March 15, 2010
By Mark Bradley

Mark BradleyIn our previous article, Dan and Bill discussed Dan’s sales budget and his decision to cap Danscaping’s growth to focus on improving its profits, along with the value of setting up a pre-purchase plan to guarantee supply, and the importance of building expense budgets to help control and minimize costs and achieve his sales plan.  

In this month’s article, Dan and Bill discuss the next key component of his operating budget: the field labour budget.

Dan had been eagerly expecting Bill’s telephone call. He’d been wrestling with labour costs for a few years now. On one hand, Dan felt like his crew’s productivity was poor, and yet two of his best guys, one of them a foreman, recently left to work for other companies.  Dan wasn’t sure whether they left out of frustration, or for better pay, but he was pretty sure they jumped ship because they got better offers. If Danscaping’s cash flow was better, he might have fought harder to keep them around, but things were tight at the time and Dan couldn’t afford to budge.
This caught Dan a little off guard, as he felt that his guys were paid well, especially given their efforts of late. At the same time, he didn’t look forward to the prospect of trying to find replacements for all his foremen! He was anxious to hear what advice Bill would come back with.

To Dan’s relief, Bill’s phone call came that evening.

“Have you taken a second look at your sales budget?” asked Bill. “Are you still confident it’s realistic, and that it’s the right direction for you?”  

“I am,” answered Dan.

“Then your next task is to create a labour budget,” said Bill. “You need to plan a realistic amount for wage expenses that will enable you to achieve your sales targets, while keeping your business profitable. Once you’ve established your labour expense targets, you must monitor them closely to ensure your labour is producing enough revenue to justify the costs.”

“Well, I know last year we spent $720,000 in labour,” said Dan. “I can read that from our payroll expense records.”

“Yes,” paused Bill, “but not all those costs were associated with production. For instance, there are the salaries for you and your wife, your designer…”

Dan interjected to defend his calculations. “But I work on production, and so does my designer. We charge for our designs, so that means her time is production time, right?”

“You’re partially right,” said Bill. “Some of your time is production time, or billable time, and some isn’t. This also applies to your designer. You have an office administrator included in that payroll summary, as well. Note that none of her hours are billable. If you were to include these hours in your field labour budget, you’d never recover their costs, because they’re not included directly in your bids. For example, you’re never going to show a customer a line item on their contract called ‘administration work, $1000,’ or ‘sales time at $1,500.’ So any time spent on non-billable activities needs to be separated from your field labour budget and included in your overhead budget. By including these in your overhead budget, you ensure that your company recovers those costs across all your bids, using what we call an overhead recovery markup.”

Some of the terms Bill spoke about sounded vaguely familiar to Dan. “I did attend a seminar on that,” said Dan, “but it didn’t work for me.”

Who is paying costs?

“Dan, you’ve admitted that you’ve never followed a budget, so no wonder it didn’t work for you,” noted Bill. “You’re here, because your current system isn’t working. I bet that if you’d have followed the advice in that seminar, we wouldn’t be having this conversation right now. Tell me something Dan, if you’re not exactly sure that your customers are paying enough to cover your overhead expenses, who is paying those costs?”

Dan knew the answer. “If my customers aren’t paying my costs, then my company is…”

“You’re absolutely right. Your company is paying for it out of profit,” said Bill. “If your customers aren’t paying for something, then you are.  We’ll discuss this point further when we get to the overhead budget, Dan. For now I have a task for you. Take your payroll expenses and divide them up into two categories: field labour expenses and overhead expenses. For your time, your designer’s time, and anyone else’s time that gets split between both tasks, you need to include only the billable (field labour) costs in this budget. You need to write down each employee who gets split wages and record how you split their wages. Tell me Dan, how much of your time is spent in the field?”  

“I couldn’t even guess,” replied Dan.

“Of course you can, and you must! If a year is too difficult to calculate, think in terms of one week. What percentage of time do you spend working bids, and how many hours are you working that aren’t billed?”

Don’t give away service

In all these years, Dan never thought to consider the exact amount of time he put into his business on a weekly basis, let alone on an annual basis.

“I’m not exactly sure, but I think I need to be billing my contracts for more of my time,” said Dan. “I always underestimate how much time I actually spend managing a job. But right now I probably don’t bill more than 15 per cent of my time.”

“Okay Dan, then your first task is to ensure you begin properly billing your time to jobs. If you’re working on jobs without billing your time to your customer, you are giving away your services for free! Based on what I know about your business so far, I’m sure we can also implement some systems later on that will dramatically reduce the time you need to spend on jobs. Look at my situation for example, do you think I want to spend 40 hours a week micro-managing my company’s work? Not a chance. I built systems that do all that for me, but you need to take it one step at a time right now, Dan. Start by dividing your labour costs into your field labour and overhead categories. You also need to contact your accountant to find out your labour burden percentage. This is the percent of expenses that go to pay the taxes, insurance, and benefits on each and every wage.”

To be continued next issue.

Wish you knew a Bill to help steer your company in the right direction? Join LMN and Landscape Ontario for their Seize Control:  Your Operating Budget workshop series. Bring your company’s numbers, and leave with an operating budget and pricing system built specifically for your company. For more information go to, email, or call 1-888-347-9864.
Mark Bradley is the president of The Beach Gardener and the Landscape Management Network.