Why Contractors THINK They Are Profitable But Have NO MONEY!

Hey everyone, it's Mike Andes and today we're going to be going over something called overhead recovery. This is a very deep and complex topic that most people don't talk about. I'm going to bring up the subject today and I'm going to breach the fact that I don't believe this is something 99% of home service business owners should be spending their time thinking about. And I'm going to present a new form of multiple overhead recovery system, also known as mors, I think is a replacement. I'm going to share at the very end of the video. Now, these videos on YouTube and Facebook don't do well at all. They don't get a lot of views. But I'm going to share this video specifically. But I would usually share this on landscapebusinesscourse.com or MBA for entrepreneurs. This is the type of really in depth teaching that I do on the courses. So if you really enjoy this, that would be a good sign that you'd probably enjoy the courses because they don't get a lot of views and the media team doesn't like when this happens because this bombs the channel for the next couple of weeks. But I, I think this is important because I made a video recently breaking down the margins of another landscaper and he specifically uses number two, the third, the second out of the three different types of overhead recovery mechanisms that we're going to talk about today. So let's go ahead. I'm going to pull up the whiteboard, I. E. On my remarkable tablet right here, and we're going to go ahead and go through the three different types of overhead recovery. Now, before we jump into it, we really need to establish what exactly are we overhead is in the business. So let's go ahead, pull this up and I'm going to make it a little bit bigger so you all can see. But when we look at overhead, we're talking about everything from rent on your office, we're talking about office salaries, you know, wages. We're talking about some people would put fuel in overhead. Fuel is not considered overhead. It's considered direct cost. We'll talk about that later. But there's other things that go into overhead. We got insurance, we have your account. So you any sort of accountant costs, you're doing your taxes, any sort of payroll or a bookkeeper that you have, all of this stuff doesn't have direct costs. These are indirect costs and overhead. That's what OH stands for, overhead. Okay, let's go over the first mechanism for determining your overhead recovery. Because guess what? If we just charge for labor and the materials, these things down here, also known as cogs, cost of good sold goods sold. Cogs. That's what a cog is, is cost of goods sold. Oh, I forgot to share. There it is. Cogs right there. Cost of goods sold. That's your labor costs, your equipment costs, your material costs, and your subcontractors. That's what's considered your cost of goods sold. These are the things that we're going to be bringing to copilot CRM when we do job costing, because those are the job costs, the direct labor, the direct cost of the actual job, if you. Your labor, equipment, material, and your subcontractors. Now, let's go ahead and look at the number one, the first way to do overhead recovery, and that is called the single overhead recovery mechanism. What we're going to do is we're going to forecast the amount of overhead costs for like the whole year. For example, you could do it by month or quarterly, but typically people do this for the whole year. Then you divide that by the forecasted total amount of cost of goods sold. So what people will do is they'll simply look at last year and say, okay, what do we spend in rent? What do we spend in office wages? What do we spend in utilities? Utilities. What did we spend in, let's call it phones for the guys? What did we spend in all these other indirect costs? Our overhead? What was the total for last year? And then we divide that by the total amount of cost of goods sold for last year. So we'd go in and we say, okay, what was the labor for last year? What was the equipment cost for labor? Was the material cost for labor? What was the sub cost for last year? And that would give us our forecasted total cogs going forward. That would then give us our overhead material markup. Now, let's go ahead and assume that we're taking a business that's doing $540,000 in total forecasted overhead costs. All right, again, overhead right here at the top, all these other things that go into running a business that are extremely expensive and most people don't take into account. And you know, this could even be like your equipment costs, your loans, and all the other stuff, all this indirect cost. Okay, divided that by 900,000, which is our total cost of goods sold expected for the upcoming year. If we do that 540,000 divided by 900,000, we get 60%. That is going to be our overhead markup, the percentage that we are going to Mark up all of these cogs in order to be able to recoup the overhead, recoup all those extra costs of the rent and everything else that goes into running the office and the admin and all the rest of it. So then what we're going to do is we look at one specific job. And this specific job in COGS is $9000, 4000 in labor, 1000 in equipment, 2000 in material, and 2000 and sub cost. But what we're going to do is just make sure that we Times that by 1.6 so we have a 60% increase, a 60% markup due to overhead costs. That would mean that our total cost plus overhead, other words, our break even, that's what B stands for right there. Our break