How to Determine EXACTLY What to Charge for Your Services
I have learned over the last 24 years in the lawn and landscape industry that some things need to be more simplified than most people make them. I have also learned that sometimes business owners have a tendency to simplify things that need to be a little more detailed and involved.
Determining what to charge for your services is a perfect example.
I have heard and read it all…
“Just charge $1 a minute and you will be fine.”
“Measure everything and you will know what to charge.”
“Just figure out what others are charging and charge the same.”
I’m sorry but it’s not that simple. However, I also want to make it clear right now that there are plenty of people and gurus who intentionally make this process sound very difficult and confusing only so they can charge you money to show you what usually turns out to be very simple math.
So I am going to explain the best way to determine what it is you need to charge for your services.
First of all, you need to create a budget. I tell everyone I work with to think about a married couple who both work and make $75,000 a year total. You can generally predict that money will be taken from your paycheck to the tune of at least 25%. Therefore, this couple has in the vicinity of $56,250 to work with.
So they have to figure out what their expenses are for the year – mortgage, car payments, medical, groceries, gas, etc…
It’s pretty much the same process for your business.
If you have been in business for several years and you intend or assume things will be about the same in the upcoming year, you can use previous year’s expenses to define and create your budget.
The bottom line here is this – a budget is an estimate. Things change. New opportunities present themselves. Equipment breaks. Gas prices go up. Be prepared to change your budget as the year goes on. And keep in mind, when the budget changes, so should your pricing.
Ok, so let’s go through step 1 – creating a budget.
Budget
If you have a chart of accounts, that is a great start. A chart of accounts is going to show you all the money you spend on particular areas of your business. Below we will create an example of a chart of accounts with anticipated expenses for the upcoming season. The amount next to the category is what you estimate will be spent in a 12 month period.
Accounting$2,500
Advertising$8,000
Attorney$1,000
Bad Debt$2,000
Products$10,000
New Equipment$3,500
Equipment Fuel$8,000
Equipment Maintenance & Repair$2,500
Liability Insurance$4,000
Licenses & Fees$1,000
Loan Payments$15,000
Office Equipment$1,500
Office Supplies$3,000
Rent/Mortgage$12,000
Truck Fuel$14,000
Truck Maintenance & Repair$4,000
Uniforms$1,000
Utilities$7,000
Total$100,000
You will notice that I have not included Labor. Before I include labor expense and worker’s compensation insurance, I want to explain something.
As a business owner, you have lots of responsibilities. But there are 3 very serious responsibilities you have before anything else, and they are:
- Pay your bills
- Pay yourself
- Make a profit
A lot of business owners do not pay themselves. They run their business, charge for their services, send the invoices, pay their bills, cross their fingers and see what is left at the end of the week, month, year and they take what they can get their hands on.
No, No, No
You should pay yourself. I recommend a set salary. So in this example, let’s say we are going to pay the owner of the business (you), a salary of $42,000 a year. Let’s also say that you have 4 employees who work in the field each being paid $11.00 per hour.
Now before we can estimate what we will pay these employees, we need to figure out how many hours they are going to work. Your goal as a business owner should be to schedule your work in a manner that can be done in a 40 hour work week. I know this isn’t always possible, but avoiding over time, which by law is time and a half, it makes sense to make your best effort to accomplish this.
So let’s say that for this example, this business is going to have 225 working days in a year. Of those 225 working days your 4 employees are going to work 8 hours each day at $11 per hour.
That means $44 per hour X 8 working hours X 225 days which totals $79,200 in initial labor expense.
Now we also need to remember that an $11 per hour employee doesn’t just cost the company $11 per hour. When you consider taxes and other burdens, you have what is referred to as a “loaded rate”. Personally, I like to consider this number at 25%. Therefore, an $11 per hour employee costs the company $13.75 per hour.
So let’s go back to the math determining our labor.
So 4 employees, costing the company $13.75 per hour, who work 8 hours per day for 225 days out of the year creates a total labor expense of $99,000. Then we need to add on the owner’s salary of $42,000 per year, giving us a total of $141,000 in labor expense.
Wait, we aren’t done yet. We still need to determine worker’s compensation insurance. This amount is different for every sate and for each classification of services the employees provide. A lawn maintenance employee’s rates are lower than an installation employee’s rates and they are both lower than a company who has employees climbing and cutting down trees.
