Stan: In one hour, I'm going to hopefully teach you something that will change your life forever. I'm going to show you three simple rules that will potentially double your profits from this year forward for the rest of your life. It’s the three percent rule, the five percent rule and the 10 percent rule. Now at the end of this video some of you are going to say the ten percent rule is not achievable and for you it isn't, so congratulations you're right. You see for me I don't live by the 10 percent rule, I've upped that ante a decade ago. I've made the 10 percent rule be my 40 percent rule, to be my 50 percent rule, to be my 60 percent rule. If I can do it, then I know you guys can do it. One of the things I want you to focus on in this next hour, is to understand the effect of scarcity. At the end of this video, I'm going to give you some actual examples of how very common businesses can have very scarce services. So make sure you stay tuned all the way to the end.
Good morning, okay, the very first thing I want to say right out of the gate is this is for you, so ask questions, there's an ability chat bar on the side, a question bar on the side, use it if at any time we lose you. This is your chance to catch up; this is the most comprehensive bidding and estimating workshop that has ever been produced.
Stan: So now we've got a nine part series, can you walk us through where we're going to be going with this series today, Phil?
Phil: Yeah you know we get a mountain of questions that are related to bidding and estimating and we could take our time each week and go through question by question on the particulars of each job, and the nuances that they have and how to bid and price them. But really I figured it's best to go back to the route, the fundamentals. If we can teach you how to accurately understand all of your numbers and all of the pricing components, we can really teach you how to bid and estimate any job and that's really our goal, is to give you all of this information. So you can go from the ground up, learning step by step what it takes. Regardless of what project you're facing, you're going to understand your numbers and how to price it accordingly and profitably.
Stan: Okay so you're not going to give these guys a fish, you're going to teach them how to fish.
Phil: That's right.
Stan: That's the point, because every job is absolutely positively unique. No two jobs are similar. But with that being said you have some similarities, enough similarities that you can start to, I call it boiler plating. Okay, so this is a house demo. This is a retaining wall bid, this is a grading job, this is a side bid, this is a drainage bid, this is etc. That's how I break them down. So you know, I look for the common thread between projects and then because I'm not creating a new proposal every time, I mean I literally will remove one name and put somebody else's name in. I will add just a few lines into a contract or proposal to make it unique to that site and to let the customer know that this is tailored to their job, even though 99% of it was tailored to the job before that. How do you do something similar to that?
Phil: You know if you understand how to build a retaining wall, let's say it's a retaining wall proposal. You write it all out in detail and it sounds beautiful. And like you said, you cut and paste that into each proposal then you add in the elements that are unique for that job. Because every job will have some site access issues. There might be some additional backfill or some additional excavations that you're doing, but you can add those in at the end. You're right, create those boilerplate templates and then every proposal from there on out goes lightning-fast. You know, we look at a lot of big jobs and I don't have time to spend an hour on each proposal. A lot of these are done in 15 minutes, maybe sometimes even less. For items that have eight different project types of items, I could have plant material, drainage, pavers and I'm telling you 15 minutes is max.
A lot of times I'll leave the customer’s house, I will go down the street to a McDonald's parking lot, park my truck and in minutes I can just fire off these proposals. I connect to my mobile hotspot say, log into QuickBooks, write it up and boom it's done. And people will tell me, they're like, oh my gosh you just left my house 15 minutes ago and I have a proposal. And I said, well that's why you're going to hire us because you can expect that we're setting the standard for how our work gets done and how fast it gets done. In reality I'm doing it, because I'm not going to have time that night. I'm going to get home, I'm going to have three kids coming after me I'm going to have good intentions, but I will not have time later to write your proposal. Because the next day I'm going to turn around and I'm going to meet with two or three more people. I'm going to have issues on jobs that I have to address. The best time to write a proposal is the second you leave. If you can get in, if you can get a system down where you can do this in minutes, you're going to love it. Because the real reason is, we think it's this big burden. Like, think about it, I've got it write all this up and put all that down; it can go very, very fast for you.
Stan: You put certain safety components into a proposal. You said something Phil, that just makes me laugh inside. Because you said 15 minutes. That was the exact conversation I had with my general manager yesterday. He was dwelling over the over retaining wall bid that we've got going on out in Minneapolis, and he just kept calling me. I'm like dude, stop it. If you ever put more than 15 minutes into a bid, you're wasting your time. Quit overthinking it, it's as simple as that.
Phil: Yeah you're exactly right, there's a lot of software and advice out there that will want you to dive deep. Now, I will say this, what we're going to teach you is going to allow you to do this stuff in 10 to 15 minutes. The reason we're doing it so fast is because I have an intimate relationship with my numbers. I know them inside out, upside down, backwards. I know and understand these numbers and I know what can get me in trouble. We're going to talk about things like the variables on the job. You know, there are certain things that you can't. People might want you to give them a lump sum for this job, but you have to put in some, the unique elements to a job are things like variables. Sinkholes are a great variable. You’ve got to have a rock clause, a soil clause, little bits of language that allow you to be flexible in the items that you might not be able to accurately predict on the front end, but everything else really honestly most of it is predictable. And if you know these numbers like we're going to show you, will be able to fire off these proposals very quickly and extremely professionally, far better than your competition will.
Stan: Yes that's when I said there's certain safety protocols that are automatically put into my proposals. Absolutely hands-down, I don't worry about these proposals. I can put out a $100,000 proposal and not blink an eye, and I do not think twice about the project because even if I win, I have safety protocols in built into these contracts that if anything changes, I win again. Yes I win even more; it's as simple as that. So this is what we've got here, this is the nine parts. This is what we're going to be covering as part of this series.
Phil: That's right, you know I couldn't think of a better way to walk you through. And the first three parts are going to go really hard-core into your business and into your numbers, and then I will talk about specific jobs. You know my goal is to leave you, and you see we've got sod, pavers, drainage, retaining wall I mean certainly that doesn't cover every single thing, but it covers really the biggest items and the most commonly requested items that we talk about. Once you understand how to do this, you can apply it to every other area and there's going to be you know, 15 other areas potentially that you know as far as lighting jobs and artificial turf. But it really won't matter, once I teach you how to do this, you're going to get it for everything; the fundamentals will always apply.