even is going to be 14,400. $400. Now this is not what you're going to charge on the estimate for the customer. This is simply your break even point. Your total cost, your cost of goods sold, plus your overhead recovery. So this is the first way to do it, your single overhead recovery. It's simply coming with the percentage based upon your overhead cost divided by your total cost of goods sold. Okay, so this is the equation you're thinking about when it comes to the force formula. Let's move on to number two, because this is the formula that Tigraine Gertz used and the video I made about him yesterday, we broke down one of his spreadsheets. This is the method he uses. First and foremost, you're going to forecast, just like we did before, your overhead costs. Again, usually you want to use historical data. And this is the tricky part, I feel is most people mess up on determining what is considered overhead. I see a lot of people not including fuel, not including other things that they're writing off as expenses for the business, but they don't ever account for them as overhead. And so they end up not charging enough on overhead recovery to actually make a profit. So let's go ahead and look at this though. Forecast your overhead overhead costs for the year. You can look at last year, for example, and use those numbers and you divide it by the forecasted number of field labor hours. Because remember, we are charging in the home service industry typically for the, the amount of labor that we impart, the labor that we give to the customer. And we need to make up for all of the costs associated with selling the job, advertising for the job, all the office and admin. All that stuff needs to be be accounted for in the labor hours in this case. So let's just say, for example, that we assume that our overhead cost for this fictitious business is $540,000 for the year. Okay, that's right here. And we're going to assume that we have 15,000 hours that are going to be out in the field for the crew that is working. That could be what, like seven, eight, nine employees potentially. So if you take the math, 540,000 divided by 15,000 hours in the year, using the year, you could do monthly, you could do quarterly, et cetera. And this is really where a lot of these, I feel overhead recovery mechanisms break apart is different types of services within the business, different timing of the year. All of these are going to have a massive impact on these percentages. And that's why I feel like you should probably take annual. And I honestly feel like you got to do this annually for each type of service because snow plowing versus pulling weeds is going to have a very different overhead structure, the amount of admin time that's required. So we're not going to get into that because I'm going to explain why at the end of this video, I'll explain why I don't think that most people should actually be looking at overhead recovery to this extent. Let me go ahead and explain. But for number two, fueled labor hours, we got $36 per hour as the amount of overhead recovery per hour out in the field that we need to charge the customer in order to be able to recoup our overhead. So now if we look at our cost of goods sold down here, this $9,000 job, again a fictitious job, same $9,000 of cost of goods sold, but now we're going to add $36 per hour. And in this case, we are assuming the labor hours right here, 100 labor hours on this job. So if you take 100 labor hours, multiply that by $36 per hour, we come up with an additional $3,600 of overhead recovery using the labor hours method. And now the total cost for this job, the break even, I should say, is the. Is $12,600. Again, this is not what you're going to charge the customer. This is simply the break even point, which is your total costs, direct costs, cost of goods sold, plus your overhead recovery. And that's going to give your actual break even. And what I see a lot of people doing is they're like, oh, well, I'm only my. My cogs are $9,000. I'm going to go ahead and charge $12,000. I made $3,000 in profit I made a 33, 33% profit. No, you didn't. You did not take into account the fact that you had $3,600 worth of overhead. That's why overhead recovery is important. And be able to make sure that you know the difference between gross profit and net profit. Because gross profit doesn't take into account your overhead. It's looking just at your cost of goods sold. And that's why someone potentially on this job would charge $12,000. They would have a cost of goods sold of 9,000 and they'd like, man, I was 25% profitable. I charged 12,000. I got $9,000 in cost. I profited 3,000. 25% profit, right? No, you're actually losing money. All right, so let's go ahead and move on to the third type of overhead recovery system, which is called mors, which is the multiple overhead recovery system. This is the most accurate. It's also the most complicated to calculate accurately. And I feel like most companies under a couple million dollars in revenue when they try to do this themselves without, you know, getting a consultant involved that really digs into all the numbers, usually messes this up. I'll just be perfectly honest. That's why I don't talk about this a lot. That's why you've never seen me make a video about this, is because the vast majority of smaller lawn care, landscaping and home service businesses mess this up massively when and they start trying to do this themselves. Let's go ahead and look at it, how it kind of works. What you're going to do is you're going to