For the sake of this example, I am going to use $2.00 for every $100 of compensation.
If you take your base labor rates of $11 per hour for the 4 employees, that totals $79,200 in labor expense. Assuming you as the owner are out in the field with your employees, we add your salary of $42,000 to give us a total of $121,200. You divide that number by 100 to give you 1,212. You then multiply that number by $2, giving you a tentative total of $2,424 in workers compensation insurance cost.
So let’s go back…
Total Expense$100,000
Labor Expense$141,000
Workers Compensation Insurance$2,424
Total Budgeted Expenses$243,424
Ok, so now we have to figure out what we charge.
So we know we have 225 working days in a year. You and your employees will be out working 8 hour days, but those 8 hours are not billable hours. You have to figure drive time as well, which I like to average at 1 hour per day. Again, this is different for every business in every situation – maintenance versus installation, etc…. But for this example, we are using 1 hour of drive time each day.
That gives us 7 billable hours per day. We have 225 working days so that gives us a total of 1,575 billable hours in a year to sell.
After all, that is what you are selling – your time. Always keep that in mind.
So back to the math. We have determined all of our budgeted/estimated expenses for the year, which is $243,424. We also know we have 5 people working in the field (you and 4 employees).
So we take $243,424 in expenses and divide that by 1,575 hours. This gives us a total of $154.55 per hour total the company needs to charge to only accomplish 2 of the 3 things we need to accomplish – pay your bills and pay yourself.
We take that number of $154.55 per hour and divide it by the number of working field employees we have which is 5. This gives us the number of $30.91.
That means we need to charge $30.91 per hour per man to pay our bills and pay ourselves.
Now, remember there are three things we need to do:
- Pay the bills
- Pay yourself
- Make a profit
So now we need to determine what our profit is going to be.
Now before we just decide upon a number let’s think about some things here.
Since we have determined out needed hourly rate to cover expenses and pay the boss is $30.91 per hour, we need to figure out where that lands in regard to competitive pricing in our area.
If you know that in your area most people are charging $40 per hour per man or $45 per hour per man, you have some options here:
1.)Charge the same going rate as most others in your area and realize a significant profit. However, you will have to compete that much harder to get the work because your price will be the same as your competitions (assuming all else is equal – speed of employees, efficiency, equipment quality and size, etc…).
2.)Charge slightly less than your competition and be a more attractive option because your rate and prices are lower and still realize a nice profit in the process.
3.)Charge significantly less than your competition, be the most attractive option due to price and still make a profit, just not as much as you might be able to make.
This is personal preference. Just keep in mind that if you are the lowest price option and your business grows, the expenses will grow, your labor expense will grow, and in time your prices will need to go up to continue to realize a profit.
So if you want to strategically penetrate an area with a lower price while still making a profit, go for it. You aren’t low-balling. You are performing your obligations as the owner of the company by paying your bills, paying yourself and making a profit.
But for the sake of this example, here is what we are going to do…
We are going to desire a pre-tax profit of 25%. That means we take our hourly rate of $30.91 per hour per man and we add on 25%, which now makes our hourly rate $38.64 per hour. This keeps us close to the going rate in the area, but still slightly lower than our competition.
So now we know our hourly man rate - $38.64 per hour per man.
Then we go back and look at how many billable hours we have to sell for the year and that total is 1,575.
So we take $38.64 per hour multiplied by 5 people working in the field for a total of $193.20 per hour. We then multiply that number by 1,575 billable hours and we determine that we should generate no less than $304,290 in gross pre-tax revenue based on our labor.
Keep in mind that turn-around goods that you buy for your customers (seed, mulch, plants, soil, salt, etc…) are not included in this determination of revenue. You should charge your hourly labor rate to do this work and mark-up your costs anywhere from 20% to 100% depending on your buying power with the vendor.
What have we accomplished?
1.)We created a budget to determine our estimated expenses for the year.
2.)We determined our labor costs and workers compensation costs.
3.)We determined how many working days we have in a year.
4.)We determined how many billable hours we have in a day.
5.)We determined what we need to charge per hour per man to cover expenses and pay the owner.
6.)We determined a profit margin we want to make and added that to our hourly rate.
7.)We determined the amount of revenue we should be able to generate in a year based on our labor.