Cost of Operation for one-man forestry mulching operation

[Hummed46]

Good point. I ballparked 12.8k running 34hrs a week, 8 months of the year. That was mostly a wag although about 6k of that is likely teeth alone. The remaining 6k would be for all other PM, repairs, and tracks fund. Seems a little light?

 

[Hummed46]

So just an update to this thread, I've retooled the model a bit to remove owner salary, increase liability expense, increase employee wages, increase maintenance costs, and now instead of renting everything for the first year and doing it all myself, I'll buy the mulching head, rent the carrier, and hire someone to operate.

I think this does a couple things for me; If I buy used, I'll have a little less risk in the equipment since the assumption there is that someone else has taken the initial hit. By hiring someone to operate I can still work my day job, so there's less risk to my livelihood, but the real benefit there is that I can focus on building the business instead of operating machinery. T320s by me are 245/day, and mulching heads are $1450. The rental price of the head is out of the question.
In the end, making these changes looks to be a little more profitable. I'll post the updated model shortly. If anyone wants the excel file I can also share that, for those that want to plug in their own numbers.

 

[Hummed46]

Here are the updated pro-forma financials...

Income Statement:


EBITDA/FCF Worksheet:


Income, Margin, and Expense ratios:


Balance Sheet:

 

[Hummed46]

Owner's Equity, CapEx, and Depreciation Schedules:


Principle and Interest Payment Schedules:


Regards,
Matt

 

[Hummed46]

One error found in the expense ratios table...I double-counted payroll. Note that the expense ratios is a table comparing each expense as a percentage of gross expenses, whereas the table above gives ratios like fuel for travel as a percent of revenue. I assumed that the more business I do, the more I'll drive...whereas with the expense ratios, it's good to see how much each line item contributes to your total costs...Looks like Salary, machinery payments, fuel for the machinery, and maintenance make up 75% of the total costs.

Regards,
Matt

 

[crane operator]

I guess I would be interested to know what a monthly rental would be for the loader. Very few people I know rent equipment by the day, unless its a one day only use. I occasionally rent a 10 k telehandler for a job where I can't get a crane into a location. Typically any rent over two days is close to a weeks rent. Two to three weeks of weekly rent is usually equal to a month's rent.

I would also look into renting the mulcher by the month vs a day. Typically the larger rental houses really don't like renting by the day, they make it very expensive. I'd look at a monthly, or a leasing cost like mowingman does. There's no way I could pay what the daily rental rate is on a crane, then rent it out to customers with a operator, the numbers don't work.

Another part to me that still doesn't make sense- where are you going to find someone that you want out running your $100,000 worth of equipment (truck, trailer, loader, mulch head)? Sure you might be paying $25 a hour. But that's not what he costs you. Workmans comp, unemployment, payroll taxes, etc.. And now you have the business starting out with him working only 16 hours a week for the first year? That's a hobby, not employment. Good operators aren't easy to find, you just can't plug in anyone, and certainly not someone who is only going to work 16 hours a week- would you work for that? None of the employment figures you have here make any sense. The fourth year you show a second employee and neither one working more than 25 hours? No business runs this way- why would yours?

In my case specialization would breed efficiency and I wouldn't have the overhead of all the other rental equipment to pay for

Specialization doesn't always breed efficiency- ian from florida makes the case on this point- he keeps busy because he has numerous attachments for his machine and knows how to use them. He doesn't sit still because "well- there's no mulching work right now". He uses the other attachments to do other jobs. And the rental company isn't using the "mulcher rate" to pay for all of the other equipment. They know what the mulcher heads cost, and people rent them because they are going to tear them up- especially someone who only wants to rent it for a day or two- hence the high price. A expensive piece of equipment to rent and repair means high daily rate.

which is ultimately how a business makes money...By driving and improving a profitable growth engine.

That sounds great in a interview in "entreprenuer" magazine, or in a self help book. I'm not sure it really applies here.

I have however heard it said- do what you know. If you don't know, hire people that do and stay out of their way.

People hire me because I can do the job they need done faster, safer, better and cheaper than they can do it themselves. I hire engine work done- because a guy that does it everyday, can do it better faster and cheaper than I can. I would hire a parking lot done at my yard, because a guy who is good with a dozer can do it better and faster and cheaper than I can do it myself. A farmer may buy his own dozer to clean waterways, because he has time, and the dozer may cost less than having the work done, because of him being able to spend the time himself to do it- it doesn't have to be done to make a profit, he can do it on his own cheaper (in his mind) himself. I buy milk at the store because its faster, better, and cheaper than owning a cow.