Stan: Perfect so where are we off to next Phil?
Phil: We're going to start with understanding the pricing components. I would like to start with, in part two is understanding your overhead. But I started thinking about this and realize that before I talk about overhead, I've got to talk about all the components to a price. So here we are at part one. We're going to break it down between your four main pricing components.
We've got revenue. Which is the total amount of money that you're earning or taking in.Earning isn't the correct word; taking in. It's just sales and that number, a lot of people tend to focus on when they get into groups with other people or when they do comparisons of their company, a lot of people will talk in terms of how big their company is. I'm 200,000 and 500,000. I'm eight hundred. It really doesn't matter, that number, in fact it matters so little; that is the last one that you're that you're really concerned with; it is all going to be about your net margin. I wish everybody could speak in the language of how big is your company net margin, how much margin are you making.
We're going to talk about COGS, which is Cost Of Goods Sold. This is a very common term in our industry. It's basically your direct cost related to the job. Overhead, which is the huge number. That’s the one we're really going to dive into. It’s the most least understood number out of all of them. It's probably the one number where if you're getting to the end of the year and saying I have no money, I have a lot of money moving through my account but I have no money. Personally, it's overhead. This is where a lot of people are pricing the jobs incorrectly. Then ultimately, profit, which is the number that we all live on, depend on, and needs for our families and for our lives. You have the lifestyle that we want. So we're going to break all of this down and again if you have questions regarding any of these please let us know.
Stan: Profit is the only number that you need to worry about when the day is done. Your gross. That’s your gross. I call it gross, or you call it revenue. I mean it's the same term; that's what confuses and traps a lot of people. It gets them stuck in the mire. I'm a $500,000 company, I'm a $1,000,000 company; that's just an ego. That is an ego number. That really is the worst thing that you can base what your company does and it means absolutely nothing, because if you have a 1 million dollar company and $900,000 of it’s gone at the end of the year, you've got a hundred thousand dollar company. You may have ten guys working to do that and each guy then is bringing in ten thousand dollars over the course of the year. Which is a lot of work on your part to make such a little amount of profit on a per man basis, and so we're going to be talking about all of these numbers. But the one thing that when it boils right down to it, I think that we all need to focus most on, is that last number, profit,. The other three lead up to that one, so when we get under control, when we wrap them up tight and we can manipulate those numbers, the other three: revenue, COGS, and overhead, then we can also eventually just through the sheer process of manipulation, we can manipulate profit. Which is what we want.
Phil: That's right. You know a lot of times when people are setting goals for themselves for the year or if they're re-evaluating what they’re doing, a lot of people will set goals in terms of their gross revenue, their total revenue. I want to double my sales, I want to expand. I'm going to show you today in this webinar that as owners, you know if you imagine yourself flying an airplane and you have all these different levers available to you to pull to make a change, you can adjust your wing, you can adjust your speed, and you can adjust your direction, your pitch, your roll things like that. A lot of times as owners, we have one mechanism that we think of when we're trying to grow, and that's sales. That tends to be the only lever we ever push. When in doubt, sell more, sell more, sell more. I'm going to show you today that without selling anything else, without adding another person, without buying another piece of equipment, how you can put more cash, not just a little bit more, a ton of cash back into your pocket. The sales lever is really like your third or fourth thing that you should be focusing on, sales growing by adding people, adding equipment. This, these numbers, you should be diving into your income statements and looking at your expenses, and I'm going to show you how that will make just tiny micro-changes, not big, giant in life earth-shattering events. Just tiny small changes can transform your business from the inside out, so it's not real functional sales.
Stan: I'll absolutely love it, Phil. When we manipulate sales, when we try to increase sales, all we're doing is increasing our own headaches. That’s really what you and I are talking about doing, is decreasing our headaches and increasing our profits at the same time. Take where you're already working, functioning, don't try to top that out. Try to refine what you're doing. Yes, I absolutely love it. All right, so why are numbers important Phil? Let’s talk about that.
Phil: Well we know that the IRS is going to ask you for some numbers. So first and foremost, the last headache that you probably want is an IRS headache. So if for no other reason, get your numbers in order, get your books in order so you have something to give to the IRS when they ask questions about your business every year at tax time. And if they ask questions about your business at any other point throughout the year, it's just good practice if you intend to grow, to just have even if you don't intend to grow. Even if you can tend to stay small. Have all your numbers in order. Do in that piggybacks on to the next thing your accountant says you need. So without good numbers, your accountant will be happy to accept a shoebox from you. They're going to charge you a lot more to sort through that shoebox, so it's going to cost you a lot less if you're the one who goes through it and categorizes it, because they will send you a bill to do that. It's not efficient and then you're only getting whatever you happen to have in the shoebox. There are so many deductions available to you as a business owner, and I'm not an accountant but I will tell you that there are things for your expenses for your home office, there are expenses for medical expenses. I'm going to show you something today with health insurance expenses; how you deduct them in the impact of things, like even Obama care. Not that I'm going to get political, but how your health expenses can lower reduce your tax liability. So these are all things to take into consideration. Your accountant is going to take whatever you give them. If all you give them is a shoebox, you are not maximizing your deductions, you are just paying money through the nose to the IRS that could easily go back into your pocket. The other reason numbers are important, these percentages I'm going to talk very key about percentages. Numbers are used to make a decision, they're not there to look pretty. They're not there to keep your accountant happy, although they do that, but they're there to make decisions. Numbers are information, and if you collect that information, look at it on a regular basis, you have to make choices based on that information. If you break things down into percent it's going to give you accurate information to make decisions from, and I'm going to show you how to do that today.
Stan: That was a mouthful. The one thing that I want to talk briefly on, is we're not here to give legal advice, we're not here to give accounting advice, but I will just mention things that you said I'm going to build off from it a little bit. …. That green shirt you’re wearing today. It's tax deductible; you're wearing it to work Phil. Yes this is what Phil's talking about. If you just bring in a shoebox and you drop it off for the things that you think are tax related items, you're missing out on a whole world. That coffee mug Phil's drinking from when he first bought that, that's a coffee pot that goes out to his job sites. Yes, deductible, am I right?
