Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.
Bernardo was a new landscape installation client of mine. He and his company were young and located in a major lake resort market. His clients were in the upper income bracket who owned at least one second home, and many owned multiple second homes.
Growth for Bernardo and his company was not a problem. There was more than enough installation work available to keep his two three-man crews busy throughout a 40-week season. His two crews were producing about $600,000 of work annually. He knew that he could install 20 to 30 percent more work if he had the qualified labor to do so. Labor was a serious problem for him. Qualified crew leaders were virtually impossible to find. Laborers were easier to find but usually didn’t last more than a week or two.
Bernardo thought mechanization might be part of the solution. He considered purchasing a mini-excavator. However, at $60,000, it was a big purchase and he needed to answer three questions:
Could he afford the payments of approximately $900 per month? How much should he charge for the mini-excavator? How much would it impact the production of his two crews and increase his sales capacity?
Is it worth it?
To answer Bernardo’s questions, we need to calculate the cost per hour (CPH) for the mini-excavator. To do so, we need to calculate its acquisition CPH, its maintenance CPH and its fuel CPH. Then, total the three to get its total CPH. I try to overestimate the costs for a piece of equipment while underestimating its lifetime billable hours. This increases the CPH, but I’d rather be a little high.
We calculate the acquisition CPH by adding the purchase price to the interest paid and then subtracting any salvage value for the mini-excavator. We divide this figure by the projected lifetime billable hours for the machine. It would look like the box to the right.
Think it through.
Bernardo thinks that he will use the mini-excavator approximately three billable hours per day or 15 billable hours per week. During a 40-week season, this would translate into it being used about 600 billable hours per season. You can calculate the useful lifetime years for this machine by dividing the lifetime billable hours by the annual billable hours used. (3,000 lifetime billable hours ÷ 600 billable hours per year = 6 lifetime years).
Assuming Bernardo bid his mini-excavator at $35 per hour and used it on jobs 15 hours per week, he would generate 600 billable hours or $21,000 (600 hours x $35 CPH) annually. The acquisition cost portion generated would be $11,100 (600 x $18.50). This equates to $925 per month ($11,100 ÷ 12 months) — more than enough to cover his monthly payment of $900.
Bernardo’s crews are currently generating $100,000 in revenue per man per year ($600,000 sales per year ÷ 6 men). While it’s impossible to precisely calculate how much this $100,000 figure would increase, it’s safe to assume that supplementing his crews with a mini-excavator that generates 15 billable hours per week would do two things. It would more than pay for itself and it would improve productivity. I’d estimate that the $100,000 per man per year would increase from 15 to 25 percent or from $115,000 to $125,000. His annual sales would increase to a minimum of $690,000 and perhaps as much as $750,000.
Mechanizing your crews can add significantly to your top line and your bottom line. It can also make you less reliant on labor. Because your crews are producing more, they are more valuable, and you can afford to pay them more. In the process, you make your company more competitive, your labor more productive and your average wage paid to labor more appealing. It’s a win, win, win, situation for everyone.