Know Your Numbers (Episode 3) – Understanding Your Business Costs
I’m on Episode 3 of a four-part series about knowing your numbers in your business (numbers that help you understand what’s going on in your trades business).
If you haven’t seen Episodes 1 & 2 yet, check them here.
I’m a business coach for trades and builders and a lot of my customers don’t really know their numbers or give them the attention they deserve.
You pay attention to your trade and you need to pay attention to your numbers. If you don’t, you could be losing money or not making as much money as you deserve
I’m going to strongly encourage you to focus on your numbers whether you want me to be your business coach or not.
I’ve built a tool called The ‘Know Your Numbers’ Workbook, along with an educational video and a tracker called the ‘Big Numbers Tracker’ to help you track your numbers. I think I’ve done enough teaching in there for you to be able to do it without me.
Of course, if you want me to help you, I’d love to be your business coach, but I’ve tried to be generous and give you enough information to do it yourself.
Understanding your costs
Now, I’m talking about costs.
It’s important to understand them properly. It’s easy to misunderstand them.
I’m going to talk about labour and your overheads.
I’m going to ignore materials, they’re easy to understand. You get an invoice from your supplier, so if you can’t understand that, something’s gone horribly wrong.
Labour costs and the true cost of employment
I’ll start with labour costs and how much your tradespeople cost you. I’m not going to go into the math now.
The gist of it is that they cost you quite a lot more than you think.
Tradespeople in terms of per hour and how you charge them to your customers cost you a lot more than you think.
You might think they’re costing you $20 – $40 an hour because that’s what you pay them, but think of it like this…
You pay them 40 hours a week, 52 weeks a year.
But they get….
4 weeks holiday, 10 days sick pay and 10 public holidays.
They spend time every day driving between jobs, to Bunnings, or picking up equipment or material from your wholesalers.
They get a smoke-o every day.
They get team meetings and training or you’re paying them and they’re not working.
There are a million other things that take their time away from being charged to a job. You’re still paying them for that time, but you’re not charging that time to a job. You need to account for that.
You need to understand that you need to recover that additional cost where they’re not charged to a job.
The way I like to do it is to add it into what they cost you per charged hour.
We’ll do some calculations about how many hours in a year you can charge them out for and then we’ll calculate their cost per charged hour.
And the answer is it’s almost double what you think you’re paying them.
So think about that.They cost you per charged hour almost double what you think you’re paying them in an hour.
I do this to help people understand what their cost of labour really is and I’m usually doing it because they’re not as profitable as we would like them to be. We’re looking at increasing the price to make sure we’re charging enough to cover what they cost.
If you understand what your costs really are and you understand that you’re really not charging enough, it’s much easier to be brave about increasing your prices.
I know that you’re all afraid of putting your prices up and being beaten on price by your competition — we all are.
It’s a fact of the world that this happens and we feel pressure from our customers, but if you’re not charging enough to cover your costs, you might as well not go to work.
So it’s time to be more brave.
Here’s a story to illustrate this.
I’m working with a garden maintenance and lawn mowing company.
They’ve got 6 people.
Some permanent employees, subcontractors, casuals and an apprentice.
He’s paying them between $20 and $35 an hour and he was charging $45 an hour to his customers and there wasn’t much money around. And I was pretty much instantly sure that $45 is not charging enough for a professional trades business, but I got a lot of resistance from my client.
- “People won’t pay that.”
- “Other people are charging that.”
- “People don’t pay more.”
- “Other people are charging $45.”
- “I’ll lose all my customers to those other cheap people.”
It was an understandable resistance.
So we went to the Big Numbers Tracker to work out what’s actually going on. We calculated what his people were actually costing him.
It’s gardening and most are small jobs, so there’s quite a lot of driving in between jobs. There was quite a lot of uncharged time going on and they were costing him close to the $45 per charged hour.
For some of his guys he lost money every hour they worked, and for some of his guys he only made a tiny bit, which is not enough to cover his overheads.
