“I’m new to the industry. How do I learn to price lawn mowing jobs so that I can win bids and be profitable?”
Pricing is really difficult. When I got started in the business I didn’t have the faintest idea how to price commercial or residential. I was clueless. I remember the challenge and the difficulty. I remember struggling to figure it out.
Learn how selling your landscape company may not be the best way to create wealth and provide you the freedom you are dreaming of.
There is so much talk about people wanting to sell their company, or the dream they have to sell their company some day. It’s sort of the American dream to build your company, sell it, have all this money, retire, whatever. My argument is, and you’ve heard it before, why is that necessary?
Jonathan shares a fool proof plan to prep your seasonal business to have enough money during winter months.
As you’ve probably heard me say in the past, I’m not a big fan of contracts in the residential business. Commercial’s different. I’m talking specifically about residential. One of the big arguments for contracts is that you receive your revenue over a twelve month period because the argument is during the down time, during the off season, during the slower months, there isn’t as much money coming in and those contracts provide for great off season revenue to keep things running and smooth out cash flow. My basic argument is that it doesn’t make sense to put yourself under a contract with a client so that they can be your savings account and make sure you don’t overspend in the months that bring in a lot of revenue and therefore not have enough money in the slow season.
This video explains why there is a discrepancy between your tax return and take home pay.
When it’s time to pay taxes and you get back your tax return from your accountant, does it ever feel like your tax returns said you made a whole lot more money than you actually put in your pocket? If so, I’m going to give you a really elementary example to show you why. And again, like so many of my other videos, if you judge the video based on the accuracy of the numbers in my examples, you’re not going to like what I have to say.
I didn’t put a lot of thought into this. I put some quick numbers into a spreadsheet. They’re solely for example purposes. Don’t get caught up on anything else. Let me show you why a couple things happen in your business that just frustrate the heck out of you and then have you asking why in the world am I not making as much money as my tax return says. Let’s use this example to set it up.
You did $200,000 in revenue. You had a $110 in expenses, and again fake numbers. Don’t make any assumptions based on these numbers about what you might be able to or not be able to do within your business. In this year at different times throughout the year, you had to buy some trucks and equipment. So, you buy your first truck for 20 grand, your second truck for 12 grand, and you had to buy $15,000 in equipment. If you look at this on a cash basis and let’s say paid cash for everything, that means you should have about $43,000. So, just imagine you didn’t take a cent out of the business all year long.
In December, you should have about 43 grand sitting in your bank account, okay. For my examples, let’s just imagine you don’t get paid a cent until year-end, okay. Now, let’s talk about this. Here’s how your tax return looks so much better than your actual bank balance. We’re a year 1 business, and just imagine that magically on day 1, January 1st, you started to accrue revenue, and as a result by the year end, you had made $200,000 in your first year. You had a $110 expenses, same as I showed a moment ago, but here’s what really happens.
You go out and you … oh, let’s jump over here to the right. If you can see versus 20 grand, you go out and you buy a truck for 20 grand and you buy another truck for 12 grand and you buy equipment for 15 grand. Please keep in mind this is throughout the year. It doesn’t all have to be January 1, but you had enough cash to pay cash. At the end of the year, we’re talking my same example as on the other sheet I’ve just shown you, you have $43,000 leftover theoretically in your bank, and actually that should be the case.
However, when your accountant does your tax return, you’re shocked to find out that you should have made $82,000. The reason for that is because when you go to deduct your trucks and your equipment, your accountant has to depreciate these assets over time. She can’t fully depreciate them. If you’re thinking about the $179 deduction, just forget that for the moment and follow me here if you’re familiar with that.
What happens is, your accountant has to classify these three things as fixed assets, and she has to depreciate them on an IRS depreciation schedule defined by the IRS, and the stuff changes over time. As a result, let’s just … I can’t remember the depreciation tables but let’s just say a truck is depreciated over 7 years and equipment over 5. I doubt that’s exactly accurate. If that were the case, then in year 1 you would only be able to deduct $2800 and then $1700 on truck 2, and $3000 on your equipment.
As a result, you spent a lot of cash leaving you with $43,000 in the bank. And maybe you paid yourself that $43,000, and that salary took all the money out of the bank to pay yourself. That was your salary. But, your tax return now says you made $82,000. That means that you have to pay taxes, and again my magic goal made up 25% tax rate. You would have to pay 25%, again not accurate, on your $82,000 which would be the equal amount of $20,000 in taxes.