Phil: You’re absolutely right.
Stan: Definitely that is the beauty of being a business owner and look if you're going to hold back here's one thing that I want to caution. A lot of guys go, oh you know I don't feel comfortable taking that tax deduction. Well don't worry, because if you don't take that tax deduction, the IRS is going to come in and go, yeah you're right, you couldn't take it. But if you do take it, the IRS worst case scenario may come and go, well you know you're only using that coffee mug 50% of the time so you can only deduct five dollars instead of $10 for that coffee mug. You still won by five dollars. Guys, I mean is, what it boils down to is, these are the micro things, and that's just an example. Maybe not the best example, but when it boils down to it, a lot of the everyday items that you use, if you can apply it to work it becomes tax deductible. Phil have you ever taken a trip, a tax-deductible trip?
Phil: Yes absolutely. Okay right. Or yes, we talk business - my wife is on the board and we have a board meeting and we talk business.
Stan: My favorite thing is to fly across country. I'll go out a country and I'll stop and at implement dealers. I'll stop at a construction site. Why? Because I love construction equipment. I love it. I look at the different kinds of equipment; I debate whether I should open up a shop in a different territory. I look at it, but it's all business related and that gives me the ability to also then make it a verifiable business expense. Now again, we're not giving legal advice, we're not giving accounting advice. I want to caution the guys listening right now, but I want the only advice for you is think outside the box when it comes to understanding where your numbers are coming from, because it's those little things that you're doing that have a big impact, all right? So where are we off to next.
Phil: So let's start at the beginning with revenue and we are going to walk you through a sample company, Dirt Monkey landscaping, this is not a real company this is a fictional company. Within this company is just under two hundred thousand dollars in revenue. So the first thing I want to point out is that we're tracking our sales by category. This has always been an important thing for me, because it helps me understand the breakdown of my business. Where a lot of the demand for our services are, and it also helps me look at it because I can evaluate which one of these categories is seeing really the most profit and where I can change and grow certain categories. So you want it so that helps you and we're going to talk about tracking the percentages here in in just a moment.
Stan: Okay so one of the things that I want to talk to these guys about right now even though this is a fictional company and you don't have to do this for your year-end tax planning and all. You could literally lump sum all of this into one category. You're not doing it for your own tax planning, you're doing it to understand where the most profitable portions of your business lies. If you go through your year, and at the end of the year you start to work on it, everything's going to get jumbled together. You're not going to remember one project from another, but when you have it broken down like this, you could say a big portion of my business comes from hardscapes. A big portion of my business from softscapes, and then you can go in and analyze. Well is that a good portion or a bad portion? You just know it's a large sized portion but that doesn't automatically mean that it's the most profitable portion, so then you can start to break that down. Hardscapes, you may have more COGS (cost of goods sold), you may have more retaining wall blocks, pavers etc, and so the percentage of hardscapes may be a lower percentage. You know your profit, versus a softscape. Well softscape may have a lot of plant material.
Phil: No it's a good point, and you know the point is, just get in the habit of tracking where your sales are going. It's going to help you understand your business even better. So if we go to the next slide, I'll talk to you about the percentages and why that's important and valuable information. All right, so if you want to grow your company, tracking the percentages is where the value of these numbers comes. Because numbers are just numbers, percentages give them a little bit of meaning. So here's what I do, I look at these categories and I try to set a goal of growing the categories that I want to grow by say 10%, and when you make that decision to say like okay, we did 73,000 dollars last year in hardscapes. How could I add ten percent, seventy three hundred dollars to that number? And if you start thinking of it in terms like that, it becomes a very realistic goal. It trains your mind so the next time you're on a project, you are thinking of suggestions for the homeowner to upsell that project and to start adding more value. How can you, look is it possible to create 10 percent more value? Absolutely when you're consciously thinking of it. If you go out there, just to sell this out, what do you want? And you're placing orders, you're a landscaping waiter. If you go out there to serve and like, I am here to add value, then you’re now you're a consultant. Now you're the professional that they want you to be and you can earn more money that way.
Stan: Okay, landscaping waiter. I love that term because it is so true. But one of the most important things you've said on the sidelines over here, Phil, is tracking percentages is key to growth. Okay yes, set a goal by increasing each category by 10%. And the caveat is whether you watch and those are important. The third one, this is exactly where we need to go. Increases come from more sales, but they also come from raising prices. That's the key. That is the key. A lot of times these guys get on these job sites and because they're already there and they feel like, you know they get uncomfortable with this face-to-face interaction. That there's always going to be a change in the job site. Yeah they'll give a major discount or a minor discount on that change. You never give a discount on the change; at least I don't. Phil, do you give discounts on those changes?
Phil: All right, so we might spin it as if they feel like they might be getting more. Value discount isn't the best word to use and I try to stay away from that word, we're going to discount this because we're already out here. Now I will use the phrase,” We're already out here so we can do this, it's easier because we already have our equipment there”, but I haven't said it's discounted. I've been in there and I'm nodding, which is training them to notice again. It's a lot easier since we're already out here and you will notice that when you nod, you can get other people to nod. When you shake your head, you can get them - I wouldn't do this over here - you'll see them going, you know it's an amazing body language side of sales.
Phil: This segment to increase your revenue goal, this is the key. As Stan was saying, and as it's written here, you don't have to just sell 10% more, you can raise your prices 5% and sell 5% more. I'm raising your prices. I will say across the board in 90 plus percentage of the cases, that is a problem with most companies. They're not charging enough money. And this goes back to the understanding of this price structure in the overhead. But I will say right out of the gate, chances are, most companies can increase their prices by at least 10 percent. The customers will never notice, and their pocketbook will be the first place that you notice all of this, so raising prices is a key to this growth process.
