Dan and Bill finished discussing the costs and benefits of hiring superstars vs. average staff. Feeling like he was prepared to better hiring and payroll decisions, Dan next asked Bill to meet him to analyze his equipment. Dan wanted to buy another skid steer, but his wife, and his book keeper, didn’t feel like it was worth the money.
As Dan explained their stalemate, Bill recalled when he and his wife started their business. “The easiest way to make a joint decision is to use numbers. Without knowing the costs and benefits, you are arguing over gut instincts. You get nowhere fast.”
Dan agreed. “Don’t get me wrong, we don’t like relying on our instincts. We’ve always wanted to make using costs and numbers, but where do you even start? In my mind, I know we need another skid steer. We spend too much time messing around trying to share the one we have. But on the other hand, we’re not in a financial position to take on more costs. Our dealer can finance for about $700 per month, but we’re not ready to commit to a 4 year term without knowing whether we can afford this.”
Bill got out his pencil and drew a quick chart. As Bill began writing, he explained what he was doing. “Dan, the reason you’re stuck is because you’re looking for an answer after solving only one part of the problem. You’ve figured out how much it will cost you to own the skid steer, but then you stopped. You need to look a few simple steps further.”
“There are three important factors you must consider when evaluating an equipment purchase:
- What are the costs of not owning the equipment?
- What will the equipment cost us to own and operate?
- How could the new equipment impact our sales volume
“We’re always looking at ways increase productivity, so we’re typically starting our process knowing what it’s costing us not to have the machine. What’s it costing you without the skid steer? How many crew hours are spent wheelbarrowing, digging or loading, unloading, and transporting materials that could be done more efficiently with a machine? And don’t forget, you’ll still need someone to operate the machine.”
“That’s a good question.” Said Dan. “We must spend at least 4 man-hours every week on tasks that could be done in minutes with the machine.”
Bill jotted some numbers into his chart. “If you could save 16 labor hours per month, and your labor costs (including burden) are around $25/hr, you could be saving $400 of that $700 monthly payment by saving labor hours.”
Bill continued, “If you saved 16 man hours, could they be working on other billable tasks? If those man-hours could be spent laying stone, or planting, or working on any other billable parts of your jobs, then you’ve added 16 labor hours of billable opportunity. Maybe your labor costs won’t change, but you can do more sales in less time. And with increased sales volumes, your overhead markups drop, making your pricing more attractive to customers. Now we’re starting to see how this investment will really affect your business, both from a cost and sales perspective.”
Dan liked Bill’s thought process. “Yes, we could keep the crews busy. We’re not short on work, but I am always short on people who can bring the job in on time.”
Bill agreed. “Every contractor has trouble finding good people, but I’ve never met a contractor who couldn’t find good equipment. If you can do more of your sales using equipment, chances are you’ll have an easier time running your business. It’s easier to hire and manage a single operator and a machine than it is 4, productive crew members.”
“I hear you!”, agreed Dan.
“Go a little further and analyze the other hidden costs in sharing equipment. There’s time spent floating equipment from site to site, slowed productivity doing work by hand when the equipment is not available, and the cost of schedule disruptions because the equipment is tied up on one site when it was needed on another site. On the flip side, you also have to factor the extra equipment operating costs such as fuel, maintenance, repairs and insurance.”
“So we throw these numbers in our operating budget and see how it pans out.” nodded Dan. “I see exactly where we’re going with this. The increase in sales and decrease in labor costs has to outweigh the increase in equipment costs.”
“ Exactly.” confirmed Bill. “The numbers will show you whether you this is a good, or bad, investment for your company. We analyzed our equipment purchases using numbers instead of opinions, and gradually became a company that relied more heavily on equipment, instead of labor, to meet our sales goals. Our equipment costs are up, but we’re more profitable because the greater sales volumes combined with our labor savings more than compensates for the extra equipment costs.”
“Quite honestly, it’s been easier to grow my business using more equipment and less labor. Dollar-for-dollar, equipment is more productive and less risky. Equipment costs less to manage and gives us less headaches than people. However, I never would have arrived where I am today without knowing that my equipment investments would pay for themselves. Sit down with your wife and bookkeeper and put numbers to these questions:
How much do you expect to save in labor costs? Include:
- Production labor savings (time)
- Equipment transportation savings (float costs)
What is it going to cost you to own + operate the equipment? Including:
- Cost of ownership
- Operating costs (fuel, insurance, repairs, etc.)
How much more sales could you generate as a result of owning the equipment? Include:
- Faster, more efficient production
- More competitive pricing (due to lower production costs)
- Increased sales opportunity by focusing your skilled labor on tasks that can’t be done by machine
“After you’ve answered these questions, review your budget and make a logical decision based on dollars and cents.”
“Brilliant.” nodded Dan. “This is the way business was meant to be run.”
To put Bill’s systems to work for your company, join Landscape Ontario and LMN for the Business Management/Operating Budget workshop series. For more information, email info@landscapemanagementnetwork.com or call 1-888-347-9864.
