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“ Budgeting and Overhead Recovery” Planning for Profitability 2011 Webinar Series October 19 th , 2011. Software Solutions for Landscape Professionals. Presenter: Marcus v andeVliet Consultant – MV Enterprises marcusv@aol.com. Agenda. Pricing Systems - Price Based/Cost Based

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software solutions for landscape professionals

“Budgeting and Overhead Recovery”

  • Planning for Profitability 2011 Webinar Series
  • October 19th, 2011

Software Solutions for Landscape Professionals

  • Presenter: Marcus vandeVliet
  • Consultant – MV Enterprises
  • marcusv@aol.com
agenda
Agenda
  • Pricing Systems - Price Based/Cost Based
  • Pricing of the Product
  • Pricing Formula
  • Bid vs. Estimate
  • General Conditions
  • Profit Factors
  • Real Company Profit
  • Budget
    • Yearly Profit and Loss Statement
    • Sales Budget, Materials, Labor, Labor Burden, Subcontractors, Equipment, Overhead
  • Industry Standard Ratio
  • DS Manage|360 Demonstration
  • Conclusion & Discussion
pricing systems
Pricing Systems
  • There are many types of pricing systems, but most can be placed into a two categories:
  • Cost Based
    • Single Overhead Recovery System
    • Multiple Overhead Recovery System
    • Labor Only Recovery System
  • Price Based
    • Multiplier System
    • Fair Market Value System
    • Comparative System
    • Guestimate
cost based
Cost Based
  • Single Overhead Recovery System
    • Used by Accountants
    • Does not account for variation in LMES ratios
  • Labor Only Recovery System
    • Used by Jim Houston
    • Does not account for variation in LMES ratios
  • Multiple Overhead Recovery System
    • Used by VKA.
    • Does account for LMES used on each project
    • Accounts for labor being the biggest cost and risk to OH.
price based
Price Based
  • Multiplier System
    • Usually a factor of material cost
    • Does not account for project general conditions
    • What about company costs and OH
  • Fair Market Value System
    • Now known as the Unfair market price
    • Where does this number come from? The Customer?
    • How does the customer know my company?
  • Comparative System
    • Compares similar previous projects
    • Did you make a profit on the previous projects?
  • Guesstimate
    • Speaks for itself.
price
Price

Costs

Overhead

“Hoped for profit”

price1
Price

“Determine

profit”

Overhead

Costs

pricing formula
Pricing Formula

Project Costs

(Labor, Materials, Equipment & Subcontractors)

+

Overhead Costs

=

Breakeven

+

Profit

=

Selling Price

pricing of the product
Pricing of the Product
  • What is the breakeven costs for producing the actual product?
  • How will I recover all my overhead costs?
  • What profit margin would I be able to apply to this product?
  • What will my customer be willing to pay for this product?
  • What is my competition charging for this product?
  • How much profit do I need to make?
bid vs estimate
Bid vs.Estimate
  • Estimating is determining what a job cost: relating to Labor, Materials, Equipment and Subcontractors.
  • Bidding is taking the estimate and adding Overhead, Profit and Contingencies to determine, the price to be paid for that job
  • Bids can be lowered by reducing profit, but estimates should not be lowered, because costs are costs
general conditions
General Conditions
  • Job specific overhead
  • Costs only associated with that project
  • Critical that all specifications are studied carefully
  • Examples:

Mobilization (Equipment and labor) Clean up & Debris Removal/Dumping

Material delivery, Load/Unload & Storage Site Conditions & Maintenance

Access Site Repair

Supervision & Meetings Warranty

Permits, Bonds, Additional Insurance etc.