Stan: Now I want to give an actual hard example of what I was talking about by not giving a discount. When I put together a retaining wall proposal or a grading proposal, any kind of a proposal, I break those numbers down into a unit price. Okay, so for let's say a retaining wall, it's going to have a price per square foot, Phil, and if the customer comes out and says, can you add 10 more square feet on? I'm not going to discount that price per square foot, it's already agreed upon before we started the job. That’s where I'm going to hold firm with my numbers. Now I don't have to mobilize the skid-steer out there, I don't have to get the guys allocated out to the job site because they're already working. Now I'm saving money by doing the addition on to it because the whole mobilization factor was already taken into account when I first started the project. So I absolutely love those change orders, but I'm not going to discount that change order. I'm going to hold firm with the original price set in the scope of work this is a critical element, so guys understand that I never got my customers. Because if you leave a bad taste in their mouth, that taste will never go away. But I also just go by the numbers that they sign on the dotted line before we start. It's as simple as that.
Phil: Yeah, you know that brings up a good point. Change orders must be in your business. I mean, that is part of your business, you know. So this is interesting, if you look here we have eight and a half percent of this business is change orders. That is good, like you want, and so for example if I change order for a patio or for a retaining wall, I don't put that into my hardscape category. It is a hardscape job, but I track change orders completely separately from everything else, because it's a whole other business within a business. It's not a shady thing, it's not it is a value-added category. In fact of all the categories there, that is probably the most value added category, is selling additional work. It’s showing that people love it when you're on the job. You know a lot of times people sign up for a job because they've got to get to know you, they start seeing your work and now it's like they believe in you and if they were skeptical before about spending more money, they want to hold on to you, you're on their site. They're like okay, we get it, you're good. Let's go ahead and do these elective items; but now because we've seen you, we know you. We see your work, now we're all in and change orders are a good thing for your business. So I would target that category for massive amounts of growth.
Stan: Change orders are absolutely critical, Phil, I want to build off from that, when you say it's a business in and of itself. I consider every job an opportunity whether it's a $200 job or a $2,000 job. Now I know I won't cross the street for a $2000 job, but you know when I’m training my guys to think like this; it's your toe in the door, okay? If you go out and you do a $2,000 job it's still a toe in the door, meaning:
Here's an actual real-world example. We went out to demo a swimming pool, something we do boilerplate. It was a five thousand dollar project. We went out, we demoed the swimming pool and when we were done demoing the swimming pool, we had 75,000 dollars in change orders. Yes, the patio. We soil-corrected their back yard, we jacked up their entire house, tore out one corner of their foundation which had sunk, because we had to soil-correct their whole backyard put that back in place, set the house back down then built retaining wall seat walls, etc etc, their total bill was over $80,000. The swimming pool at five thousand dollars was the toe in the door and it was the test. The customers were testing us, they had the money, they needed the right person, they didn't know they weren't going to sign on the dotted line for eighty thousand dollars and then get stuck, right? They were looking for the person they could believe in, so don't hesitate, embrace those smaller jobs but put a lot of profit into those smaller jobs to make it worth your while just in case you don't get the change orders. Just in case the smaller job stays a smaller job, you've got to have enough money to allocate it into that project to cover your mobilization.
Don't downplay mobilization, hitting a skid loader, getting guys allocated, getting trucks set up and getting them sent out to a site that's a couple hours there and a couple hours back. On an average basis by the time you add everybody's time and standing around with their hands in their pockets, they're kicking their toe in the dirt a little bit and then they're trying (this is the part I hate for worse) Phil, we're trying to wrap their head around what has to be done on the job, right? I mean you got to give it to them because they've got to do it, but they come out you know what has to be done that you come out. You can just see the wheels spinning and you're like, God I wish they spun faster. You know they're trying to figure out exactly what has to be done, one order and wrap their head around it, but that all takes time and time is money. Time is a critical factor.
Phil: Yeah there's not much that we do that would be considered less than one day. I don't care if we're planning to spend three hours on a project, I'm going to do it as if it's a day. Because you know the rest of that day, you're not getting back. I mean unless it is clearly, you know, half a day at this neighbor and half a day, which almost never happens. If you have a three or four-hour job, you’re going to have an hour and a half in the morning, you're going to have an hour and a half at the end of the day. It's a one-day job and just budget the price it as if it's a day. If you gain a couple extra hours at the end of the day, that goes in your pocket. But you got to remember this; your competition is not just staying steady. He said I'm not going to go across the street for a two thousand dollar job. Look when you get to a certain size, you just can’t afford to, because now we're paying really skilled labor or labor’s pretty skilled. So they make a lot more money per hour, so I have to put them on jobs where their talents are maximized. I can't put them on a job where someone wants to replace a few plants and prune a few bushes. They're too expensive of guys to do that. But for every company like that, that leaves the door wide open. There's a whole market of jobs that are twenty five hundred to three thousand dollars or less, that companies like ours cannot do and will not do and companies that are real small, don't have the skill, the capability, the equipment, the people to do so. If you're at this $200,000 level or if you're an owner operator and you've got help, and you've got skill and talent, there is this group of jobs under 3000 that are insanely profitable. If you price them that way, because these people are at home robo-dialing companies that won’t call them back, won't come out, won't look at them because we can we have fifteen thousand dollar jobs or ten thousand dollar jobs or twenty thousand dollar jobs that we're focused on. So you go in and swoop up all these jobs and make a killing. I've often said that if every employee of mine left, if I lost every piece of equipment, I would restart a business doing nothing but three thousand dollar jobs and under, because these people can't get people to even come out or qualify people to come out and look at it. Sorry for the rant.
Stan: Exactly. No, you're a hundred percent right. One of the things that I want to address, is you have to match your talent and your equipment to the projects that you're willing to take, Phil. So this is a conversation I had yesterday with one of my managers. We talked about demoing swimming pools, digging basements and laying sod. He's like; well I didn't think there was a lot of money in laying sod. I said there's a ton of money in laying sod, but there is no money in laying sod when you've got an excavator, bulldozer a payload or three dump trucks, four packers, 2 TLBs, four skid loaders, that need to be moving massive quantities of dirt. There's no money and throwing tootsie rolls then. But if you don't have all of that massive amount of equipment and you bid a side job the right way, there's a ton of money that can be made in laying sod.
