May 2, 2018
Benchmarking your equipment
BY MARK BRADLEY
Recently, I attended a meeting with an objective to create financial benchmarks as guidelines for companies in our profession. A few issues ago, we covered overhead benchmarking, and then field labour benchmarking. In this issue, we’ll tackle equipment.
Our goal is not to define a company as wrong or right or good or bad by benchmarks. The intent of these benchmarks, and these articles, is to provide a general framework for success for owners and managers who lack experience or a strong financial background.
Step one: Establish a common standard for benchmarkingThe single most important step to benchmarking your data against industry standards, or even in discussions with your peers in the industry, is to standardize the numbers so we’re all speaking the same language. With so many contractors choosing to cost equipment as overhead, this is an easy trap to fall into when discussing equipment.
Briefly, here’s what we’re including as equipment costs:
- All vehicles and equipment (including trucks, trailers, skid steers, mowers, mini-excavators) assigned to crews. We are not including trucks and equipment assigned to the owner, office staff, or yard staff.
- Straight-line depreciation of all owned equipment. This means we treat equipment depreciation as if it was depreciated evenly each year. A truck that costs $50,000 used for 10 years and was worth $5,000 after 10 years would have an annual depreciation of $4,500 per year, even if you paid for it in cash in the first year.
- Any lease or financing costs, including monthly payments and interest.
- Fuel costs.
- All costs related to repairs and/or maintenance (parts, filters, tires, etc.).
- Insurance costs (related specifically to vehicle and equipment insurance).
The average landscape company spends between 12 and 18 per cent of its revenue on equipment costs.
Step two: Benchmark
Maintenance companies and landscape companies tend to spend about the same percentage of revenue on equipment costs. Install crews tend to run less equipment, but the equipment is typically bigger and more expensive. Maintenance crews tend to run more pieces of smaller, less expensive equipment and they typically burn more fuel per day than a landscape install crew.
Step three: Identify and explain exceptionsWhat if I’m spending less than 12 per cent of my sales on equipment costs? This could be a good thing. The less revenue you spend, the better your profits are likely to be. It could be the result of very productive crews, which means the equipment ratio is low because revenues are higher than industry averages. Other reasons could be:
- A consistent estimating method that always recovers equipment costs on the job.
- A small geographic work area, which keeps fuel costs and equipment depreciation to a minimum.
- Mostly new equipment with very low repair and maintenance costs.
- Most of your work is very hands-on (e.g. garden maintenance, install work on very small properties).
There’s nothing necessarily wrong with spending less than the industry average. In many cases, it could be a good thing. If your company is consistently profitable, this is likely the case. On the other hand, if your equipment ratio is low and your company is not consistently profitable, it could indicate a problem. If your company spends less than average on equipment, but more than the industry average on field labour and overhead and isn’t making good profit each year, there are reasons for concern.
It’s likely you don’t have enough equipment to do the work efficiently. You’re spending too much on labour and your overhead ratio is high because you aren’t completing enough jobs in the year (production is slow without the equipment to do the job efficiently). Companies that share a lot of equipment (in the hopes of cutting costs) often find themselves stuck in this trap. Equipment costs are low, but they are overspending everywhere else because crews are often working without the best equipment for the job, while they’re also spending far too many hours moving equipment to and from jobsites.
Finding and keeping good field staff is a significant challenge these days. If your equipment ratio is low, you could look to boost revenue by adding equipment instead of field staff to make the crews you have more productive and efficient. It’s far easier to better equip your crews than to hire more people.
What if I’m spending more than 18 per cent of my sales on equipment expenses?
When companies spend more than 18 per cent of their sales on equipment, they often struggle to be competitive on price or they struggle to make a consistent, fair net profit. However, it doesn’t necessarily mean there’s a problem. Run through this checklist to see if any of these conditions apply to your company:
- You might have the right equipment mix, but revenues remain low because your staff are less productive than the industry average.
- You have a lot of snow equipment that sits unused all summer.
- You have a lot of old equipment and your repair costs are high.
- Your company performs very equipment-heavy work including excavation, grading or large-lot snowplowing. As long as your field labour ratio is low, this scenario should not be a problem.
- You have a very large geographic work area, so you burn lots of fuel and put a lot of kilometers on vehicles each year.
To truly understand whether your equipment ratio is a strength or a problem, you really need to use it in combination with two other expenses: your field labour, and your overhead. If your equipment ratio is low, but so is your overhead and your field labour, congratulations, you’re likely running a profitable company. If your equipment ratio is high, but so too is your field labour and your overhead, chances are your company needs to improve its efficiency. A solution could be to invest in equipment to help generate more revenue per day or reduce your field labour spend.
Tune in next issue when we examine several key methods to improve your equipment ratio and your profitability.
Mark Bradley is the CEO of TBG Environmental and LMN, based in Ontario.
The objective of this article is give general guidance on common financial numbers specific to the landscape profession. It is not intended to provide or act as professional financial advice.
No LMN user data was analyzed or used to provide information for this article. Financial benchmarks contained in this article are gathered from industry surveys and one-on-one experiences with thousands of landscape contractors across North America.