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Contractormag 11234 Rhino On The Bridge

Success or failure

June 20, 2018
No one I’ve known who ventured out on their own set out to be a failure and, yet, the majority of new small businesses will fail within the first three years.

No one I’ve known who ventured out on their own set out to be a failure and, yet, the majority of new small businesses will fail within the first three years. The most glaringly obvious issue, for trades folks, is they’re typically outstanding technicians who can analyze and repair most anything and know, intuitively, when the widget is beyond a point where investing time and money is wise. They know it would be a waste of time/money and can sell the customer on why. The boss, who has been managing the business so well, makes it look easy and gives the employee the impression that they can do as well as the boss can.

Then comes the I can do it better, faster, and cheaper mentality and they jump into the deep end of the pool only to discover by drips and drabs that they are not good swimmers. The basics are deceptively simple: charge enough to cover overhead and mark up the goods being sold to earn a profit.

Overhead is the single largest beast in the room so often misunderstood or overlooked. There are a number of types of overhead.

Administrative overhead:

·      Salaries of anyone who does not produce billable hours. That includes you whenever you are on-the-clock, but not direct-billing your time to a customer.

·      Utilities.

·      Office equipment and supplies.

·      Legal and accounting fees.

·      Company car(s).

·      Travel and entertainment – like conventions/trade shows.

·      Rent or mortgage cost. You might work out of a home “office”, but if you do you should be deducting that portion of your home’s utilities as a business expense and your accountant can set up how to properly pay rent on the space.

·      Insurances: good grief don’t get me started on insurance! Automotive; liability; health (if you plan on providing that for yourself and/or employees); property; fire; theft; materials on a job site – in transit – or in a storage trailer; vehicle theft coverage for both materials and tools; and you can count on the insurance companies finding new creative ways to come up with new coverage you will need each year. One of the constant struggles we face each year is to manage and contain the cost of insurances we carry.

Employee overhead:

·      Oil & gas.

·      Supplies provided to employees.

·      Employee uniforms.

·      Shop tools and tool you provide that may be assigned to each truck.

·      Vehicles and vehicle maintenance.

·      Projected replacement costs.

·      Retirement programs like a 401K that the employer contributes to and/or pays the annual fees.

·      Medical expenses not covered by an insurer.

·      Workman’s Compensation insurance. One your customers often do not understand exposes them to liability if the contractor fails to have coverage is workman’s compensation insurance. An employee who gets injured on their property can go after the homeowners’ insurance company. On one local construction site, a mason showed up on a weekend, fell off of the scaffolding, broke his back, did not have insurance and neither did the general contractor. The homeowners found themselves on the hook for the mason’s medical expenses and loss of work revenue.    

·      Training and ongoing education on company time (trade shows plug in here)

·      Health insurance.

·      Disability insurance.

·      Some companies also provide life insurance.

·      Non-productive hours. You should keep an ongoing record of each employee’s productive and non-productive hours. My ex-partner was our company bookkeeper and failed to do this simple procedure. When our partnership broke up, we did an employee forensic examination to determine who was being productive and discovered he took all the deadwood with him to start up a competing business. Because we analyzed the productivity for each employee, we knew he was headed for bankruptcy, which took almost three years to the day, long before he ever realized the end was nearing for his business venture.

In manufacturing labor costs are part of overhead, but not so in our trades businesses for employees turning in billable hours as those hours are also goods being sold. Traditionally, overhead is covered in the hourly rate charged to your customers and not associated with hard goods sold because productive labor hours are the lone constant you are selling each and every day. The majority of net profits are garnered from material sales, which is why direct-to-consumers Internet sales are a sharp thorn in our collective sides. When sold to someone in a state where the seller does not have a brick-and-mortar presence, they can skip charging sales tax too, which makes them virtually impossible to compete against. At some point, we are all going to be faced with the reality that a portion of the required business profits will need to be tied to the hourly labor rate.

Overhead is anything that costs the business money you cannot sell. Either you or your accountant must perform a break-even cost analysis to accurately know how much you need to charge per hour to customers over and above the hourly labor rate you will be paying the employees whose time is billable. 

Have an exit strategy? Want to retire comfortably without money problems? Best factor that into your hourly billing rate too. If you think your overhead is lower because you work out of your home and/or your own garage, think again. Yes, you can fly by the seat of your pants, but after three years, you’re liable to end up with your rear-end exposed and deeply in debt. As Taco says: Do it Once; Do it Right!

Dave Yates material both in print and online is protected by Copyright 2017. Any reuse of this material (print or electronic) must have the express written permission of Dave Yates and CONTRACTOR magazine. Please contact via email at [email protected].

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