You’re paying $20,000 in taxes, but you only took home $43,000 so theoretically that 20 is going to come out of your 43 and you’re going to make about $22,000 for the year. That’s highly frustrating. That’s the first example of how you make far less than what you actually take home. Yeah, you make far less than what your tax return says. It’s because depreciation will get you over time.
Now, let’s continue on with the second example. Now in year 2, nothing in your business gets better. You do the exact same accounts for the exact same revenue with the exact same expenses, but you now own your trucks and equipment, so you don’t have to actually buy anything.
Now in year 2, you have the same exact depreciation as year 1 because you’re depreciating in the second year of your fixed assets, so your tax return should show that you made $82,429. And so you think, oh great, I should have $82,000 left in the bank this year. Well, actually no. Because what happened is on April 15th of the second year of your business, you did your taxes and you did your taxes for year 1. You owe $20,607 and so you had to pay the $20,000 out of the company.
The reason I use this example is, a lot of times many companies in their first couple of years don’t actually report their income as payroll, so they don’t pay payroll taxes. So then what they do is, they take the money out of the company to pay the taxes. So you’d have to take out $20,000 to pay your taxes for the prior year because, remember you took $43,000 the first year which depleted the accounts and then the second in which your tax return showed $82,000. Now, you got to pay tax on year 1 of $20,000. In year 2, you were actually doing really good except, oh, you have to pay the $20,000 from the prior year, so you only got to take home $61,000 that year. Again, all fictitious, but this is the effect of depreciation and this is the effect of taxes.
Most companies, even if you are on payroll, you might be getting some form of distributions, or you have sort of phantom profits. That’s really the wrong word to use, but you have profits that you never actually put in your pocket because you’re investing in trucks and equipment, or you may be paying cash for those things and so things never line up between your tax return and how much money is in the bank and how much money you have. These are two examples of why.
Now, the inverse of this would be an alternative, and I used this approach for many years. Now, unfortunately the IRS is really making this difficult because tax laws changed quite a bit in the last many years, but what I did in the years priors, I used the Section 179 deduction.
In early years of my business under President Bush, they had really made the 179 deduction generous. I don’t remember the number now, but you could depreciate up to like 500,000 in fixed assets in one year.
Let me explain. Using our same example, what I did is instead of paying taxes, I made payments. Actually, let me rephrase that. Instead of paying my trucks and my equipment in cash, I financed them. What happens is, at some point in year 1, I bought a truck and I made about $1600 worth of payments. Maybe on this $20,000 truck, that’s 3, 3-1/2 months of payments. Then, on my $12,000 truck, I made some number of payments. Let’s call 6 or 7 months. Then, on my equipment, I made some number of payments. Let’s call it 6 months as well of payments. So, on a cash basis if you were to look at my bank account, I’ll have about 82,000 leftover within the year because I didn’t pay cash for these things. Remember they are 20, 12, and 15,000, but I didn’t pay cash.
I actually have $82,000 dollars left in the bank. But, thanks to the Section 179 deduction, I was able to fully depreciate 100% of my trucks and 100% of my equipment. On my tax return, I only showed that I made $43,000, when in fact I actually made 82 because I had 82 left in the bank. As a result, the difference between these two numbers saved me $9857 in tax. So, had I paid cash for my trucks and not been able to fully depreciate them, I would not have saved this $9800 in taxes. But, I was able to save the taxes because I was fully able to depreciate them this year.
Now in the year 2015, when I’m recording this video, these deductions have been severely pulled back. I mean, there’s a lot of limits placed on how much you can straight line depreciate under Section 179, so it’s changed drastically. But, in years prior, I was able to use something like this.
If your business is relatively small, you’re not depreciating much. You still may be able to take advantage of quite a bit of depreciation on a truck or a couple trucks under Section 179. But, it’s nothing like it was 5, 6 and 7 years ago.
Again, in summary, these are a couple examples of why your taxes and your cash balance in your bank account or your take home pay will never line up. They’ll never match. This is a great example why.
Jonathan answers, “How much money do I need to save to retire and still be able to keep my lifestyle?”
Hello. I’ve got a question that I’m going to answer, and first I’ll read it to you. My question is, “How much should I sock away for the future when I retire? I’m 40, and I will be starting a lawn care business part-time next spring. I know there are a lot of factors here. Thanks.”
This is another one that with a lack of information, it makes it very challenging for me to answer it, but let me throw some stuff out at you and give you some ideas.
