Know your numbers
While it’s certainly tempting to delegate the financials to the accountant, the accountant is only running the numbers, not running your jobs. In such a competitive environment, jobs could be won on the narrowest of margins, so it’s critical that your numbers be highly accurate. Here are just a few tips to help you keep your numbers accurate and your margins healthy.
It’s easiest to combine equipment depreciation, interest, insurance, taxes and permits into an ownership cost per hour. Accurately calculating the equipment costs is important because it will drive the rate at which you bill your equipment to your customer. Most companies use average rates for machines in a given size class in order to simplify the estimating process.
Accuracy is critical because if you estimate an equipment rental rate too low, your bid may be too low to return a good margin. If your rate is too high, you may not be competitive. You should regularly review your costs and rates and make adjustments based on what’s happening in the areas where you work.
Operating costs for a machine include the costs of tires/undercarriage, wear parts (bucket edges and tips), preventive maintenance and normal wear service or repairs (fluid and filter changes). Again, for convenience, most companies convert all of this into a cost per hour. As utilization of a machine changes, operating costs need to be adjusted for accuracy.
As machines age, operating costs tend to increase. Proactive equipment management using inspections and condition monitoring can help reduce these costs over the life of the machine. Keeping accurate numbers also helps you more effectively evaluate when renting or leasing equipment makes more economic sense than ownership.
While keeping accurate costs in this area seems straight forward, there are a couple of areas where it’s easy to miscalculate. Labor burden is one of them. Labor burden includes all the fringe benefits such as health insurance, payroll taxes and workers’ compensation insurance. Insurance premiums can vary greatly and change at least annually, so it is critical that you and your accountant review and validate the numbers on a regular basis.
If you have your own shop or maintenance area, be sure that you are aware of any compliance requirements such as disposal, so that you can avoid any penalties for non-compliance in areas such as waste management (coolants, lubricants, batteries, tires) or proper storage of fluids and chemicals.
Direct labor, sub-contractors, materials and fuel calculations will have the highest degree of accuracy when you do a thorough job of scoping and clarifying the job requirements. Some areas that are often miscalculated are procurement costs, transportation costs and regulatory costs.
Procurement costs can get off track when you’re working with new suppliers or when things are moving quickly and price and delivery dates are not accurately confirmed. Materials that don’t arrive on time can disrupt an entire project schedule, add costs or eliminate the opportunity for completion bonuses.
While transportation costs may include transport of equipment to and from the job site, it’s easy to overlook the cost of your company vehicles. It’s also important to regularly verify costs if you’re using transport contractors, as they are constantly adjusting their costs to accommodate items like rising fuel prices.
Getting good margins and keeping them that way takes relentless, accurate management of all your owning and operating costs. Know your numbers and watch them grow.
Are you in the know?
Here are some additional numbers you should know to accurately manage your costs. Take a look at this list and see how many of your numbers you know.
- Your gross and net profit
- Average margins on similar types of jobs
- Your annual sales volume
- Average number of bids per month
- Your win-loss record on bids
- Bid volume required to keep you running at a profit
- Target margins per month/quarter/year
- Monthly cash flow
- Accounts receivable aging
- Weekly payroll