So it's a critical element that you look at what you currently have, not what you want to have, but what you currently have. Because you're going to get to where you have the things you want, eventually right? There's hard work, perseverance bidding the jobs the right way, we'll get you the funds backed up so that you can purchase that skid loader or whatever you're looking at expanding into. But once you get that skid loader, you've got to understand that all of a sudden sometimes getting more equipment shuts the door on certain jobs. Now you have an excavator or a skid loader, now you got to put that thing to work. Now you better go out and find basements to dig your grading jobs, or anything that has to keep that thing working and when you're keeping that work and you can no longer do the other jobs. So just be careful when you expand what you're eliminating during that expansion process.
Phil: Absolutely. Well good, so here's cost of goods sold. Here's some of the sample categories that you can see the breakdown of it. There are multiple ways to slice and dice these numbers; I would only cut them up into the chunks that you're going to use to make decisions. I could track everything under the sun, which is great if you're going to use and analyze that information I don't want you to over complicate this at the beginning. Even if you go back to your sales and you say, I have three categories: hardscapes, softscapes and great, maybe those are in drainage. Maybe you have four categories. If you're going to look at all of them individually, do that but don't overdo it either. So here are some pretty good examples of your cost of goods. So these are direct costs related to the job. These are costs that you would never ever incur if you did not have that project. So that's why you see something like credit card processing fees on here; if I didn't have that job, I would pay a processing fee so that it’s not overhead. It's a cost of goods sold; so here's a breakdown of it: you know we've got your day laborer and your field laborer, you'll see in parentheses it says that it includes labor burden. We're going to get into labor burden a little bit in overhead, but basically it's the taxes that you pay, if you pay any vacation time or any paid type of paid time off, if there's uniforms built into it these are all going to fall into your labor burden. So $15 an hour guy doesn't really cost you $15. It really cost you maybe 19 or $20 an hour, but once you factor this in subs, you want to track your subcontractor separately. You won't find owner’s payroll in here. Owner’s payroll, your pay, is an overhead cost. So you'll see that's the difference in a direct cost, versus an indirect cost which we'll talk about next.
Stan: So one of the things that I want to point out is equipment repairs and maintenance is in the cost of goods sold, because if you weren't running that equipment, you probably would have a lot less. You still have a little bit of maintenance, but you'd have a lot less maintenance. No it's really that is something that you could allocate I mean if you really were picky, if you're that picky, you’re at the wrong place, okay, but if you're really picky you can allocate a portion of that towards the overhead. But in this case we're putting it into the cost of goods sold and just directly eliminating it out of there, because if like I said if you run in a skid loader and you know it's on that job and it blows a tire, well there you go, there's your repair. There's your maintenance, you wouldn't have the problem if it wasn't running.
Phil: That's right, the other thing is look at the percentages. The percentages give me a very quick snapshot into what's going on with my company because there are going to be some numbers that you're going to become very familiar with and you're going to realize that a gross profit of 50 percent is good. I mean, it's a good gross profit. Once you start to understand what a good overhead percentage is, you can quickly zoom to the bottom of this. If you're analyzing your numbers on a weekly basis, say while I'm at a 40 or 35 percent gross profit, I can already tell you if you're at a 35 percent gross profit before I've looked at your overhead and before I've looked at your net, that’s where it's going to end up. And it’s not going to end up that good, but I can tell you if I were to look at your numbers today, the first thing I would do is take your total sales minus your expenses, and I will look at your gross profit percentage and it starts to tell the story of the financial health of your company. So that's why I separate all this out into percentages, again if you have an accountant that you're working with he'll never do this for you. He's going to analyze your numbers how the IRS wants them analyzed. He's not going to analyze them in a way that allows you to make decisions based off of what you see, so as soon as I look at these numbers I would start to decide, okay what's the health of this company and where are some areas we can start to look at to correct it.
Stan: Now this is an analysis of a general landscaping lawn care, we're going to call a landscaping installation company. 50% gross profit, okay, but it’s 50% net, I should say, really. I mean, that's what we're looking at here, right, 50 percent, no it's not net. I'm sorry. Cost of Goods Sold (COGS) is about half of the gross. I want to caution people. I know this is going to be a little bit complicated but the more you specialize, the higher your profit ratios will go. So because if you have a very unique set of skills and you can find a niche and dominate that niche, you can charge an absolute premium for those services.
Phil: You’re freezing up a little bit.
Stan: I got you, okay, so a great example is pond maintenance pond work. You can charge a premium for that, because there's not every landscaping company out there is doing pond maintenance or pond work. So the more specialized you are, the higher your profits will be. So don't be afraid to look at those numbers and go fifty percent, that's the low side, you can actually you could actually improve those well beyond that.
Phil: Yet you make a good point. This is really related to a turn-key type landscape company and a lot of times people choose to be turn-key because they might not have enough business. You know we do a lot of artificial turf, which if I were to separate that out, that would be an insanely profitable section. Just not enough artificial turf business to make an artificial turf company, so we take it as a niche service and we do it when it becomes available. That's why there's lighting and drainage and multiple things. This is not very well suited, there’s no maintenance in this business model. In maintenance of course, you have very, very low cost of goods sold. You’re not really selling many materials. But the one thing I want you to know, if you are a company that's running maintenance and design and build, do not lump these numbers together. They are really two separate businesses within a business. I would keep separate books. You're still the same company, for IRS purposes you're going to be one company, but I would track these separately because if you blend them together you're going to get just a hodgepodge of numbers that are hard to make sense of.
Stan: Okay agreed But I want these guys to look at where the profits are. The riches are in the niches. We talked about this with Mike Mc, and please, you’ve got to understand, you've got to do everything but focus on a few very select areas and that's where any time you can get those jobs, you drop everything else and you go do those jobs. Because those jobs lead to a crazy insane profits.
Phil: Hey no problem, happy to do it. So here are your indirect costs. These are costs you would not incur if you did not have jobs, but we call these costs, the bill in the night. These are the bills that keep on coming, whether you are working or not working. These are the commitments, the financial commitments that you have to yourself for running a business. This is a very real thing. And when you have this device, you don't have this list for your company, you're missing a great opportunity to earn, to put money in your pocket. In fact, money is probably going out the window, and it's breaking down every single cost that you have. QuickBooks will do this. If you're not running QuickBooks, graph paper and pen will do this but this is the key number that you need to be tacking on to jobs before you add on profit. A lot of guys either eliminate this number or significantly miscalculate what the reality of this number is.