Probably when you were younger, you’re imagining, and I was this way, I thought, “Man, if I could just make $90,000 a year, and if I could save a million dollars, boom, life would be first class, like, I’d be set.” Then you make ninety grand and then you’re like, “Uh wow, this ninety grand doesn’t buy nearly as much freedom and fun as I thought it would, and oh man, now I’ve got a wife and kids, and wow, that’s not as much as I thought it was.” And, a million doesn’t pay so well anymore, so let me give you an example.
Back when I was in my early 20s and I had money market funds with Vanguard, I think I was making like 5% in my money market fund, maybe 6, it was great. I don’t remember the exact amount but it was really good. It was like 5%. I still have that same money market fund today, it’s one of many, and in that fund, I think I make .018%…not even a quarter of a percent. I have another money market fund that they’d only let me put so much money into it, it capped out, and I earn 1% on that. It’s my best by far. In fact, I think they use as a loss leader to get business, because at the end of 2015, I no longer will get 1% of my money in that anymore. Just think about that math. Let’s just say it’s 1%. If you saved a million dollars, what’s 1% a year on a million dollars? You can’t live on that.
Now you can’t even keep a 1% return on money right now in a money market fund. Not that you’d keep all your money in a money market fund, but it’s just very conservative. If you go to something like Treasury Bills with the US government, super, super safe, because I believe by law, if they can’t repay them, they tax the public, so they’re considered ultra-safe, but they don’t pay. The return is horrible. A CD with the bank…horrible returns. None of these things on a million dollars would pay you enough money to even live. You could not survive. You probably couldn’t even pay your rent or your mortgage with the money on that.
So you have to have your money in assets that are growing, and they have to be diversified across a bunch of different stuff. They can’t just be in ultra safe things; which brings risk into the equation, that something could go wrong. That money that you had spent years and years building, something bad could happen to it; it’s not there when you need it. Or 2008 could happen and the absolute worse time to be pulling money to live on, is ’08 when everything’s been cut down by 40%. Now you’re pulling your principal when it’s only got 60% of the original value. I could go on and on. There’s all these factors to consider.
The million dollar dream is flawed. It’s not enough. So what I would suggest at a minimum, which for most people they’re going to throw up their hands when they hear what I’m about to say, but for me, the minimum number is $5-million. But it also comes back to, “What do you expect out of life, and what is the lifestyle you want to live, and travel, and cars, and homes, and things of that sort. Five million, truly is not an extravagant lifestyle, but it’s a pretty good one. It’s a really good one, but the return on that if invested in a somewhat safe fashion is enough that you could continue having a pretty good life, that might be equivalent to the times when you owned a company and it was making hundreds of thousands of dollars a year in profits.
For me, the $5-million isn’t enough to do what I want to accomplish, but for most people, it truly could be enough. It’s just I kind of have a little bit bigger goal than that. But that could be flawed. You may say, “Boy, that’s crazy!” But $5-million is kind of that number. What happens when you hear $5-million? You hear $5-million, you’re like, “I’m never going to get to $5-million. I mean, that’s impossible. It’s going to take me forever. I’m 40 years old. How am I going to save $5-million after tax?” And some of your money could be pre-tax.
That gets into what I really want to mention. Here are a couple things: One, the way I believe you think about this is, this is the beauty of building a company, and this is the beauty of building a company where you’re not the person doing the work, because imagine being the person doing the work when you’re 60 or 70. It’s not going to happen. Then you better have that money to live on. Another thing to keep in mind is as technology and medicine, everything continues to improve, I think it’s realistic to believe that we’ll live longer; five years, ten years longer than the average.
I don’t know what that is, but we will continue to live longer, even at 40, you have plenty of time in terms of time horizon for a tremendous number of things to improve in society, that it’s possible that the average life expectancy will have increased by five or more years, by the time you get into your 80s. That requires more money, so back to my point. If you don’t commit to learning and doing what it takes to build a real company that has a team, and it’s not just you, at 60 and 70 years old, how much energy and motivation will you have to keep up with the ridiculous amount of change that’s happening in society, as you’ve got to continue to think creatively about your business, and as you have to continue to year after year, mold your business to keep up with all the disruption and the change.
So you want to build that team around you to help you. If you do that, this totally changes the amount of money that you have to have saved. Totally. This $5-million requirement isn’t the same, because really the reason for $5-million is so that when you invest it, it can return to you some amount of money. I didn’t do the math, but let’s just say it’s two hundred grand a year. The real focus here, is not the $5-million, the real focus is the return you get each year; the money that you make each year, so that you can live.
