Am I doing the numbers correct?

[todd66]

I am no wiz at the numbers let me say that right off the bat. Over the next couple days if I post some specifics is there someone that can tell me if im even in the right ball park? If I am close I will get with my accountant to firm them up but Im trying to save a few bucks before I get that far.

[todd66]

Starting with figuring each piece of my equipment costs/hour using the following formula:
* Formula = Cost of expense / lifetime hrs x expected run hrs per year + fuel and maint / expected run hrs per year = Cost per hour

EXAMPLE: Mower 50”.......... 5800 /1500 X 200 + 640 / 200 = $7.06/hr

To keep this easy lets just say I have a 1 hr mowing job and only that mower is being used this is how I think I have to figure what to charge for this job.

Mower: $7.06
Labor: $20.00
Labor Burden: $12.00 (multiplier of 1.6 through a staffing agency)
Gross Profit $19.53
TOTAL gross/ hr $58.59

Then take out indirect costs: I looked at last years costs and added them all up then divided them up by the # of hours I worked for the year to get a per/hr number.

Total Gross income:$58.59
Indirect costs:.......-$2.20
labor costs...........-$32.00
PROFIT..................$24.39

How am I doing so far???

[todd66]

Really??? No advise???

[Harold Mansfield]

I guess I'm a little lost on what you need help with.

[todd66]

Just want to be sure im looking at this the right way to reach my per hour rate and again to figure profit. Am I missing anything? Sometimes you stare at numbers long enough and over think things.

[Harold Mansfield]

I guess you'd probably need to hear from someone with a business a little more closely related to the one you are proposing. I can't think of any specific operational costs that you've left out, only to say that there will be costs that you didn't account for. And you won't know what they are until you get started and they hit you. Just be prepared to make some adjustments.

[todd66]

Ok. Thanks Harold.

[Fulcrum]

As much as I enjoy running numbers and trying to decipher what they are telling me, there needs to be a reason behind taking the time to do it. Don't take this the wrong way but your question reads like it's coming out of a textbook.

As to the numbers you gave, how is it that your final job profit is higher than your going in gross profit? It looks to me like you forgot to subtract something.:eek: Also, how much of the indirect cost can you breakout and attribute to the job at hand?

[paul woodall]

Hello todd66,

Your numbers are correct from my math but really not sure what is included in all your "costs". Gas, insurance, car repairs, food, etc. I see equipment being a fixed cost. Fine to amortize it as you have done. You have labor twice ($20 and $32). Not sure what "labour burden" is.

The GP will cover all your other overheads (Marketing, building, staff ,etc) so only you know if that is sufficient or not. You should charge enough I would hope to earn you enough money for the entire year NOT just the summer. May price you out of the market.

Which you should know to ensure what you charge is relevant to your offering and market.

Cheers,

[todd66]

Mower: $7.06
Labor: $20.00
Labor Burden: $12.00 (multiplier of 1.6 through a staffing agency)
Gross Profit $19.53 
TOTAL gross/ hr $58.59
Minus indirect costs $2.20
gives me a net profit of $17.33 (29%)

Ya I over thought that into a mistake.

Reason for doing this is to make sure im paying for my equipment, labor, and indirect costs and still making a profit. I want to make sure the way I figure my equipment costs (formula above) is correct. I am goint to take my information to my accountant and have him look it over also but if I can get an outside eye to look it over first it could save me some money and I can learn in the process.

If there is a text book that goes through this from a beginners stand point including figuring equipment costs I will buy it!!!

Buisness is new to me and I have been working from scratch over the last couple years.

[todd66]

Thanks a bunch for the responses. I really appreciate the help!!!

[todd66]

Paul, thanks. This is a business to add to a pension. It will always run as a seasonal business for me. I think this will allow me to remain competitive. Im hoping anyway.

[paul woodall]

Easy formula you may alreay know:

Sales - Var Costs = Gross Profit - Fixed & Indirect Costs = Operating Profit - Incomes Taxes = Net Income

Your example:

$58.59 - ($7.06 +$20.00 + $12.00) = $19.53 GP - $2.20 Indirect = $17.33 OP

There is also depreciation on assets etc that your accountant can speak to and he may suggest moving some or the $7.06 to indirect. I would also suggest looking at determining your "job rate vs hourly rate" depending on what kind of jobs you are doing. You will have less costs on one 4 hour job vs four 1 hour jobs (more gas/ maintenance, commuting time, etc) $60/hr may be too high for most residential or commercial accounts. Shop your competition.

Good luck.