So I'll let you kind of look over the whole thing, but there's a few things that jump out. And I've asked some questions at the bottom: you know, what if the owner is single with no children, versus an owner that's married with three children? And this is what I want to point out is, when we make comparisons to other company’s prices, well this is what this guy charges or that guy charges, you got to understand every company is going to have a different overhead. One company owner might be driving a brand new F250 Lariat, $70,000 vehicle. Somebody else might be driving a ten-year-old F150; you know that is paid off. It's going to significantly vary what your overhead is. So where I come up with the whole married thing up in the upper right, it says owner health insurance. You know 7,140 that is a humongous number. But if you have kids and a family and you're paying for your own health insurance, who's going to pay for that? Someone is, so you're going to want to compensate yourself for that health insurance. That's a real overhead cost. So when you're updating jobs, you got to have health insurance. You got to you got to lump this into your price. If you're a single guy on a real simple plan, that could be a much lower number.
Stan: So question for you Phil, do we dive any more into these overhead numbers on upcoming slides or is this next part to the series going to be all on Overhead?
Phil: So the next series after this is going to dive all into Overhead. How these numbers come about and how to find and use these numbers and calculate them out.
Stan: Okay the reason I ask that is, because if it didn't, I'd like to go through and help guys understand how to break these numbers down for their own business. How to apply these numbers to their job sites and how to figure out some easy, very simple easy ways, but it sounds like we're going to be doing that in the very next series.
Phil: Around the next series although I think if you've got some things to point out now, I wouldn’t mind giving them a little extra time.
Stan: No I want to do it right, Phil. I mean, this is, the overhead is a big portion of the profits of a project and so I want to make sure that we address this. That's all. That's all I wanted to do is make sure that we are going to address how guys can individually understand overhead in their own companies. Some ways that they can calculate it, and then how they can break it down and apply it within their own business. But it sounds like we're going to be covering that in depth. yes that's what's important to me.
Phil: That's our next webinar. And so I'll leave you with this. On this page again it's boiled down to, at the bottom, 30%. So in our last page, we had 50%. Now we have another 30% of our costs are in overhead. I would tend to look at this, and I didn't create this these numbers to be good or bad, I created them to communicate. We're going to use these same numbers on the next part - I created them so we can make decisions from them. So they're not all necessarily designed to be pretty numbers. I would look at this and say, gosh this is high. That would be my first reaction if these numbers are presented to me, to say there is a lot of money that could go into your pocket, analyzing these numbers and talking about them. So we'll save that for part two but this is again designed to make decisions from.
Stan: Okay how many more slides do we have Phil.
Phil: Ah I don't know we're probably more than halfway through it um we're getting into…
Stan: We got 10 minutes left of this webinar so I hope we're more than halfway!
Phil: We're good, we're going to make it, we're getting to the end here. So we're going to talk about with you here, Stan and I harp on these micro-changes. We want to emphasize that truly making these small changes is what is the key to becoming insanely wealthy without having to add headaches. We're happy to see you grow and to help you grow and to get you to the point where you're ready to expand your business, but we want you to have every ounce of profit taken available to you and we want to make sure that we've really given you the time to dive into this and show you how to make these micro corrections to your number. So here's a summary of what we just saw: total revenue, about 192 thousand we've got, you know roughly 50% and 30%, so we're showing once we subtract that out, a net income of 19% in this company. Not bad. I mean it's a pretty much in line with industry standard. It's not horrible, but I'm guessing that there is definitely room for a lot of improvement.
Stan: I wouldn't run a two hundred thousand dollar company to have profits of twenty percent.
Phil: And yet a lot of people do and they don't know that, and they don't know that until the end of the year. That's the thing. You know, I wouldn't either. It would mean, imagine what it takes to start your dream, run your own business and then get to the end of the year and realize, man, I'm making twenty percent. It was forty thousand dollars and this is why we don't want you to get that disappointed feeling. When you get ahead of these numbers, stay on top of it because you can make corrections if you understand these numbers tomorrow, you can make corrections tomorrow, and you can adjust the whole rest of your year, and start being really profitable.
Stan: Agreed, so next slide or where are we going with this?
Phil: All right, so we're going to make a three percent change. so you start at the top. That was a summary I showed you on the last screen, then section down. I'm going to say what if you increased your prices by three percent; how would that impact your bottom line? And immediately you see you've got almost six thousand dollars more in your pocket by doing nothing to any other number, other than increasing your price by three percent. Do you think your customers would even notice three percent? A thousand dollar job, adding thirty dollars to it now became a thousand dollar 30 job. I did the math right, yes. Alright, so I mean that's nothing. You can put that into every proposal tomorrow and have six thousand more dollars. In this instance now, what if you increased your price three percent and lowered your materials three percent? Do you think you could babysit your shopping list on materials and find three percent of fluff or waste? You know you bought a few extra materials; you ordered a half a pound extra; do you think you could fine-tune that three percent? I can say in every case, yes. You can look at that with a little bit more of a microscope and find three percent. Now what if you did all three: increase price, lower your cost, and looked at your overhead list, and found three percent that you could save. Guys, doing nothing, you've added not a single sale not a single employee in a single piece of equipment, you can put in this case 10,000 almost 10,500 dollars more in your pocket for doing micro changes. $10,000. It's huge when you start to look at it.
Stan: $48,000 income is a lot better than the $38,000 income. You can actually enjoy life a little bit at that at that range. But what you're talking about doing Phil, is all very easy. Let's talk about cost of goods sold, right? Your material supplies. In this case we had a hardscape material list, which was the biggest portion of that. Negotiate the beginning of the season, negotiate a better price. Negotiate with your block suppliers, with whoever you're working with. That doesn't make a difference, you know you can look at those things; you can also fine-tune and tweak.