Your investment is spinning off cash. That cash is what you live on. The real goal is the two hundred, not the $5-million. So what you first do is you figure out how much money do you need to live on in the future? Remember, there’s going to be inflation and things in the future, so the value of money continually declines, so in the future, how much do you need to live on? That’s what you’re trying to get to. Five million just is the principal that you need, so that after your return on investment on that $5-million, it returns to you $200,000 to live on.
Now could you create a business with a team that runs itself, that doesn’t require all of your time, that maybe when you get older, you only have to work in that business 15 hours a week, and that business returns to you $200,000? That’s the same thing. Your business is an asset; it’s an investment. What I think the real approach here is, how can I build a company that is a real company, which is very different from what most people build, because they’re unwilling to learn, do the work, or go through the short-term pain to better themselves, to grow, and to solve problems?
If you’re willing to do that, then this business could make you, let’s call it, $150,000 a year. It could be way better than that, but let’s just call it $150,000 a year. And you have decided that you want to live really well into retirement, and so you want to make at least $200 a year. Now the amount of money you need invested is way smaller. Maybe it’s a million and a half. I’m making up numbers. If you do my math, it’s going to be screwed up; I’m making a point. Now maybe all you need is a million and a half, because the million and half will spin off another fifty. Or maybe you need a couple million, so that that couple million will spin off a hundred a year, and you can use fifty of that to live on, and another fifty keeps getting saved; so that you’re still saving every year as you go into your retirement.
When you think about it that way, that your business is an investment, and it can generate a big portion of your retirement income, and then your money saved can make up the difference, or if you could accomplish it where your business pays for all of your retirement, and your investments just continue to grow, and grow and grow, then you’ve really built a security blanket, in a sense. You’ve really set yourself up to be somewhat protected. Then too, when you’ve done that with your business, you don’t have to take as many risks on your investment to get a big return. You can play it a little more safe. Yes, you’ll get lower returns, but that the probability of something happening to your stash is way less.
That’s the way to really think about it. Don’t just think about, “Yeah, I need to build this big amount of money so I can be done, and I’ll live on that money.” What if your business is thought of just like investing in stocks, or bonds, or real estate, or whatever, and it’s spinning off cash that you live on.
A couple things. I read a book awhile back that will do a better job explaining this. I read this book, I was like, “Hm, yeah.” I was kind of nodding as I was reading it. It did a good job of explaining some of what I just said, which I had learned years and years ago, and I think that Tony Robbins, he wrote a book called, “Money: Master the Game,” and he does a really good job of explaining that.
In fact, he has a calculator you can go to to put in some things about your home, your cars, your vacations, all these different things you want. He’ll say, this is how much money you need to make per year, and then it will say, “This is how much money you need to save.” I think it even gives the business analogy in there that I just gave. He does a good job explaining it. I recommend that book. I thought it was good.
Regardless of what you think of Tony Robbins, and I actually don’t have a problem with him. I think he does a tremendous amount of good. But some people don’t like him. I think that book is a solid read. I recommend that to everybody. I think he does a really good job of explaining some financial topics at a more simple level, that we all can understand.
One other book, so for Academy, for our elite members in Academy, one of our members asked what I thought of the book called, “Profit First,” by a guy named Mike something. His last name starts with an M. The cover has a pig on it, like a piggy bank, a pink pig. I’m only half-way through the book. I haven’t formulated my opinion yet. I will say that I’m on the fence on a few things, but I’ll have my opinion when I’m done, and I can kind of think through it. I will say, that he has said a ton of things in that book that I completely agree with, that I’ve said, probably on video and to others a million times, and I feel like I’ve agreed with him on a lot of stuff.
The only thing I’m not quite sure about is, can I grow companies as fast using his method as I have with my approach? I don’t know. I’ve got to think through that. Where I’m going with this is, that book is probably a solid read. I can’t say for sure if it’s a great book, or my favorite, but thus far, I think it’s a no-brainer to read it, and think about it. So many of us build these companies that don’t generate a lot of money, or a lot of profit, and I’ve probably said it before, that’s the entire point of the business. It’s gross revenue is not the point and he makes that argument.
If you get your business set up properly, and you build it properly, so that it’s someday sort of running itself, or running very smoothly with minimal involvement from you, and it’s spinning off a lot of profit, you’ll very quickly accomplish the goal I’ve talked about. You don’t have to wait until you’re 65. You can get there in five, 10 years, or maybe shorter, depending on how aggressive you are. So those two books would be good reads to think through your goal of building enough money to retire, and be very successful.
I hope this helped. Good luck with that.