profit factors
Profit Factors
  • Size of Project
  • Risks Involved
  • The Marketplace
  • The Need for Crew/Company
  • Competitive Advantages/Disadvantages
  • Client Factors
real company profit
Real Company Profit:
  • The most important number for your company is not your bank balance.
  • The other irrelevant number is gross sales.
  • The single most important representation of your success is long-term sustainable profit.
  • Short-term profit may be impacted by factors such as:
    • The marketplace
    • Preparation for growth, new market, new product etc.
    • Capital improvements.
    • Employees.
real company profit cont
Real Company Profit: - Cont.
  • Another common question: my profit loss statement shows I am making a profit of $200,000, where is the money?
  • The real profit can only be determined by also looking at your Balance Sheet report.
  • The accounting industry’s primary mission is to determine your tax liability ( and to confuse business owners and management to ensure their job security).
  • Balance sheet, profit and loss and budget need to be reviewed together on a regular basis to track the overall corporate picture.
real company profit cont1
Real Company Profit: - Cont.
  • Balance sheet items that impact profit:
    • Inventory value.
    • Equipment payments.
    • Capital improvement payments.
    • Loans.
    • Lines of credit.
    • Accounts Receivable.
    • Accounts payable.
real company profit cont2
Real Company Profit: - Cont.
  • These items should be deducted from the profit shown on your P&L statement, to produce the real profit.
  • Real profit is the money that you actually have in hand, that can be used for the following purposes:
    • Owner return on investment.
    • Employee bonus.
    • Payment of outstanding liabilities.
    • Growth.
    • Capital improvement.
    • Employee development and education.
    • More consulting.
pricing summary
Pricing Summary
  • Use cost based OH Recovery system
  • Cost + OH + Profit = Price
  • Adjust Profit for each project
  • Build the project in your mind: GC
  • Real profit needs to include Balance sheet items.
budget
Budget
  • Projected for Upcoming Year (2012)
  • Not Your Accountants Budget
    • Field Equipment in Costs of Goods Sold (COGS)
    • Labor Burden and insurance for Field Persons in COGS
  • Set up to Determine Overhead Recovery Percentage (OH%)
  • Broken Down Into
    • Sales
    • Cost of Goods Sold
    • Overhead
budget1
Budget
  • Include Key Employees
  • The budget will not be perfect the first time
  • Be Conservative
  • Review monthly
    • Allocate expenses as they occur
    • Review YTD and make adjustments for next year
  • Set up Chart of Accounts in P&L to match Budget.
sales critical item
Sales : Critical Item
  • Can we sell this budgeted amount ?
    • Work must be profitable
    • Match our Sweet Spot
  • What is our production capacity ?
  • What is our sales strategy ?
  • What is our minimum sales amount to recover overhead ?
    • Sales volume below BE, must recover OH from Profit.
  • What are the individual sales goals?
materials
Materials
  • Wholesale Cost of Materials
  • Material Cost Increases as Volume Increases
  • Impact of Subcontracting Changes
  • Include Sales Tax and Freight & Delivery
  • Inventory - Use Cost & Additional Expenses:
    • Shipping
    • Handling
    • Spoilage
labor budget
Labor Budget
  • Field Persons Only
    • Foreman & Labor
  • No Overhead Persons
    • Supervisors are OH
  • List Employee Names and Next Year’s Wage
  • Hourly Employees: ($ Rate + Overtime) x Weeks
labor burden
Labor Burden
  • Additional Taxes and Expenses Added to Labor
  • Calculate on Average Wage as a Percentage
  • Define Field Burden and Overhead (OH) Burden
  • OH Burden Does Not Include: Liability Ins.; WC Rates are Lower; Paid Time Off
subcontractors
Subcontractors
  • Independent business that completes part of your contract for a fixed price.
  • Look ahead to next year: What is the total $ amount you will subcontract out this upcoming year?
  • Increases as Volume Increases
  • Ensure the sub-contractor’s price includes the entire scope of work.
rental equipment
Rental Equipment
  • Project Next Year’s Rental Cost
  • May be better to rent equipment, than purchase.
  • Rent specialized equipment, with experienced operator.
overhead
Overhead
  • Typically overhead (OH) is not directly related to sales volume.
  • OH remains constant and can not be completely eliminated.
  • Does inflation effect the item?
  • Is this item any place else in your budget?
industry standard ratios
Industry Standard Ratios
  • Overhead vs. Gross Sales 25%-30%
  • Direct Labor vs. Gross Sales 18%-21%
  • Material vs. Gross Sales 25%-40%
  • Equipment vs. Gross Sales 7%-10%
  • OH Salaries vs. Gross Sales 8%-13%
budget summary
Budget Summary
  • Project numbers for 2012.
    • Sales
    • COGS
    • Expenses
  • Good starting point P&L for 2011.
  • Involve key people for buy-in.
  • Review each month.
dynascape manage 360
Dynascape Manage|360
  • Demonstrate DS Manage|360 Capability for Different Type of Overhead Recover – Division Screen
  • Demonstrate DS Manage|360 capability to see your break even number for cost book items – Show plant/material in cost book.
  • Demonstrate DS Manage|360 capability to see your break even point on an estimate – Open an existing estimate.
slide37

Thank you for attending DynaSCAPES

“Budgeting and Overhead Recovery” Webinar

Presented By : Marcus vandeVliet Organizer: Andrew Wilson

Consultant – MV Enterprises Manage360 Account Mngr/Sales Rep

Phone: (302) 239-6612 1 800 710 1900 x231

marcusv@aol.com awilson@dynascape.com

www.mventerprises.biz www.dynascape.com