WHY seasonal business is a DEATH SENTENCE (for most)

We have interest rates on mortgages going up, we have the Fed increasing interest rates. There's going to be a lot of rough waters ahead, in my opinion.

Hey everyone, my name is Mike Andes. I'm the founder of Augusta Lawn Care. We have over 90 locations around North America. And today I'm going to be talking about fixed versus variable expenses and why it's so important to turn your fixed expenses into variable expenses when you're heading into an economic contraction or, or recession. And so if you follow my channel, you know that in the next couple years I expect there is some pretty choppy waters when it comes to the economy. We have interest rates on mortgages going up, we have the Fed increasing interest rates, and there's going to be a lot of rough waters ahead, in my opinion. And when you're going into those times, you have to ask yourself, how do I take advantage of these lower prices when things do go down in value, when there is a better labor economy, when there is better real estate deals out there, when. Where can I deploy my capital for the best return during those recessionary times? And so the question is, how do I keep cash available in my business to take opportunity, actually grow and expand my business during those times instead of contract them? And one of the biggest things that prevents people from growing their business and taking advantage of a recession is the fact that they have too many fixed expenses instead of variable. I'm gonna go over this because at the end of this video I'm gonna throw a curve ball that's actually going to contradict everything I say in the first half of the video. And you'll wann because there's the nuances of finances. That is important. People will take one headline and they'll run with it, but you have to look at the nuances and where you're applying things. So when we look at fixed versus variable expenses, I'm just going to write out a couple. This could be a much longer list. You can go online and find, I'm sure, a more comprehensive list of these things. When we look at fixed versus variable expenses, fixed expenses are going to be things like a mortgage. So if you bought some land, there's going to be a mortgage. If you have any sort of debt that you have to pay, any sort of payments on. So like loan payments, when you go into a recessionary time when there's not much money and the bank wants you to pay the loan, guess what? They're not gonna be like, oh yeah, just skip it. No worries, you're not busy, no problem. At the end of the day, the easy way to determine between fixed and variable expenses is this. If you get more work doesn't mean that the cost goes up. If the answer to that question is yes, it's probably a variable expense. If you had absolutely no work or halved next month, would that expense stay the same? If the answer to that question is yes, it's probably a fixed expense, which means it doesn't change. Another fixed expense is probably going to be something like insurance. And you're not going to probably pause your vehicle payments or your insurance premium payments just because you had a slightly slower month. Or if sales go down by 25% in your home improvement business, you're not going to like stop paying insurance on your trucks. You're going to still have general liability insurance. Even if your business gets cut in half tomorrow, you're still going to have that fixed expense of general liability. Other fixed expenses is. This one here is important, in my opinion, when it comes to labor industries. And that is going to be salaries. Salaries are going to be for people that get paid a fixed amount per week or per month or whatever pay period you're on. And it's set, it's fixed, it doesn't change. And if you're going to keep them employed, you have to pay them a certain salary. And we'll get into that in just a second. The next thing is going to be things like utilities, alright, utilities and rent. And this is why for most small businesses and most home improvement businesses in their first three years of business shouldn't be going and buying a big piece of property and investing a whole bunch of money into a mortgage and getting a bunch of utilities and Internet and all the rest of it. You can literally spend your entire profits plus more just on a mortgage and utilities and rent. If you're just getting your business off the ground. Because the growth of the business is also needing that cash flow in order to fund the growth and hire more people and buy more trucks and get more equipment. So every single one of these could be scrutinized. I'm going to zero in on just one of these really quickly and say this is why in my opinion, salaries are a bad idea. Giving salaries to labor type positions, first of all, is in most states illegal unless they're a manager. But furthermore, I don't want fixed expenses. Most small businesses fail because they have too many fixed expenses, they have too much debt, they have salaries and utilities and rent, all these fixed expenses. And then as this is kind of how it looks like in my opinion, you have these fixed expenses here, and then as they have a seasonal business. And so during the winter months, this is kind of what it looks like. And then during this is where they make profit. All right. The problem is, if you have high fixed expenses, what you're doing is you're raising this bar right here and reducing the amount of time of the year where you're actually profitable and creating a higher and higher delta between the times when you're unprofitable. Now, obviously, the goal is to smooth out your cash flow, make it maybe something more like this that would be more ideal, so that way you can spend more time above the line in terms of profitability. But for most small businesses, we have some sort of seasonality where this down here is actually happening, and we're unprofitable. How do you reduce that? You cut out fixed expenses so that when the amount of work reduces during the winter, your expenses are mostly variable, and therefore your expenses go down. When we are thinking about recession and a time when potentially might be harder to find customers, people are not spending as much money. My goal is to move as many of these fixed expenses into the variable expenses. And one of the ones we're just going to zero on today, just right now, is the fact that I want to try to get my wages, that I'm paying my employees from a salary that's fixed over to the point where it's variable. And this is where this book comes into play, P for P, where you pay a percentage of the labor revenue to the employees. Now, it's better for the employees, yes, but it's also better for the business, because guess what? I'm not fixed on someone's salary. If there's not a ton of work coming in, there are going to be less wages going out. And therefore, I'm able to move wages over to the variable side. So over here, we could potentially say P for P, variable for wages. This is more ideal, in my opinion, to have your wages on this side of the