But I guess I don't find that this chart means any more to me than the last one. You seem to want to show the "profit" available in the mulching game, and I don't deny that there's money to be made there. I just don't see how your particular chart, makes the case that its the game you should be in, when you don't know anything about mulching- except that they are really expensive to rent for the day, and they charge a lot to do it.

That doesn't mean you can't become the mulching expert in your area. Or hire the mulching expert.

I'm just not seeing anything here that would make me want to invest my $ in you doing it, so why would a banker? And if a banker wouldn't loan you the money to do it, why would you want to invest your own $ in it, unless you don't have to have the $, which is why its important what your wife does, or if you have a uncle/ brother/ father in law that will come in and bail you out if it doesn't work, or- that you are wealthy enough yourself that it doesn't matter. IF you are wealthy enough it doesn't matter, then I guess it doesn't matter what the charts say- because it doesn't matter if it works or not. Buy it and try it.

 

[Hummed46]

Thanks for taking the time to write everything out. The whole point of this post was to get some hard numbers to figure out if this is worth it. You'd probably be giving me just as much crap if I said "Hey I think there's a big market out there, so I'm going to just lease a machine and see what happens without planning anything"...It would just be different stuff.

Monthly rate for the skidsteer = $3,355, or about 14 days worth of rentals using the same place with the $245 daily rate. I got no idea what kind of work is out there. I threw a few ads up on craigslist and people called me. Is there work out there? Yes. Is there enough work to bring someone on full-time and lease a machine? I have no idea. What percentage of work can be done with a rotary brush cutter for $700/day vs mulcher work for $1400? Again, no idea, but that's pretty important because I can pay the bills on $1400/day. Not so at the lower rate. So I plan for daily rates because the payment on a used truck/trailer and mulching head is a lot less than the payment for all of that PLUS a lease on an $85k machine, and I can't just drop a lease like I could sell off a truck and trailer.

Is there a guy out there that wants to work a couple days on the weekend, or wants to fill holes in his schedules because he works four 10's and wants to make it five? Probably. Do I know who he is yet? No. If you're paying someone $25/hr, what's your all-in cost? What do YOU pay for WC, payroll, and unemployment? I'll plug them into the spreadsheet. It's free advice, but it's not super helpful to say "your numbers are wrong" and then not throw me some numbers to plug in. What are your costs to keep someone employed? Even a percentage is fine...2x, 3x the hourly rate.

The whole point of the chart is to see how the numbers work out...Cause if they're red numbers, then I'll find something else to do...Best case is the numbers are all black. Second best case is the numbers are all red, and I find something else. Worst case is the numbers are black on paper and red in real life...And that's why I'm asking you all for real-world numbers, and to point out anything I might've missed.

I'm making another assumption here...That the land clearing companies that are clearing miles of right-of-way every day with four excavators, 2 Bandit chippers, and half a dozen dedicated forestry machines plus trucks and 20 guys aren't the same companies that are going to come out and cut you a horse trail around your 10-acre farm...Same industry, but very different markets. Did those companies start that way? Surely not. Would it be great to run two CTLs with mulchers all day every day, and pay my guys 26/hr for 40 hour weeks, with a backlog of work out 5 weeks, and plan for that from the start? Sure...But you'd probably tell me that's just as unrealistic as paying someone to mulch horse trails and brushy pastures for part-time loader work. All I'm trying to do here is figure out some real-world numbers to get an idea. No plan survives first contact anyway.

 

[Hummed46]

Hey that all being said, the next time I'm in Missouri I'll buy you a beer and you can teach me the crane business!

 

[John C.]

You should be contacting your state for costs on industrial insurance and taxes for real numbers. You apparently are not going to have any fringe benefits such as medical, dental or retirement. Are you going to supply your operator with any kind of tools? What about providing for his travel time to and from job sites? Back when I ran shops with $18 per hour wages the loaded rate was about $40 per hour. That was state industrial insurance, cheap medical policy, no retirement or 401K matching and one week of vacation after the first year and two weeks after the third year. Mechanics had to supply all their own tools and there was no tool replacement policy. I forgot, the employee paid half their state industrial insurance. Service charge out rate back then was about $60 per hour. Within a few years the rate went to $90 per hour and now it's about $140 for a wrench to insert a key in the door lock of the service truck. Maybe you should talk to the local Operating Engineers Union to check on their rates. It might give you more insight.

 

[crane operator]

Wages vary vastly by area. By me- the 25 would be pretty high wages. In silicon valley, or most of california, or chicago, probably pittsburgh or philly, you couldn't afford to eat. Union or non union makes a big difference too.

That said, I kind of figure whatever I'm paying someone on their check, cost me about double that. If you're paying full health insurance, retirement, pension, union scale, figure another third more.

I'm not busting your chops here, sorry if it seems like that.

