Know your numbers

October 17, 2017 -  By
Photo: ©istock.com/artisteer

Photo: ©istock.com/artisteer

Operate profitably by understanding these figures.

I can think of no fundamental more important—or anything that yields a greater return—than knowing your numbers. There are many numbers, rates and ratios you can use to measure your progress against past performance or others in the industry. Even so, knowing your most basic numbers will give you the foundation necessary for sustainable growth and profitability. You should know the following numbers like the back of your hand.

Direct costs

What does it cost you to do the work you do? This is step No. 1 for any proposal or company’s pricing structure. If you don’t know what it costs to perform your work, how can you know how much to charge? I hear the same responses all the time: “I charge $45 per man hour ” or “I get $15 per square foot for brick pavers.” These answers are fine, but only if they stem from knowing one’s real direct costs.

Direct costs are those that can be allocated directly to a specific job. These are actual labor costs with burden, material, fuel, subcontractor and often job-specific equipment costs. Some companies go as far as allocating exact equipment costs to each job, while others consider equipment an indirect cost or overhead. I’m fine with either method, as long as you know the exact cost and that it’s accounted for. Never provide a proposal until you know exactly what it will cost you to perform the work. The so-called “going rate” for the service in question is practically irrelevant. Always start with knowing your direct costs.

Labor costs

It’s absolutely essential to know how much labor really costs. A $15-per-hour mowing foreman doesn’t really cost $15 per hour. You need to understand labor burden, which is your cost in addition to an employee’s salary, which includes benefits, workers’ comp and company-paid taxes.

Depending on your policies regarding uniforms, vacation pay and benefits—and considering your workers’ comp rate—a 50 percent burden isn’t unheard of. That said, a $15-per-hour mowing foreman actually could be a $22.50-per-hour employee. Because direct costs are the foundation for pricing, you see why knowing your real labor costs is so important. Take the time to know these numbers. Don’t guess, don’t assume and don’t estimate.

Overhead

It’s important to know your overhead numbers first so you can recover or pay for these expenses. Overhead is the indirect costs for which a company is on the hook, regardless of the work produced in the field. Some examples of overhead expenses are rent, utilities, advertising, insurance and managerial salaries. All of this must be adequately funded.

Once you know your overhead, select a method to recover or pay for it. While there are many ways to go about this, each varying in complexity, none are possible without understanding overhead costs. Once you know the numbers, your overhead costs can be converted into an overhead recovery rate. Say your overhead costs this year will be $200,000, and you’ve budgeted (with reasonable confidence) $500,000 in revenue. Your overhead recovery rate is 40 percent. Or, said another way, 40 cents on every dollar you generate will help pay the overhead.

Know and use your numbers

It’s imperative to know your numbers. Once you do, use the information to take control of the future of your business. When you know your numbers, you can accurately budget, forecast and identify shortcomings before it’s too late. You also can establish pricing structures and cost controls that all but assure profitability. Once you know the basic numbers, pricing becomes simple: direct costs + overhead recovery + desired net profit = price.

What’s measured is managed. Once you know your numbers, measure often. Measure daily and by crew, and be sure to job cost every project. Look at actual versus estimated numbers often to make sure you’re reaching your goals. Your profit and loss statement is a great tool, but it’s like a report card in school. By the time you look at it, it’s too late to do anything about it. Measure daily. Know your numbers.

Voories is COO of Brilar, a Detroit-based facility services company. Reach him at mvoories@brilar.net.

Photo: ©istock.com/artisteer

This article is tagged with and posted in 1017, Business Planner 2018

About the Author:

Voories is the COO at Brilar, a Detroit-based landscape maintenance and snow removal firm. He can be reached at mvoories@brilar.net.

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