You know your guys; a lot of guys are going to be divas. You know what I'm talking about, is when you start to hire people, when you hire people, oh they got to have this, and they got to have that. When you and I grew up, when we were out running job sites we got by. Now when you hire guys to do it, they got to have the things that we got by with, we just we were able to live without it. Now they need it, and so sometimes you got to retrain your guys to start to learn to live with a little bit less and to keep the quality up. Because if you can do it, I can do it. The guys watching this out here, they can do it. They've got to understand that the next generation that they're going to train, because that's a critical element to the growth and success of their business, is training someone to replace them out on the actual job sites. They've got to able to fine-tune and tweak those little things and get by without the very best of the best.
Phil: That's right. We'll go to the next slide I'm going to show you. I will say this 3% is super, super easy to do, it's not even hard to do. On future slides I'll challenge you to do 10%, to be honest, but let's look at even a 5 percent change. Again, very, very easy to do. We'll go through the numbers; again at the end of the year you're looking at seventeen thousand dollars more. No extra people. See you have yet to push that sales lever, you haven't worked in a single extra appointment, an extra night, all you've done is taken the time to invest into your numbers and to negotiating with vendors. Negotiating your insurance rates. Five percent change, seventeen thousand dollars more. In this business, it is huge. You still haven't had to price yourself out of anything. This is so simple, if you start to get into these numbers and work the system.
Stan: Yes we're not putting the burden entirely on our customers, right, we're putting it on to the business itself. It's divided between customers, suppliers. It goes into our own overhead. Tweaking what we do within our business, how much we pay for materials, the time spent doing projects, get rid of those guys kicking their toe in the dirt in the beginning of the day. And at the end of the day, make sure everybody's moving. Nobody should ever be stopping. I have a rule, if my people ask me if they can smoke at my job sites. And I joke, it's as long as it never touches your fingers. They're like, what are you talking about? It says if you do this with a cigarette, that hand should be working. I mean, you get literally, when you're on my job site you're working. That's those micro changes that make a big impact. So alright, and the 10% change that you're talking about Phil, you're going to challenge these guys to?
Phil: Yeah, that it’s very realistic. I didn't put it up here because I didn't want people to sit. I wanted to make it so easy for you to make money. I didn't want people to say that's impossible because it might feel impossible looking at 10%. I am always looking at these numbers, pushing and pushing and pushing. There is always more efficiency, always more money to take out of these jobs and put into your pocket. If you could imagine 10%; you’re in line for what, $20,000 more, $18,000 more money? Double that, thirty some thousand dollars a year in the same exact business. But I can tell you, I wanted to just spoon feed this low-lying fruit because 3%,5%, it's nothing. You can make this change within a month, a 30-day period, you can have these changes implemented and next month, next week, you can start putting money in your pocket by looking at these efficiency waste and the prices you pay for things.
Stan: So you're looking at about a 30 to 33, four thousand dollar change when you change just 10% of the profit structure of your company. And that's just at a two hundred thousand dollar company level. You are almost literally doubling your net profits at that point, you're going from thirty eight thousand, and you’re adding another 30 to four thousand dollars on to that by changing only ten percent of what you do. We're putting this in perspective for you guys; ten percent and you left it out because it may seem like a big thing, but when you make the five percent change and you see how easy a five percent change is, you can start to go, I can do ten percent. I can do it and you can do ten percent, it's within reach.
Phil: You're asking someone to sell a two thousand dollar job for $2,200 are you good enough of an educator consultant sales person to spec, to tweak your pitch in your delivery of your message to create two hundred dollars more of value? And I would say use your mouth? Yes, you are. I mean you are, that is your profession that is what you are an expert in. Use it, create the value to sell, make that two thousand dollar job, two thousand two hundred. Get in the habit: 10 percent, 10 percent, 10 percent, and then start raising your level of sales ability. Practice in the mirror, practice your introduction, practice your speed of delivering that proposal. Get it out within 5 hours. We can start with 24 hours; if you're the guy that's going out meeting with someone and it’s taking you three days to get a proposal, you're not going to increase your sales by 10%. If you can turn, go down the street, park in a parking lot and deliver. That’s why I’m charging more money because I’m going to deliver, deliver, deliver, deliver. You constantly find ways to increase a value and increase your ability to deliver that value, and ten percent is going to be nothing to add on to the top and they will hire you and say you know.
Stan: I hear ten percent more than anybody else, but you're worth it. I hear it all the time and we go back to the niche specialties. Adding that ten percent on is even easier, the more specialized you are, the less competition, the less other people. And then when you up the ante by improving the service, turning around and giving them a fast proposal, being an educator when you're out on a job site, those are all easy ways to hit that ten percent or even more mark. It's not, I'm shaking my head, yes, as you're talking Phil, because I know a lot of guys. I'm thinking a lot of guys, their response is going to be, will somebody else to come in and undercut me on price? Yeah but specialize Jack, go out and specialize your services. Do something nobody else is going to do, give a presentation nobody else is going to get, give the customer a reason to be willing to pay more for you. If you're not doing that, then if you're equal with everybody else, then they're just going to base their decision on price alone. That's your biggest downfall; you've got to become, you’ve got to offer something unique. You've got to become something unique. You've got to give the customer something that nobody else is doing and their comfort level with you will increase, and their willingness to spend more money with you will increase. But if you're just like everybody else, offering the same services and it's based solely on price, that's a rut that you got to pull yourself out of.
Phil: Yep and that's why we were talking about those jobs that are under 3000 as being such a niche; you know those command a higher profit margin. You make the assumption that everybody's showing up. Look, when people tell me that they're going to, well I'm going to call three different companies, I smile on the inside. I'm thinking like good luck getting three people to answer the phone live to schedule the appointment, and show up on time to come to the appointment, and then turn around a proposal immediately. I mean I'm going to hit on three or four key things that are going to establish my trust with you. I'm going to build trust in the first 48 hours that we get to know each other. Immediately trust, trust, trust, trust I deliver, deliver, deliver before we've ever started your job, and when they see that, they're going to be like, oh no brainer I'm going to go with you. I mean, I trust you. When they trust you and then you deliver on every part that you've promised, it's a no-brainer and then they tell their friends, oh yeah this guy was higher, but you've got to use him, he's the best. It just starts the pattern of expectation. Like people know you are not the cheapest company, but they also know that finally there's somebody that they're not going to have to babysit, that they can just trust and your price can go up.
