach those goals,” Kowalski explained. “Some of our jobs are pre-sold for the next year so we know in advance the type of equipment we’ll need based on what we have that’s in good condition and how many more crews we may need to add because of growth.”

How does Kowalski know he can afford the equipment he’s planning on purchasing? He does a simple equation.

“I take the total cost of the equipment plus the financing and predicted maintenance costs over the assumed four-year lifespan and then look at the total,” he explained. “I know that to purchase that machine, I have to be able to recoup that cost over the next four years to warrant buying it.”

Kowalski’s philosophy on equipment life is simple: “I pay close attention,” he said. “Mowers tend to last four years. Trimmers tend to last two years. The longer you hold on to the equipment the more major breakdowns you’ll have. After four or five years, a piece of equipment will need new joints and have transmission problems. We try to get new equipment before that happens.

“Also, we always buy new – that way you know what you’re getting and you have a warranty,” Kowalski added. “Landscape contractors tend to beat their equipment up – that’s why we don’t buy used.”

Buying new, Kowalski advised, also helps the company retain a professional image.

The decision to buy a new piece of equipment usually comes after Kowalski has rented it at least two to three times per month.

“Purchasing equipment will save you money if you’re renting it that often,” he stressed. “You have to remember that when you’re renting, you’re not only paying rent, but you’re paying for the cost to pick up and drop off the equipment. You want to bill for every hour that you can and renting takes away from that.”

A regular buyer, Kowalski is trying leasing for the first time this year.

“It seems like we might be better off leasing because we can get a better interest rate – 11½ percent instead of between 9½ and 16 percent to finance,” Kowalski explained. “We can also write off the whole payment instead of just a percentage of it.”

When purchasing equipment, Kowalski also makes sure to have a backup fleet in case of breakdowns and to make room for growth, including an extra mower, trimmer and blower.

“This gives us the opportunity to grow over the year without having to make any additional equipment purchases,” he said.

USING RESEARCH. Michael Hornung, president, Valley Green Professional Lawn & Tree Care, St. Cloud, Minn., starts his equipment budgeting earlier than Kowalski – October and November of the previous year. Then he purchases his equipment in November and December.

To help in estimating what he needs, Hornung uses the Professional Lawn Care Association of America’s Operating Efficiency Study.

According to PLCAA’s 1997 study, the median for return on assets is 9.5 percent and equipment and vehicles comprise 39 percent of total assets.

“We do more business per production unit than the average listed in the study,” Hornung said. “But we use it as a guideline to try and achieve a high rate of efficiency.”

When it comes to leasing vs. buying, Hornung said the decision is based on what he’s using the equipment for.

“If the equipment is going to wear out faster due to additional use, we lease it because I don’t want any downtime,” Hornung explained. “A lease for a pickup truck gives us about 15,000 miles per year, which is more than enough for a seasonal business. For our production units, we get 5,000 to 7,000 miles per year.”

DAY-BY-DAY. Unlike Kowalski and Hornung, Chris Mason, president, Mason & Co. Landscaping, Gilbert, Az., doesn’t plan his equipment budget in advance each year.

“We do it along the way,” Mason pointed out. “I keep a daily log with our construction manager of what our needs are. For example, right now we’re digging the footing for a retaining wall and it’s pretty tough. We could save money by renting a jackhammer. If we rent a piece of equipment and then notice that we’re renting it often, then we’ll buy it. There’s no magic number. I just look at how many times we rent the machine over one or two month increments and do an adhoc cost justification.”

Mason refers to his budgeting method as “needs-based.”

“My system is an ongoing planning and budgeting process,” he explained. “We try to replace equipment before it costs us money.”

Mason saves his daily logs so that he can group them into six-month increments. Then he reviews 12 months' worth of records so he can monitor equipment trends.

“Tracking trends can help me make some equipment predictions,” Mason explained. “But we still need to make our purchases on an ongoing needs basis. Sometimes trends are worthwhile to focus on, sometimes they’re not.”

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