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Thread: Question about calculating overhead

  1. #1

    Default Question about calculating overhead

    I'm in the process of starting a sole proprietor landscaping company, and am using my home for storing my gear and for doing design work, and am using my personal truck for work as well. I'm not in a position to afford an accountant yet, so hopefully I can get some feedback here:

    I've been struggling with pricing my work, and am not sure what exactly to include when calculating overhead costs. Everyone I talk to seems to have a different opinion on this... would a certain percentage of my home rent and vehicle expenses count as overhead (and how do I find out that percentage?) or none of them, or all of them? And are taxes considered an overhead cost?

    I know in a sole prop we are supposed to keep our own personal hourly wage separate from overhead and materials, but when we're using our personal living space and vehicle for work, where do we draw the line? I'd like to be able to get the numbers clear!

    Thanks a lot.

  2. #2

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    So, firstly, I'm not an accountant but in my experience with this, a percentage of your rent and vehicle expenses can be attributed to your business. For home rent, it's the percentage of square footage used for your business. I have seen an accountant use a measuring tape to determine the percentage being used for the business and then multiplying that percentage to the rent.

    One thing I recall being brought up is to make sure it's really not a dual use space, like it's literally a space only used for the business. This is because lots of people in the past have thought they were clever by setting up an LLC and then just deducting their rent as a business expense when there was no real business.

    As for your vehicle, best measure is the miles used purely for business versus purely for any other reason. Try to avoid dual use miles as the IRS likes to scrutinize these things for sole props. Keep books and records for all these business trips, origin, destination, time/date and miles travelled. These are things that an employer would know if they were reimbursing an employee for travel so you'll have to treat yourself in the same manner.

    Hope that is somewhat helpful.

  3. #3

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    Not an accountant, but I am a bookkeeper for small businesses, and a sole proprietor myself, so I can hopefully offer a little help! Make sure you keep receipts/records of everything, either paper or digital copies - for business trips/mileage, but also for any other expenses. If you use an accounting software like QuickBooks, you can take a pic of receipts and it uploads and saves them for you, which I have found very handy!

    Things like mileage, home office space, and vehicle expenses will probably be able to be deducted on your taxes, and that's why it's so important to keep separate your personal and business expenses - like Melanie said, only the business portion can be deducted. There are more details within the actual tax forms about how to calculate the amount of your deductions if you're doing it yourself. As a sole proprietor, you'll likely be filing a Schedule C form in addition to your 1040, so you'll want to check the instructions for those forms.

    One note about your pay - as a sole proprietor, you don't have to pay yourself an hourly wage. Your withdrawal of money from your business is called an owner's draw, and you can take money out of your business at literally any time (as long as there's money for you to take!) Any time you take a draw, you'll enter it in your books as such - it's something of a business expense.

    Hope that helps a bit! Happy to try to answer any other questions you have

  4. #4

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    Since your question is about pricing rather than strictly financial accounting or tax issues, my take is a little different. If you intend to build a viable business, your pricing should contemplate what you expect your overhead to be when you have an office, vehicles and a storage yard. I have represented several landscaping companies and I can tell you that if you build your client base with clients who are used to paying a price that doesn't enable you to recover a REASONABLE overhead, then when you do start incurring those overhead charges, you are going to have a hard time charging what you need to charge to recoup your costs.

    Of course pricing can't be done in a vacuum. You have competitors to consider and are also limited by the value that potential customers place on the services you provide. Also, to start building a customer base, you may want to come in slightly lower than your ideal price. But the starting point should always be knowing what your baseline costs are, and that includes the true overhead you expect to have once you are up and running as a business.

  5. #5
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    I'll echo what David said and add a few more things. Also, get an accountant whether you think you can afford one or not. A good one will save you more than they cost.

    When it comes to your vehicles (trucks and trailers) set your overhead cost based upon new vehicle costs. Use a 3/4 ton truck (1 ton better) cost at a minimum and 10,000lb trailers (I'd go with both a deckover and landscaping trailer).

    For work and storage space, figure out what size you would like and what an average warehouse that size rents for and use that for your calculations.

    When it comes to setting your prices, you will be better off being in the upper third with regards to rate; however, you will also need to have the skills that price will demand. I've done, and still do, this myself.

    To determine my total costs I do the following. I'm not using actual numbers, but they will be reasonably close.
    1) Add up my monthly fixed costs (rent, electric, heat, Insurance, etc), not including wages and salary, and divide by the total workable hours in a month. Let's assume that your expenses will work out to $3000 per month and you need to figure out what that works out to in $/hour. It's reasonable to assume that there are 2080 hour available in a working year (52 weeks per year times 40 hours per week. So the formula works out to $3000/(2080/12)=$17.31 per hour.
    2) Add up my total cost per hour for my equipment (assume $61.25 real cost per hour
    3) Add up my total cost per hour for wages/salary (assume $36.06 real cost per hour or $75,000/year). Multiply this number by the amount of employees.
    4) Add 1, 2 and 3 together. $17.31+61.25+(36.06*2)=$150.68 per hour total costs.

    For me, I'm not making a profit unless the business generates just over $150/hour.

    Hope this helps.
    Brad Miedema
    Fulcrum Saw & Tool

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