If you want to use the crane business as a example, I'm not sure I'd be the one to teach you. But I'll just put this out there, because it might help you.

I could make more $ tomorrow, in my weekly check my "business" pays to me, if I went back to working union working for someone else. Now I choose what I pay myself, so that's no ones fault but my own. But my business does pay for itself. The cranes, the shop property, insurance etc, which is building equity- ultimately for me. I may die with nothing but a bunch of worn out cranes, but I'll have fun doing it. My kids can fend for themselves hopefully by that time.

But, and here's the big one, I know cranes. I know how to rig stuff, set the cranes up, get into a bad spot, and have all kinds of $ invested in stuff that lays around my shop and I use once a year. I grew up in construction. And I tinker around with rebuilding trucks. And sometimes equipment moving projects, and do a little hauling. Do our own mechanic work as much as we can.

I don't take days off. My kids talk about our 1 family vacation. I enjoy what I do and I probably do it too much. And most guys I know in the construction industry that are small businesses put in hours even more than I do.

So I guess what I'm trying to say, I'm more concerned on your knowledge, and financial situation, than I am about the numbers in your chart. Because that information, will ultimately determine your bottom line.

If you can afford to buy the mulcher, and loader, and pay the repair bills, and either have the $ yourself, or can live really cheap, you can make it, if you know the business.

If you start a crane business tomorrow, with no knowledge, its going to be really tough, unless you've got a lot of other peoples money to play with. There's publicly traded crane companies and some owned by private equity firms (some of the largest are) and they just hire the experts, and play the numbers. And the biggest ones have all been in and out of bankruptcy. But I can't help you with those kind of financial game numbers.

Right now, I have a peterbilt truck in my shop that's getting a motor swapped. The next stall over sets my biggest crane, which has been down for three weeks, and probably will be for another three weeks while I'm waiting for parts from New Zealand. I've got a pickup broken down out in Oklahoma, that I tore up saturday, that I'm going to go get tomorrow and haul home, to rebuild the transfer case, and maybe the transmission too. I've got a truck in the back yard, that I'm going to turn back into a dump truck, that I spent today looking for a used bed to put on it. And that's just in between/ extra stuff, to the everyday crane stuff. And I guess I don't know how to put all that in your statement?

A small business- I've always found- the owner/ boss, really needs to know what he's talking about , or your wasting time and money. Which is fine if you have a lot of money to start with.

Can you fix the loader or mulcher if its broke/ makes a big difference on repair bills. Can you tell a customer where you can and can't get a mulcher machine, and bid a job and make $? Bury the mulcher in a swamp or tear the head up on a stand of black locust and lose a week of work and/or a big wrecker and repair bill and its now a ugly month. If you hand a customer a bill for twice the amount of time that you told him it would take, that's the last time you will work for him, or anyone he knows.

I wish it was easier for me to give you a better answer, and say "yes your chart works", or "no it doesn't" but I guess I think the business is more complicated than the flow chart, and I don't have enough info to give you a accurate number. Because I don't know what kind of losses you can stand, and what knowledge you bring.

If on the first job you do, you tear a track off the loader on a buried fence post. Can you pay the rental house for the track? If you shell the gearbox on the mulcher, or the hydraulic motor, and there's a $15,000 repair bill on it- on the very first job. Can you handle that? What if the very first week, the two year old diesel truck drops a piston, the loader goes down, and the gearbox breaks? Have you got another $25,000?
What if you hire someone, who doesn't really know what he's doing (because you don't really either) and he rolls the rental loader, and ruins it and the mower? Can you handle the $80,000?

It can be a lesson in the school of hard knocks, and I guess I'm more interested in your knowledge of that school, than what your chart shows for six years from now.

 

[Hummed46]

That's fair...All good insight, and it's appreciated because sometimes you can't quantify the best advice. Money-wise I'm not bad-off...got a good job now and have managed to put some away. I can't say I've really had to deal with the school of hard knocks, spent 8 years in the Marine Corps but that was just a lot of fun, got out and went back to school which is how I ended up at my current job. It's fairly easy work to manage but I work 70 hours/week and for awhile I've been thinking that if I have to work this much, I might as well work for myself where the effort I put in actually pays off for me instead of the company I work for.

I think you've got good points about misfortune...But I also think those are things all small businesses starting up have to face. There's always that risk. Right now my entire livelihood is decided by one person. I could do the best job in the work at work, but if my boss thinks I'm not worth it there goes my entire livelihood and I'm on the street over a single person's decision, and I have very little control over that for a bunch of reasons I won't get into so as not to sidetrack this thread. I hear you though...my father in law has a small tri-axle hauling company. Hit a deer one day and wrecked 20k in radiators/intercoolers/everything else on the front of the motor cause the deer went straight through the grill. Never saw it coming. You've gotta bend over to pick up the dollar...Just hope you're not bending over at the wrong time, in the wrong place, in front of the wrong dude.

