In the snow and ice industry, knowing the details of a job (lot size, man-hours, equipment costs, salt usage, etc.) are vital and the threshold between profit and loss. In his presentation, “Know Your Snow and Ice Numbers,” Ken Hochkeppel, CEO of Enterprise Analysis explained to attendees of the 22nd SIMA Snow and Ice Symposium in Grand Rapids, Michigan, that knowing your numbers is about changing your expectations.
“It is about measuring something that we can do better, I cannot say it enough about how critical it is to say that you can do better,” he said. “You can’t do better, unless you measure it against yourself.”
Hochkeppel’s presentation provided insight on establishing clear expectations to measure performance in snow operations.
Developing a model for your capacity
Hochkeppel personally attested that the snow and ice industry is a “squirrelly” business where no year is like the last making it tough for managers and owners to wrap their arms around the business as a whole.
“In old days, I had no freaking idea what my capacity was, how many plows I had. It was all foreign to me,” he admitted to attendees. “I didn’t have the methodology. I relied on the people in the field.”
Hochkeppel encouraged the crowd to understand that “profit/loss sheet” is not a dirty word, and diving into specifics (depreciation/appreciation, owner salary, etc.) will help figure out your exact capacity.
He noted that “capacity” is defined by a company’s internals (amount of salt trucks, equipment, etc.), and what material is considered critical.
“If you have the capacity to do $3 million worth of work and you’re doing $2.5 million, that extra half-million, at 50% gross margin, is going to drop $250,000 to your bottom line,” Hochkeppel warned. “If you’re not doing that, you can do better. That is the name of the game.”
Gross Margin vs. Gross Profit
Hochkeppel explained the difference between gross margin and gross profit (Margin is the percentage of revenue; Profit is the dollars), and said most owners and managers use the two terms interchangeably. However, it is important to know the dissimilarities.
“The reason that margin is important is because it’s different than a markup. Margin is always going to be a percent of the revenue,” he said. “The other thing that is important to know when defining gross margin is how you define the direct costs. Everyone in this room has a different idea of what is a direct cost.”
Hochkeppel described direct costs as labor, materials, equipment and subcontracting. However, he noted that some owners would include overtime while others would add workers compensation and travel time.
“Your direct costs maybe 65% while someone else’s is 50%, and you’re thinking they’re doing much better than you,” he said. “You have all these variations. Don’t let numbers scare you when someone tells you how much better they are doing because it all depends on how you define gross margins.”
Measuring gross profit by service and job
Hochkeppel said it is important to set up a job costing system where all direct costs are reported and charged to both the job and the service type that includes labor, product, subcontract and rented or owned equipment. He also recommended to compile and compare estimates to actuals in an annual job analysis.
“I call it the ‘book of business.’ It is a listing of all your jobs, estimates and pricing. This way, you know your margins for each one of the jobs in your book of business,” he said.
Owners and managers should also start this off with a true estimate, Hochkeppel added. “We need to know our direct costs and estimated hours. Every job is different and has a different blend of the four service types. Your margins will vary.”
He said to have the estimate align with the company’s profit and loss, job costs and budget reports, plus establish expectations for each job and route to accurately price the job.
Hochkeppel finished his presentation with a quote about risk and reward that he modified for the snow and ice professionals on hand.
“You don’t do snow and ice without a team, you don’t do snow and ice without being fit, you don’t do snow and ice with being prepared,” he said. “You don’t do snow and ice without balancing the risk and rewards. And you never do snow and ice by accident, it has be to intentional.
“One of the reason why we are doing all this measuring is because we want to do this by intent,” he continued. “We don’t want to be successful by accident because it’s hard to repeat an accident.”