Not sure if you are doing residential or commercial but your costs will be less on a 4 hour job vs four 1 hour jobs - less commuting = less gas/ maintenance on your truck.

[todd66]

Thank You Paul that is very helpful! I did not know that formula and will put it to use. Also I have been using the hourly rate to this point and just subtracting or adding equipment cost depending on what the job required. I will research "job rate" and see what I can come up with. I didn't consider my cost of say my truck being less for 4hrs vs 4-1hr jobs but I will also look at that. One thing that confuses me is the suggestion of moving part or all of the mower cost to indirect cost. Just when I thought I had learned something I get a knuckle ball. I will definitely ask my accountant about that one but curious why you wouldn't consider all costs of a mower as a direct cost?

[paul woodall]

You own the mower, computer, truck no matter what. If you mow 1 lawn or 30 lawns, your costs do not go up based on your sales. Direct costs go up with sales - gas, maintenance, labour, discounts, fertilizer, etc.

Also depends on your tax laws as equipment is usually depreciated and considered a fixed cost that you claim every year as a lump sum based on the category it is in (i.e. mower costs $5,800 so government allows you to claim a deduction for the cost of the mower (i.e. 20% each year over 5 years = $1,160/year).

Again...your accountant can confirm exactly.

[todd66]

OK i think I have been looking at some of that backwards then. Back to the drawing board. Thanks Paul, You have been very helpful!

[paul woodall]

You're close. Just use the $640 fuel & maintenance / 200 hours = $3.20 per hour. Forget about the costs of the mower to determine GP.

In the end, you want to price your services that make you competitive, cover your direct + indirect costs AND make you some profit.

[Harold Mansfield]

Mower: $7.06
Labor: $20.00
Labor Burden: $12.00 (multiplier of 1.6 through a staffing agency)
Gross Profit $19.53
TOTAL gross/ hr $58.59
Minus indirect costs $2.20
gives me a net profit of $17.33 (29%)

Ya I over thought that into a mistake.

Reason for doing this is to make sure im paying for my equipment, labor, and indirect costs and still making a profit. I want to make sure the way I figure my equipment costs (formula above) is correct. I am goint to take my information to my accountant and have him look it over also but if I can get an outside eye to look it over first it could save me some money and I can learn in the process.

If there is a text book that goes through this from a beginners stand point including figuring equipment costs I will buy it!!!

Buisness is new to me and I have been working from scratch over the last couple years.

You forgot taxes.

[todd66]

Harold can you explain? I understand I have to pay taxes and my structure at this time is sole propriator so I do my taxes in the spring on a 1040 and schedule C. (Accountant handles this) I am looking at LLC for next year which my understanding is I can take a paycheck and pay taxes on that but can leave some operating money for the following year.

As far as adding tax in as a cost in the above example I haven't seen a good way to figure that out yet. I just figured if I was working with a 29% profit in the example aprox 25% of that would be taxes. That is as far as i have gone with this issue and sure could use some advise in this area as well. In any case it is on my list to as the accountant about but at least having the right question to ask would be very helpful! @$100/hr its less time I have to spend with him trying to explain a question.

Thanks for any help

[Harold Mansfield]

I'm thinking a little simpler. For each transaction I do I take into consideration how much of it is processing fees, and how much I owe Uncle Sam. That's I how I truly see what I'm actually making. I don't wait for the accountant to tell me. I know with each job.

[paul woodall]

Some info your should be prepared to discuss with your accountant.

1) Approx $Sales you think your business will bring in annually OR how much money you want to earn AFTER TAX (i.e.) $20,000
2) Direct and Fixed Costs (we spoke about these)
3) Any info on whether you'll have employees, etc

I would then ask him for advice (1 and 4 are key for him):

1) Are there "costs" you are missing in your calculations?
2) What sales do I need to earn my "Profit Target" of $20,000?
3) What are some ways to price your services (He may or may not be able to help you here)?
4) What legal structure is the best based on your objectives?
5) If you run it out of your house, what "deductions" can you take (mortgage, insurance, phone, hydro, etc)?
6) What is the best way to pay yourself to minimize taxes?

I think Harold was stating don't forget to ensure you have built in the 25% for taxes that you mention after operating profit.

[todd66]

Ok thanks guys all yout help has been great! I will make an apt. With him to discuss this information. It sure would be nice to have a basic SMALL business 101 course that covered this for us old newbee's. I am greatful for groups such as this!

[paul woodall]

No problem at all.

I was actually thinking of creating such a course. What sort of things would you want in it? How much would you be willing to spend?

Can you email me at pwoodall@thelittlebusinesscoach.com?

Cheers,