Surprisingly few otherwise astute professional snow and ice management contractors or business owners are aware of how much it costs them each day to open the doors of their business. Even fewer understand how much it costs their operation to provide contracted for services their “best” customer or customers.
Admittedly, it is the rare snow removal owner or manager, who is unaware whether their operation is profitable or not. How many contractors, however, know whether their bids, jobs or even the types of services that they perform are profitable?
The answer to these and many other questions, of course, lies with “costing.” Tracking the costs of the snow and ice removal operation need not be burdensome or all-inclusive enough to reveal what a particular job, service or customer actually costs. Even the most rudimentary accounting for costs will, however, reveal a number of surprises and can lead, if acted upon, to increased profits in even the worst of times.
MOM AND POP’S BUSINESS
Many snow removal contractors operate a mom-and-pop business. Pop is hustling up work or in the field performing the services that generate the income for their operation. Mom has the pleasure of doing all the chores such as billing, bookkeeping and scheduling as well as fielding complaints and handling correspondence.
If Pop charges $200 for a job completed in three hours, he might figure he is making a not-too-shabby $50 per hour after subtracting a generous amount for the fuel used. Unfortunately, reality intrudes.
Ignored in that all-too-common, seat-of-the-pants equation are a few expenses that can add substantially to costs. What about the cost of Mom’s labor, the time spent setting up the job, scheduling, billing and collecting the amount due? What about the cost of the vehicle used to get to the job site, the wear-and-tear on any equipment needed to perform that service or the cost of Pop’s time to sell that job?
The expenses of traveling to that job as well as between jobs, deserves consideration, as does the cost of having Mom perform her services. And don’t forget about overhead costs for such things as advertising and the expense of maintaining a base of operations even if it is only the kitchen table that Mom works from. Above all, don’t overlook the cost of the money essential to the operation of every business regardless of size.
KEEPING TABS ON COSTS
What does it cost your snow removal or ice management business to perform its services, job or fulfill a contract? Although the operation’s financial statements, if available, clearly show expenses, they are rarely broken down into specific jobs or even categories of services. That is where cost accounting enters the picture.
Cost accounting is the process of allocating all of the operation’s costs associated with generating a sale, performing a service, etc., both direct and indirect. Direct costs include such things as the total wages paid workers, supervisors’ salaries, fuel and other supplies expended, etc. Indirect costs are all of the other expenses associated with keeping the operation going.
Cost accounting is as simple or as complex as desired. Just as is the case with the cost of money, cost accounting should never be ignored. How can profitable bids be prepared, discounts offered, or prices and fees decided if the operation’s expenses are not known?
Consider the cost of adding labor. When Mom and Pop hired an employee, they paid her a fair amount without benefits. Mom and Pop assumed, wrongly, that the cost of that employee equaled the wages paid her.
They were correct in assuming the addition of an employee adds to the cost of doing business. But the true cost of that employee is more than the amount of wages paid. There is also the amount paid for matching FICA contributions and unemployment taxes and don’t forget workers’ compensation insurance.
There is also more to sending an employee out to do a job or perform a service then wages and those employment taxes. There is also the snow removal business’s insurance expense to be considered. Employees, after all, increase risk, a liability covered by insurance.
There are also costs with supporting that employee. The cost of supervision, the cost of bookkeeping and payroll services, etc. Add to those figures the basic support costs of sales, administration and other overhead expenses. As the cost of fielding an employee increases, so too, should the amounts a customer is charged.
ESTABLISH A SYSTEM, CREATE A GOAL
To set up an effective cost accounting system, the help of an accountant or CPA might be advisable. Cost accounting can, after all be fairly complicated. The money spent for professional guidance will be well worth it.
Naturally, before the operation's efficiency, particularly in the area of its non-revenue generating services, can be improved they must first be identified. In other words, it must be possible to identify the specific support activities the operation is performing, understand how it is performing those activities and establish how much the operation is spending on those activities.
Conventional cost accounting, such as that used in many software programs, usually places support costs into a pool that is distributed across the operations cost centers or services. This can distort actual costs as illustrated by a job that requires 10 estimates and 10 sales calls before finally winning the job. This job is usually assigned the same support costs as a job requiring fewer estimates or sales calls.
ACCOUNTING FOR COSTS, REDUCING COSTS
Obviously, there is more to cost accounting then determining the cost of a job or service performed. Every snow contractor should carefully analyze their costs of doing business to locate and reduce any out-of-line expenses.
Many contractors and small business owners begin by comparing this month's expense figures with last month’s or with the same month last year. Eventually year-to-date expenses are compared with comparable figures from last year. Then an attempt is made to explain any discrepancies between the figures in different accounting periods and, perhaps, to fix the blame for costs that have increased.
If, for example, supplies expenses represented two percent of sales last year and shot up to 15 percent this year, why? Equally important, that analysis also provides a real insight into the fiscal health of the business. The snow removal business's financial health has its bearing on much more than the bottom line or profits. It can also affect the cost and the availability of financing.
Taking financial control of your business means knowing and understanding the cost of money. It also means accounting for costs to understand what each service, contract or job actually costs your operation. That same cost accounting uses the discrepancies revealed to discover why costs have been rising.
Accounting for costs means pricing your services more realistically and allowing those costs to be passed to the customer. Cost accounting is also invaluable when determining what a particular job actually cost or, if detailed enough, that cost accounting can reveal what your “best customer” actually cost you and your snow removal business.Mark E. Battersby is Snow Magazine’s financial writer. He resides in Ardmore, Pa.