take every single one of your cost of goods sold, the four different buckets, labor, equipment, material and subs, and you're going to do a certain percentage markup for overhead recovery. Now I'm going to use 50% markup for labor, 25% markup for equipment, 10% for material, and 5% for your subs. Now, some people might be wondering, why do you have a 5% markup on subs and then you have 50% markup markup on labor? And it's pretty straightforward. Think about it. What, how much more overhead is it going to take you for sales and admin of doing the work yourself versus just subbing it out to a subcontractor and then taking over? So that's why the MORGE system is the most accurate, because not all revenue is created equal when it comes to overhead. If I'm buying a piece of equipment, my overhead on that piece of equipment is not as much Like I got to store it, yes, I have to warehouse it, do maintenance on it, fuel, et cetera. But there's way more overhead involved in the actual labor of the job. If I'm doing the work, my crew's out there, have project managers and I have a salesperson selling the job. And I've got to make sure everything is, the billing and the admin is all taken care of. Way more overhead. And so Moore's is the most accurate form of overhead recovery. It's also the most complicated because most people, these numbers are kind of like the standards for the industry that I gave you here, but they are accurate for everyone. And again, your labor costs, like the percentage of overhead on every single service might be different. For example, fertilization, weed control, might not take hardly any sort of overhead from the office because you just send them on a year long package you pre sell at the beginning of the year. You never have complaints. You don't have to manage anyone. You sit the person out There, they have 300 clients and they just go for it versus mowing where you got to start and stop at the beginning, end of the season you have to build them every single month. And you have more churn, more training, there's more complaints, more, more customers saying more things back like, so there's total differences. But let's just assume 50% markup on labor. I'm gonna make an in depth lecture on determining your labor cost on what you should do to markup when it comes to overhead on landscapebusinesscourse.com and mbaforantrepreneurs.com so again, more's most accurate, most complicated. So in using this method, if I take my labor costs, again, we're down here at our cogs. If we're taking that, we can do 4,000 in labor costs times 1.5 or 50% markup is going to be $6,000 I'm actually going to charge on this job. I'm going to bring these percentages down. Markup for every single one of my cogs. All right, so for equipment, for materials and for my subs. And when I do that, now I have my total costs plus my overhead recovery is now I'm gonna. My breakeven's $11,550. Okay, now I made up these numbers. It's not necessarily to stay. I did not try to make it where 1, 2 and 3. It got cheaper every single time I think I did that. But you can see there's substantial differences of cost based upon the methodology that you're doing overhead recovery, whether it be the single overhead recovery, just taking a set amount, and boom, we're going to do this certain 60% markup immediately to overhead to recover the cost of overhead. In our second one, we use the amount of labor hours to determine that there was $3,600 worth of overhead that we need to recover inside the cost. And then finally, when we use the multiple overhead recovery system here, you can see here that because of 30%, so you got late. Right here, the labor, we're doing 4,000, and then we have 2,000. A third of this job is being done by subs. So that was the massive drop in overhead recovery that I needed to sustain. Now, although Moore's is definitely the most accurate, I just see people consistently making mistakes and pulling these numbers up top here out of thin air. And really, the only way to accurately get those numbers is to really have a consultant go through your numbers and really dig deep on every service and every single aspect of the business. That's why you don't hear me talk about it. Now, this is the new Morse. Now, I don't call it Morse, Right. Is actually gonna call Mads. Mads M A D S. All right, we got Mads. It's mics, admin, Delivery and sales. And technically it should be backwards, but MSDA doesn't really sound that very good. So I call it Mads. It's mics, admin, Delivery and sales. Because in every single transaction, every single business, you have three different departments. In general, you have the selling of the job, you have the delivery or the actual fulfillment of the job. Call it delivery, fulfillment, whatever. And then admin, the back end required. The office side of things is required in every single job. This is what I like to look at, Mads. And these are all part of Mads. Okay, I'm going to go through some real quick KPIs that I believe is much more important than overhead recovery. Because I believe that if you're doing under $2 million in annual revenue, you would be much better off spending your time figuring out these numbers than trying to figure out percentages on each service and what markup you should have on materials and your equipment versus your labor versus your subs. I just don't. I don't see the return on that investment in time, money, energy, or hiring a consultant to actually get more information. So this is my recommendation. Although I'm going to do a whole lecture