Stan: Yes fact I was at a mastermind group in Chicago and a deck-building company was the highest priced in the market, admittedly. But they said when they would go out to a job site they would show how they would put their decks together, they would use extra fasteners. They had a better process and they would stay booked out for months in advance, and every customer that would hire them, would hire them bringing them out knowing right out of the gate that they're going to cost more than anybody else. And that's a deck company Phil, that's it. There are hundreds of deck builders out there, everybody can build decks. This company said, we have our own process and they educated their customers on how their process worked. Now I'm air quoting their process was better than everybody else's, and that's how they differentiated themselves from everyone else in the market.
Phil: Yeah have your signature, your unique signature on the items that you provide. I talked about this a few weeks ago in a video on sod, and you know, sod is sod. You’ve got to make it something special by adding your signature, what do you do that's so different about it and explain it to people.
Stan: Exactly Phil, do we have any slides left?
Phil: Oh maybe one, there it is. Closing thoughts. So you know we want to encourage you to not think so much about the way to improve your business is to add more sales. I didn't even mention adding a single more seeing another sale today. Before you talk about, and you know I got to hire somebody, I've got to add a crew, I've got to buy a truck, look inside. If you don't have these numbers all the time available to you in front of you in a moment's notice, then that's where to start with growing your business.
Stan: One of the things that I want to point out is we talked about overhead. We talked about employees, we talked about tweaking those things. We have an employee handbook out right now and that employee handbook helps to lay out the expectations that we as the employers expect from the people that we bring into the company. It clearly defines every aspect, every component that an employee is expected to perform at, so that is a tool that is available over at Dirtmonkey University. It's called the employee handbook. I'm going to highly encourage people to start to utilize that tool specifically to improve the production out of their employees. Now this webinar series is going to be available at Dirt Monkey University; it is currently only for Mastermind members. Mastermind members cost what, 20 bucks a month, Phil I think?
Stan: There yet the entire series, but we're going to put this series together and we're going to probably price it at what, nine hundred bucks?
Phil: Yes, around nine hundred dollars. There’s a lot of value they’re going to get out of this.
Stan: It's the it's the reason it's going to be that is, because we will guarantee that after you go through this series your very first job, you're going to see increased profits. You're going to, this this webinar series will pay for itself over and over and over again. Plain and simple, there is nowhere else you're going to understand learning how to bid numbers, how to bid specific jobs. Understanding overhead which is our next webinar series. So if you guys are watching this, I'm going to highly encourage you to go join the Mastermind group, it's 20 bucks a month you're going to get all of these webinars plus our whole backlog catalogue. A whole backlog of webinars, you have access to that otherwise you don't have to be a mastermind, and you can go over to Dirtmonkey and you can pay nine hundred bucks for the entire series. Which, yeah which is not quite a bargain, as if you are a member of the mastermind group, but still worth it in every way. So go check it out over at DirtmonkeyUniversity.com. I hope this kind of training helps you guys out; let us know we want to hear from you guys. If you think this is what you want to hear, see, you want more of this, we've got to know so let us know, Phil.
Stan: Thank you guys, Phil thank you for all your hard work you put into this, we will see you on the overhead, understanding overhead, the next webinar series. Awesome, thanks guys. Have a great weekend.
Stan: So now you've heard about the three percent rule, and the five percent rule, and the ten percent rule. You've come to basically understand what these things are. They seem a little too simple to be applied, but I own an average landscape business. For just an average guy with a two-year college degree that took me six years to acquire, and I've applied that rule to the 40, the 50, and the 60 percent range by adding the effect of scarcity. By adding the effect of a niche, now how can you do that? Maybe you're saying to yourself, oh I just cut grass, or I just do this. First thing, you've just limited your own potential, so stop it. You're going to make excuses, you're only going to limit yourself. I stopped making those excuses and I've started to achieve my dream. I'm going to give you a hard facts story. a friend of mine named Scott Owens, Meridian Tree in the Twin Cities metropolitan area. This is a real business, this is a real story. He does the same kind of tree work that all of that hundreds of other companies do around the Twin Cities metropolitan area, but his business is in high demand. The scarcity point is, there's only one Scott in the Twin Cities metropolitan area, so when he goes out to a job site he connects with the customer, that customer isn't buying tree service, they're buying Scott. They’re buying the level of care, they're buying the level of attention, they're buying the comfort of working with him.
Do you see how every common business can become uncommon when you apply a personal touch to it? You've got to understand, you are a magnet, you're a magnet of mediocrity, you're a magnet of greatness. It doesn't make a difference which one, you choose. You become one or the other. If you believe that you are something special and you offer that specialness to your customers, they're going to feel it. They're going to pick it up, so make sure that you understand that, how valuable that's how important you as a person are.
Now that's just one way of separating yourself from the rest of the cattle out there. A second way that you can do it, is by specializing in your skills that create a niche whether you have one or not. Create something unique about your company that other companies just probably aren't doing. When you offer a higher level of service, people are going to be willing to pay for it, that is a fact. And finally a third way that you can differentiate your service is just by offering more services. Become a more well-rounded company. Some companies specialize so much that they won't offer other things; they won't help solve potential problems. Become that person that's willing to go outside of their own box and help the customer to the degree that the customer appreciates that extra level of service, even if it's not being done by you specifically.
There's three solid ways that you can specialize your company. You can “niche-fy” your organization, you can improve your profits: the three percent rule, the five percent rule and the 10 percent rule can apply to just about anybody. But when you want to start applying the 40, the 50, or the 60 percent rule, you've got to be able to offer a service that nobody else is doing. And it doesn't have to be a magic bullet, it can be simple things that you can start to implement and as time goes on, you're going to be able to refine that message over and over again to improve your bottom line. God bless, now this is part one of a nine part series, the other eight parts are designed for Mastermind members only. If you do want to tune into those, just simply go to Dirtmonkey University and click on the Mastermind group. It is literally just $20 a month to become a Mastermind member and you get all of the webinars we've ever produced, plus the ones coming up. It's as easy as that. God bless, go get them. Don't let anything stand in your way.