July 31, 2012

Snow Business

Numbers are more important than ever


Editor’s note: J. Paul Lamarche, known as JPL, has helped countless Canadian horticultural business owners find the path toward prosperity by understanding their true business costs. For background, see his article Benchmarks guide your business, in the April 2008 edition of Landscape Trades, available at www.landscapetrades.com/JPLbenchmarks.

Horticultural service companies often get into the snow removal business to generate some cash flow during the off-season, retain staff, and keep their summer maintenance customers happy. But if you don’t keep an eye on your labour overhead and equipment costs through benchmarking, you could be assuming a lot of work and risk with no rewards. This was never truer than this past winter.

Labour costs more in the winter
We cannot control when snow comes; even predicting snowfall is inexact. But you are certain to bear downtime staff costs between snowfalls. Smart operators understand their true labour costs for snow removal by including a downtime percentage in their cost-of-labour calculations.

What does such a calculation look like? My systems are based on division. I have used a 25 per cent downtime estimate in the example below, although snow removal downtimes can be as high as 42 per cent.
Hourly rate + Payroll tax
100 % - Downtime percentage

For example:
$25 (Hourly rate) + $5 (Payroll tax)
100% - 25% (Downtime)
$30 (Hourly rate + Payroll tax)
75% (100% - 25% Downtime)
= $40

This illustration really drives a point home; when you have to pay your employees for downtime, your true hourly cost can almost double! Add this to the cost of operating a tractor or truck, and the expense could easily be more than $100 per hour.

Know your labour breakeven
Build on that valuable number to find the starting-point rate for charging clients — your labour breakeven rate. If you do not know your overhead percentage, see All you need is a calculator, Landscape Trades, June 2005, www.landscapetrades.com/JPLcalculator.
Cost of goods sold (Your true hourly labour cost)
100% - Your overhead percentage
For example:
$40 (True hourly labour cost)
58% (100% - 42%* Overhead)
= $68.97 per hour
*This is a benchmark property maintenance overhead percentage.

You can adapt this formula to find your breakeven costs per day or per snow event. Remember, this is only the starting point on what you must charge your customers; your profit margin begins on top of this number.

Equipment: Looking toward the future
As with other contracting specialties, my practical formulas can tell you how investing in snow equipment that improves productivity can pay for itself. My Equipment Costing Formula is a tool to help you figure Return on Investment (ROI). This important, often overlooked idea, is to charge your customers for actual equipment costs, as well as an ROI factor — to allow you to buy a new piece of equipment when it needs to be replaced. A sample calculation for a snow blade expected to last four years looks like this:
$5,000 (snow blade costing $6,000, less its $1,000 residual value)
(Lifespan ÷ 2) x usage

1,000 [(4-year lifespan ÷ 2) x 10 hours x 50 visits, including salting trips]
= $5 per hour

This formula is a powerful, yet simple tool; build a $5 per hour charge into the rates for your blade, protect that cash in a separate equipment replacement fund, and you can write a cheque when you need a new blade in four years!

Take a hard look at snow operations
Everything I have written in Landscape Trades, and shared in my role as a consultant, applies to the snow removal business — knowing your true costs, your overhead, return on investment and profit margin. However, snow removal by necessity involves extra costs; that means extra risk.

Snow removal contractors need 4x4 trucks, while “no removal” companies can operate with six-cylinder, two-wheel drive trucks, at half the cost. Gas, insurance, repair and utility costs are higher, as are equipment, storage and repair shop needs. All these costs drive your overheads up.

If your company performs both snow removal and summer maintenance or construction work, it is essential to maintain separate actual and budget numbers, so you have a clear picture of each endeavour’s profitability.

A solid understanding of your numbers could actually lead you to conclude that you could do better, overall, by improving efficiency and profitability for your summer operations. On the other hand, there is money to be made in snow — by using the right equipment and the right costing strategy.
For more information on J. Paul Lamarche’s initiatives to improve business management in Canada’s green industry, visit www.jplbiz.ca.