equation. It makes it much more liquid when your business starts to have less customers coming in. Because if you have less work coming in, if it's a variable expense, you should be paying out less in wages. So I want to tie my wages to the amount of revenue, the amount of work coming in. So as it goes down, I'm not stuck with an unprofitable business. Now, when we talk about variable expenses, a couple other examples of this, just so that we're all on the same page, is gonna be things like fuel all right? Now if you get more work, you have more trucks, you're growing, you're probably gonna use more fuel. Cause your machines are operating all day long, you're driving around more. So fuel is a variable expense. There's a whole bunch of other variables in our business that we would use. Things like material cost. You can't just say, well, material cost is a percentage of my revenue. Not necessarily. Because if your business is growing and you're doing more services that require more products, this is going to be a variable expense. It's going to depend on how much projects you sell that require materials. And if you don't have any jobs tomorrow that require materials, guess what? You're not going to have this expense. Therefore, it is variable. So there's a whole bunch of other things that are variable. There's things like uniforms. If you get more employees because you have more work, things like uniforms are going to change the amount of food you purchase and other things that you have purchased for your team. That's all going to be variable expenses. As the business grows, as you get more work, you're going to buy more of it. So I would recommend what can you do to reduce your fixed expenses right now and put as much of them over into variable as possible. This is why so many people are trying to switch to P4P right now, is because it's a matter of, look, I cannot afford to pay these salaries during the winter months. You can during the summer. It's always a great deal during the summer and during the spring rush to pay people salaries. But moving that over into pay for performance where they get a percentage of the labor revenue and they're not paid an hourly wage is going to be more variable. And as your business slows down or increases in size and increases in amount of work, that will move with it. Now I'm going to discount now everything I just said by saying this and that is variable expenses do not create a moat or create a business that is impregnable. Listen to what I'm saying here because some people misunderstand me and they will make justifications as to why they should go buy a whole bunch of stuff in their business, get a whole bunch of debt and get a big shop, start paying people salaries and get a bunch of fixed expenses. Fixed expenses or capex, capital expenditures typically are actually the thing that create a moat around your business and make it where no one else can compete with you. So when you think about a company like Microsoft or Amazon, the reason Amazon has so little competition and it's so hard to compete with them is because they've sent billions and billions and billions and billions of dollars on doing what? Buying fixed expenses in the form of fulfillment centers and warehouses and planes, vans, trucks, massive amounts of logistics and software and equipment. That is all fixed expenses. If tomorrow no one bought anything on Amazon, there would be billions of dollars worth of cost in developing, maintaining and paying for those fixed expenses. But that fixed expense is what makes it so difficult to compete with Amazon. If they were renting everything, they were renting everything that they purchased, or they were using UPS and FedEx as the only way to mail out their packages, and they did not go invest in fixed expenses like planes and vans and trucks to deliver. If they just used variable, they'd actually be more profitable in the short term. But in the long run, they'd be depending on UPS, they'd be depending on FedEx, they'd be depending on the USPS. And so what they're doing is they're investing a ton of money into the fixed expenses, thereby creating a moat that no one else can compete with them. Or it's very difficult to compete profitably with Amazon because they've invested in the moat, the fixed expenses, the capex around their business. But the difference between Amazon and our small businesses is size and scale. We do not have billions of dollars, we do not serve millions and hundreds of millions of customers. And so what you have to realize is that for small businesses, your best moat is profitability. The best moat in your business that protects you, that makes you different than all your competitors and will allow you to take advantage of a recession, is the company that has the leanest model that is able to reduce their fixed expenses and bring them over into variable expenses to the point when things slow down, they still remain profitable, whether that is seasonality, like during the wintertime, when things might slow down, they can still remain profitable because a lot of variable expenses. Also when you go into into a more of a macroeconomic downtrend or recession, they're also remaining profitable. Whilst their competitors that have a whole bunch of fixed expenses, fancy trucks, equipment, debt, et cetera, they go out of business. And then guess who is able to suck up all of their competitors competition, all of their competition's customers during that time. It's the people that had the leanest model, the most profitable model with the most variable expense can compare to fixed expenses. So when we look at Amazon, we look at all these companies, their moat, their protection against what they deem as their unique selling proposition is the ability to have data centers and massive infrastructure and they invest billions of dollars for a small business. Your unique selling proposition the thing that's gonna make you different and better than your competition and allow you to pick up things for pennies on the dollar. Employees for much cheaper during a recessionary time is going to be your ability to make move the expenses from fixed over to variable, thereby creating a much more lean model. This might mean you become less profitable when it comes to the best time of the year when everything's going up and all the economy's booming and it's more expensive to rent things, it's more expensive to find employees that want to have P4P. When everything's booming, it's a little bit less profitable. Have this side of the business, but it's more stable. So when things go down, whether it be the wintertime seasonality or or recessionary times, this company will come out on top. Because as things slow down, their expenses go down and their expense is not so high that they lose money when things slow down even slightly. I'm Mike Andes. If you enjoyed that video, check this video out here where I talk about waste in your business and four different ways to make your business much, much more profitable due to the fact that waste is hiding in your business.