Monday, August 3, 2009

Financial Policy

50\ 50 is Fair
Money management and profit sharing plan.

I'm always telling everyone, " No matter what you do, the company eats up 50%. When I was young I never would have believed it. I had to run my own business. I wanted 100%. Now I am amazed at how much I am still learning about what it takes to build a real viable business.

In 1977 when I decided I was going to do this. Anyone could start anything anyway they wanted. Nowadays, ( Is that a word?) people are more informed and knowledgeable. More and more customers want an established reputable company. Especially in the high risk tree business. To make a long story short. I can train young people and get them started so much better, easier, quicker and safer, than what I went through.

Actually the standard has always been 1\3. Ideally you spend only 1\3 on labor. This leaves enough for building the business, acquiring equipment, and a margin of profit.

Now, let me explain then, how this works at 50%. This business is all about trees, but more than that it's all about wood. Sure trees provide shade and aesthetics, but while they are doing all of this, they are producing wood. This was the concept I had at the beginning, this is why I started the tree business over 30 yrs. ago. The real value is in the wood, and ultimately this would help pay for their care and eventual removal. Now I'm saying you're not really providing a tree service if you don't have a sawmill. Our goal is to have branch locations and these (little big) mills within a 300 mile radius of Deary. Also if we produce good arborists through our apprenticeship program we can establish them anywhere with a franchise and an advantage over the local competition.

What does this have to do with the 50 per cent? More than trees and more than wood, it's about people. Let me tell you the reasons I believe we can operate at 50%. I read the biography of Les Schwab. In fact, I strongly recommend everyone read it. When he started in 1952, the tire shops were owned by the big corporations that owned the rubber companies. The service was poor and the prices were high. There were times when he really stuck his neck out to develop his independent business. He did it with people. He designed and developed systems that allowed good wages which retained good people which in turn provided good service. The secret? Everything went into the business and it's people. No corporate conglomerate executives or stockholders pockets to line. The employees were the stockholders.

Now in this part of the country we really don't have to worry about huge tree service conglomerates other than the power line trimmers which we don't worry about any way. Here and in most areas of the US that aren't over populated the problem is the opposite. That is the small independents with one or two boom trucks and a chipper. It's all about them and their equipment. They hire seasonal grunts when they need them. They don't pay any wages or benefits. They make sure they don't learn any more than they already know so they never have to worry about paying them anymore. They would never pay $20.00 an hour for a climber. That's too slow any way. They're not too worried about the few jobs they might loose because they can't climb a tree.

You know the old saying, "Build a better mousetrap and the world will beat a path to your door." Finally, people here are starting to discover that we provide better service. Better quality, better performance, more options, and we do it all with a rope. How wonderfully simple.
Having said all of that, I want to lay out the vision I've had for handling the finances and providing incentives for workers through profit sharing.

50% goes into an account for all labor costs except for secretarial and administrative positions. Ultimately this will include all payroll taxes and expenses, sick leave, vacation pay, medical, retirement plans, and bonuses. This might sound like a lot, or it might not sound like enough. When you look at the expenses for the business, (the other 50%), it might seem the same, one way or the other. Don't become confused this way. There's only 100%. There's never going to be any more. Everything depends on efficiency and production. The 50% will always be proportionate to performance. In other words if efficiency and production are up, everyone is doing alright.

Also, in this trade, it is the best advantage for the trainees and the managers to own and be responsible for their personal equipment. This helps them to insure their own responsibility, and especially their own safety. Climbing gear, ropes, hand saws, power saws, personal protective gear, etc. This is also another reason we can pay 50% for labor costs. The company is not providing the personal equipment. This also, gives the workers a sense of pride in their equipment and they keep track of it, and they draw a better rate because they have it.

At 50%, there should accumulate a good surplus. Initially this will be applied to developing the benefits we mention earlier. Beyond that, we hope to be able to do profit sharing, especially with the managers, because they have so much to deal with and they have to know everything!
The one big problem I see with this is that it can be like working on a percentage, which has obvious drawbacks. Namely quality and safety. The quality and safety record of this company for 30 plus years is phenomenal and incomparable. In the past I always rejected the idea of working on percentages. In other words I took all the responsibility and personally made sure details were tended to. Everyone strictly worked by the hour. This is where the managers really have to manage. The managers will hopefully do what I did. They say the secret to success is, "To hire people like yourself." In the "Les Schwab" system, the ultimate goal was to work your way up, learn all the ropes, and become manager, while the manager you replaced started a new store.

Another reason we can pay out 50% for labor is that we have minimal equipment. In fact this is one of our primary safety rules. " Minimize equipment, most accidents are equipment related." As you can see we are paying more for people and less for equipment. This is backwards from the traditional American Way - more equipment and less labor. I would rather invest in people. I believe in people and people make the difference. Training the next generation. This is What Sustainable Is.

Now, for a few ideas about the other 50%. I know the list of company expenses is horrendous, but I believe it can work. As you can imagine it requires running a tight ship. The first and biggest expense is administration. Secretarial and accounting. Then you have equipment and fuel. Next, advertising, yellow pages, uniforms, signs, etc. Then, licenses and insurance. Then, of course, profit. Now you can see why you normally need two thirds to do all this. If managers or apprentices use there own heavy equipment(anything bigger than a powersaw) and fuel, they will be reimbursed from the company account. I'm thinking 50% of standard rental rate plus fuel. I think equipment rental companies have to charge double to cover all of their overhead, as well as the time the equipment is sitting. Obviously, if the company has to pay the outlandish rental rates, it would be better for the company to own everything.

Before I quit. There needs to be a third account for quarterly payments to make sure those funds are there when they need to be paid, which at this stage is quarterly. This includes payroll taxes, which come out of the labor account. Workman's comp insurance which is another labor cost. WA state B & O tax which is a business expense that goes directly into this account and is unrelated to either labor or business.

Just a word about cell phones and I'll get out of here. We encourage everyone to have a company phone. This way, not only is the phone cheaper on the group plan. There's no charge to call between all of us. However, to be fair to those who have their own. Employees are charged a minimal fee ( $25.00 \ mo.) for the company phone. Of course they have the use of it 24\7, so I presume this is logical and fair. One problem we have discovered is that all the phones share a pool of minutes, and if we use up the pool, which we normally do not, all the phones start racking up time. This can double the bill real fast. Therefore we do advise everyone to be conservative.

Before I go. Let me put it another way to help clarify. Example; If a manager and an apprentice do a job for $1000.00. They get 50%. That's $500.00. Let's say it took them 10 man hours. This is what we hope for our bottom price. If the apprentice is getting $10.00 an hour. The payroll cost for that is about $15.00. That comes to $150.00. The manager is at say $20.00 an hour. Payroll expense is about $30.00. That comes to $300.00. Now you are at $450.00. If the apprentice is making $15.00, there goes your $500.00. You can see why it is a well known fact. $50.00 per man hour is the minimum wage for legitimate contracting. You all know that we often make twice that, and this is where we make up for lost time, slack time, winter time, etc.
You can see though, there's not a whole lot of room for any mis-management. You can also see why most shops, and electricians, and plumbers charge $75.00 an hour.
On the up side. There is a lot of efficiency that happens with a bigger team. Shared rides, shared equipment, company backing for more equipment and human resources. Someone is always closer to a job when it needs to be done. Etc. Co-operation and teamwork is of inestimable value.
Keep up the good work. Godspeed.

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