on this inside of MBA for Entrepreneurs and Landscape Business course, I still don't believe that the Vast majority of people should spend their time focusing on overhead recovery. These numbers here, if you've knocked all these out of the park and these come like you can wake up at two in the morning and know these like the back of your hand, I would then give you permission to go figure out mores. I'd then go give you permission to figure out your recovery, your overhead recovery on all of your cogs, labor, equipment, material, subs, dig really deep into it. But the vast majority of people should be focusing on these things. I would venture that 99% of my audience listening to this video right now should be focused on these metrics. And this is again why you have never heard me talk about overhead recovery in depth and go really deep. Because I truly believe that 99% of you should focus on this. Close ratio. What percentage of your estimates are getting closed being accepted? Your labor rate, like what are you charging per hour? It boggles my brain that still to this day I go to conferences and ask people what do you charge per hour? And the vast majority of people don't know what they're actually charging per hour. Attrition. What percentage of your customers, your recurring customers are leaving every single month? Every single year. That's a number you should know. The profit percentage after the owner salary. So after the salary of the owner has been paid, what is the profit percentage of the business? Again, blows my mind. That people don't know that. They don't know what they're getting paid on their salary and they don't know what the profit percentages of the business after their salary blows my mind. Fixed expenses every single month. What are the fixed expenses? How much do you need to make in revenue just to be able to cover the fixed expenses? Fixed expenses are things like debt and your rent and, and your insurance. Those things don't change. They're fixed. They're not variable costs. They go up and down based upon the time of the year, seasonality. They are fixed costs. Very important to know this number because when you go below that number of revenue, you are burning money. And that is why a lot of businesses in the home service industries go go bankrupt is because they go through winter, they go through seasons when it's slow and they don't know what their breakeven is and they lose a bunch of money. Labor efficiency Budgeted hours versus actual. How efficient and accurate are you against budget hours? Project completion percentage. If you're doing a massive project, 2, 3, 400 budget hours, a thousand budgeted hours, you should be knowing throughout the entire Project what? Where are you at? Are you 40% done? Are you 30% done? Are you 80% done? Are you 120% done? I. E. Over budget? This is something you should be tracking throughout the entire time. We do that on p4psoftware.com it's extremely important. Growth rate verse profit percentage. Very important. How fast are you growing? And then versus what is your profitability rate? Again, back up to this one up here. The profit after owner salary. What is that number against your growth rate? Because I guarantee you, if you're growing fast, your profit percentage will be lower. But you want to know that when your growth rate slows down, that your profit percentage goes up. And when you have this kind of data, it's very encouraging. So if you are growing, you understand that you're not probably going to be as profitable, and that when you start, when you slow down growth, you typically become more profitable. Last one, recurring versus project revenue. Okay, so these are all part of the Mads Mike's admin delivery and sales. This is the mechanism that I think 99% of people should use. And they should leave overhead recovery to the people that like to make things really complicated. Because even some. What I see all the time is people doing 3, 4, $500,000 in annual revenue, spending hours, working days, weeks on trying to figure out mores and trying to figure out all their markup and all the rest of it. And I'm like, if you just spent that time training your team, developing your marketing and your sales ability, taking a course on Facebook ads, you would dramatically change your business to a much higher level than knowing, hey, I love knowing numbers. This is like my. My oxygen, right? I probably made some mistakes, but, like, I breathe this stuff and I don't have any notes. I'm literally looking at myself right here. This is what I do. However, I still believe that most people should not focus on that. They should focus on these numbers. These are the numbers I need you to know at least. At the very least, what you can do is just track how much overhead you have every single month. That is part of the MADs. And that is what are your fixed expenses? Right here? Fixed expenses per month. You want that number as low as possible. And that's part. Most fixed expenses are going to be overhead. Okay, so that's just my two cents. Maybe it makes you mad, maybe it makes you glad. Maybe you now don't have to have fear of missing out. Because, like, oh, man, I know this overhead recovery thing. If you're like a $200,000 business per year. Trust me, know these numbers. Don't worry about overhead recovery. So there. There you have it. Check this video out here for four secrets that I wish I knew when I started my lawn care landscape in business that might be just as revealing as overhead recovery. Check them out right here.