Because he was working on the tools 40-hours a week, and then doing the admin work outside that time, he was covering up for the fact that those guys weren’t profitable.
But as he was growing and wanting to grow his team and the business and pull himself off the tools, non-profitability was becoming more and more apparent.
So, of course, he understood and he put his price up to $60 an hour.
We started gently. We started with new quotes before we went back to all the old customers and said prices are going up.
We staged it in but he’s now charging $60 an hour for all of his customers.
His quotes are being accepted. He’s kept all of his old customers and he’s starting to run a profitable business.
It does work. If this sounds like you, please download the workbook and the tracker and get your pricing right.
That brings me to overheads — that’s your labour.
If your cost of sales is materials and labour then overheads are all your other costs:
- Your business coach (very important)
- An admin person
Your overheads are often more than you think.
If you pay yourself a wage, even if it’s not massively generous — $80,000 a year or $1,000 a week, it’s really easy for your overheads to $200,000.
I know a business turns over $500,000 a year. His overheads are $200,000, including his salary — that’s not even a big trades business.
They need to make enough on materials to cover that $200,000 and also make a profit. A business’s job is to make a profit and you should make a profit on top of your salary for doing the job. That is what rewards you for the risk and the stress that goes with it.
So, let’s go back to this $200,000.
The business has overheads of $200,000 a year — that’s $4,000 a week.
If you’ve got four people in the field working 40 hours each, that’s 160 hours being worked.
That 160 hours has to cover that $4,000, doesn’t it?
$4,000 divided by 160 is $25, so those guys have to make $25 on top of what they cost you per hour before your business starts turning a profit.
Now, I’m playing fast and loose with the numbers. It’s a bit more complicated than that.
On the one hand, you’ve got materials and you can make a margins on your materials ,which makes you a bit more profitable — makes that $25 a bit less.
On the other hand, I haven’t accounted for holidays, sick pay, mistakes, etc.
$25 might not be exactly accurate, but it’s pretty close.
If $25 an hour per person is right, you need to add that to what those people cost you from the calculation we did previously.
If we’re talking about the garden maintenance example above – $45 an hour plus the $25 means they need to be earning you $70 an hour before we start turning a profit, before you start having any allowance in there for risk, contingency and things going wrong.
A business costs you more than you realise and understanding what those numbers are for your business is really important.
I did this exercise recently with a fencing company.
A few months ago they changed their model. They used to use subcontractors so that meant they got a price to install a fence, and could put some margin on it and everything worked. The risk was on the subcontractors for they shifted their model.
Now they have employed fencers doing the installations and they’re not making as much money as they should be. So we used the same approach.
We worked out what their fences were costing them per hour and we took this approach for the overheads and they’ve put the hourly rate that they’re charging up significantly so it covers both of those costs plus some profit.
We still have some work to do. This is a recent change so we haven’t seen the results yet, but at least we’ve seen the problem and we’ve taken action.
We still have work to do to make sure we allow enough hours in our quotes so that they recover enough money and make sure that their fencers take the same amount of time we allowed in the quotes.
But they’ve taken that first crucial step. They started with understanding and being confident about their pricing.
I hope this has persuaded you that your numbers are important and understanding your costs are important.
You can get the tracker for free, just follow the steps below.
Why don’t you go and check your numbers?
- Press the button to download the ‘Know Your Numbers’ workbook which explains everything in more detail
- Watch the explanation video
- Download the tracker by sharing it with 3 people
There are four ways you can engage with me:
1. Subscribe to these emails and get them once a week in your inbox so you never miss a video from me.
2. Join the Trades Business Toolshed Facebook Group where you can watch these videos, ask me questions or talk to your peers.
3. Attend my next Tradie Profit Webinar.
4. Book yourself a 10-minute chat with me. We’ll talk about whether coaching is right for you now and if it is, we’ll go further into the process before you have to make your mind up.
See you later.