Practical profit

Do you run out of money before you run out of month when it comes to paying your bills? In 2018, did you find yourself asking, “Why don’t I have more money in my checking account?” Think about it. If you’re not making money and don’t have a healthy bottom line in this economy, when will you? This economy is about as good as it gets. As a good ole boy recently told me, “If it ain’t working now, it probably ain’t gonna work.”

Wrapping your head around your business.

1. Price it right. You have to price your services and projects accurately.
2. Produce it right. You have to produce them the way you price them or price them the way you produce them.
3. Produce enough of it. You have to produce enough volume to cover all of your fixed costs such as rent, truck and equipment payments, utilities, etc.

Throughout 2018, I worked with a number of new clients who understood how to produce the work in the field. However, they didn’t understand how to price their work accurately or the importance of producing enough volume. They were great with software, scheduling, customer relations, field tracking and so forth, but they still had a terrible bottom line.

These entrepreneurs lacked two things. One, they didn’t have a comprehensive cost-estimating system for pricing their services and projects. And two, they didn’t know how to track and monitor their pipeline.

I’m fond of quoting Tom Peters who says in his book “Thriving on Chaos,” “What gets measured gets done.” However, before you measure anything, you have to define it. Here’s how we measure what’s important in a green industry business.

The comprehensive cost-estimating system.

Every check you write for your business should fit into it and have a specific place in your pricing model. In addition, every cost that you incur in your business should be passed onto your clients with an appropriate margin added to it.

Section 1 contains costs for materials, field labor, field equipment and subcontractors that are required for producing or providing the end product: the plants, fertilizers, etc.; the labor to install the plants, mow the yards; the mowers, skid-steers, edgers; and finally, any needed subcontractors to produce the end product.

Section 2 contains costs for the same four categories that are required for producing or providing the end product but aren’t necessarily part of it: lumber for forming concrete, crew drive time, supervisory time, warrantee time, crew and delivery trucks, subcontractor costs such as traffic control or site security. We call these costs general conditions.

In section 3, we add sales tax onto materials (if required – in some instances you add sales tax to the entire job) and labor burden to field labor costs. The total of all of those sections is your total direct costs (TDC). General and administrative (G&A) overhead is then added to the TDC. Once you add these two together, you’ve calculated the break-even point (BEP) for the project or service. We then add a net profit margin (NPM) to the BEP to determine the price for the service or project. The gross profit margin (GPM) is determined by adding the BEP to the NPM.

TDC + G&A overhead = BEP

G&A overhead + NPM = GPM

Conclusion.

Before you can measure and control what’s going on in your business, you have to define the categories and costs within it. If you have a comprehensive pricing method, it should capture all of the costs in your business and pass them onto your customers with an appropriate net profit margin added onto them. It’s just a system that allows you to wrap your head around your business and make it profitable. You can have such a system and apply it to your business or you can continue to shoot from the hip. Entrepreneurs who take the time to study their business and implement a comprehensive pricing system not only understand their businesses much better than those who don’t, but they also tend to have a better bottom line at the end of the year. And isn’t that what it’s all about?

Jim Huston runs J.R. Huston Consulting, a green industry consulting firm.