Mike Andes explains how to decide whether to take a loan to grow a lawn care business by focusing on risk tolerance, appropriate cash reserves, and the true cost of capital. He walks through numerical examples: a solo crew making $40,000 profit/year, taking on $30,000 of equipment debt with $200/month interest ($2,400/year), or $1,000/month payments ($12,000/year) where $9,600 goes to principal and $2,400 to interest; he also discusses annual depreciation of $6,000 if amortized over five years and how those figures affect net additional profit (e.g., $40,000 − $12,000 = $28,000; conservatively after depreciation ~$22,000). Advice centers on comparing incremental profit to debt service and matching reserves to risk tolerance.
Chapters
So this is what I would do. Because really, what it has to do here is someone asked me this other day, like, how much money should I be having in the bank in terms of just, like, reserves? It really comes down to your risk tolerance. Right? Like, so, for example, when it comes to reserves, I said, well, look, some people are gonna want three months worth of revenue in the bank. Some people are only gonna want one month's worth of payroll, and some people are going to want one month's worth of cash flow. Like, so. There's so many different ranges. It depends on your risk tolerance. Right. And so when it comes to this, how much debt would you be having? Again, I wouldn't be looking at percentage like that as much as I would be looking at how much did your first crew profit. So, for example, I love having the whiteboard. If I can get in the habit of doing Q and A in front of this whiteboard and actually start answering questions, there is going to be so much better information come out on these Q and A's. Let me tell you what so. Goodness clumsy. So if we have a business, if your crew one. David. If your crew one.
Pumps out $40,000. I know, I'm just making up a number. Like, come on, give me a break here. Let's just say it's a solo route. They do $40,000 in profit over the course of a year. Okay? That's their profit. Now, let's say. Okay, now let's look at Crew 2, which is a potential. Based upon what? Whether or not you take out the loan. Okay? So now the question is, what is the cost of capital? Cost of capital is what's the interest going to be, et cetera. So let's say, for example, well, if we just look at payments, which includes principal. So cost of capital traditionally only refers to interest. All right? So the cost of getting that money. Oops. Can you guys see that? Oh, you're good. Cost of capital typically only talks about interest. But if you want to be a little more conservative, because the interest on, let's say a whole crew, a truck, set up everything. Let's say. Let's just say 40,000. Let's say $30,000 for your new truck and the equipment that you need. And so let's say that the interest on that is.
200 bucks a month. So then the interest over the course of a year would be $2,400. So then if you look at. Okay, cost of capital is only $2,400. If I can make $40,000 on profit per year because of that. Like, let's go like, this is a great deal now, but if you look at it more from a more conservative standpoint, you. Your payments per month might be, let's just say $1,000 per month to get this equipment. So now we're looking at $12,000 in payments, most of that going towards principal. So in this case, 9,600. Oh, you guys can't see this? Don't worry. All is not lost. $9,600 in this case would be going towards principal. So pay down, like the actual cost of the loan, the actual $40,000 that we had to start, $30,000 in debt. I hope this didn't make too much complications for you guys. Sorry. But basically, if we had $30,000 in debt, we have $200 per month, $200 per month in interest. That's $2,400 per year in interest. That is the cost of capital. If you want to be really liberal in terms of getting debt, that's what people look at. Okay, cost of capital, $2,400. Sometimes people will take depreciation off this too, by the way, but $2,400 versus I can profit $40,000. Let's go now a little more conservative is, okay, I got $12,000 per year in payments, and 96 of that's going to principal. 2400 is going to interest. But at the end of the day, I'm doing $12,000 in payments. But again, I can make $40,000 in profit. So if I take $40,000 minus 12, I still can do $28,000 in profit because I borrowed this money and that's on an annual basis. Then what you can do more conservatives. Okay, that $30,000 debt, maybe I amortrized over five years. So I'm going to use lose $6,000 in amortization or depreciation, I should say every single year. Then you could say, okay, well, I'm going to add. I know this is a little bit over your head, but listen to a few times if it is okay, because this is really important, then you really should be adding $6,000 per year in depreciation to those assets. And now this becomes 18, 18, and this becomes 22. Okay? So at the end of the day, you start asking yourself, okay, so am I willing to make $22,000 per year, have a $1,000 payment and, you know, pay this off of maybe three or four years? But again, you're not going to make $40,000 profit like you did in your crew number one. Because now you have this debt burden. Okay? So these are things to think about. I know. That was like a little bit deeper. Watch it a few times. It will make sen.