So the rough plan is to NOT quit the day job...Rent a machine, finance the mulcher used or start with a $7k rotary brush cutter instead of a 27k mulcher, buy a used truck and trailer because I can carry the payments on all that if I buy smart...Cut brush and mulch on the weekends for Joe homeowner with 5 or 6 acres, and hire someone part time if I can find him to work the weekdays when I'm stuck behind a desk, and figure it out. No one wants to figure things out anymore...they just want to watch other people figure it out on youtube. Ironic, yes, because I'm asking for advice on the internet. But basically, I'm trying to get to a 70% solution with numbers so I can make the first decision. If it works? Then I'll grow the business. If I have too much work for the weekend days and I can't find someone to work the weekdays, and it looks like I have the volume then I'll look at quitting my day job or putting someone behind the machine full time with a leased piece of equipment. But if I can't? Then I'll just take down the ads, sell off the equipment, and stay put at my job for awhile. There's risk here but what I'm really trying to do is build something to test the market, so I can answer the question of whether or not I should dump in a bunch of coin. Once I have an answer there, then I'll start answering the other questions as they come up...Where to find bigger jobs, where to expand, what new markets to get into...Expand the services to stump grinding, and whatnot.

 

[Rentalmechanic]

I read threw this, very interesting but what caught my eye was the rental machine. The fear of tearing it up and being stuck with the bill. United rentals rents equipment with a option of RPP.
Rental protection plan covers the unknown, I'm not sure of the specifics . I know that rental we cover all the maintenance . Damaged hoses on the equipment side is covered, tracks,etc .There is a deductible but its way cheaper then what I have seen damaged.

 

[Hummed46]

Thats definitely a consideration. I got quoets this week for new machines, both to buy and to lease, plus cost of renting and then buying used. One of the things they sent me was a preventative maintenance schedule...so I took the prices, stripped off the labor, and plugged them into my model. The PM including teeth, tracks, and undercarriage comes to about 6k annually per 500 hrs (this is for a mulcher).

 

[Hummed46]

Now granted, this is for parts and fluids from a dealer, so they probably have more markup than you would normally see, but it's the first set of big numbers I"ve gotten in awhile so I went with it. It's also the most conservative data I've found.

All this to say, under some Bobcat rentals oure responsible for damages and fluid levels...so no hyd oil changes, but topping it off is your job. For 10% of the rental price they offered waived damages up to $1000, then a thousand dollar deductible from damages between 1k and 2k, and then over 2k you paid a deductible plus 50%. Without the actuarial tables (past average damages), its hard to ay if its a good deal. Probabilistically, your chances of exploding on day 10 of a rental are the same as day 1, but the probability of you paying for the bill if you rent it for 10 days of the month are much higher than if you rent it for one, assuming its fully rented by someone else for the rest of the time. On the other hand, you pay a flat 10% markup on the rental contract, so it's possible you could break even. I can figure this out for you guys if you want, just not at 1130pm.

One final note...regarding the lase or buy debate, when maintenance is include, over a 5 year lifespan there's only about 2k difference between leasing for 2 years and then exercising your option to buy the machine, versus outright buying a new machine. The narror winner is the purchaser on payments alone. I didnt consider resale since in both cases, at debt maturity you're the owner of the same equipment and you can resell it in both cases.

Where you really come out ahead is when the rental yard lets you rent monthly, and then applies 80% of your rental payments as the downpayment. I was given a price of about 60k for a machine with 600 hours. If I had rented at $2900/month for a year, the principal value of the loan works out to around 35k. Amortized over 60 months, the payment was pretty low! If your business has the cash flow to support tha rental payment initially, thats the way to go because you save about 10k at the end.

Finally, I did a study on the resale values of used machinery. For a T770, theres no surprise that year and hours together directly influence the price of the machine...but with a hundred listings, when I adjusted for te hours, seting them to 0 (i.e. a new machine), the calculated prie was around 75k. Since all the machines had different options package, I assumed they averaged out. Bottom line: a machine with 0 hours should sell for 75k in the secondary market, and whatever you pay over that is pretty much what you lose driving it off the lot. Give or take.

 

[Hummed46]

Appologize for typos, sending frm my phone

 

[Hummed46]

Tldr: rent to own if youve got good cash flow, dont pay more than 75k for a new T770, and maintenance on a mulcher is expensive BEFORE you break anything!

 

[ianjoub]

I find it hard to believe leasing is any different between equipment and autos. With autos, every part of the lease is negotiable: hours you can have on the clock, initial value, value at end of lease, purchase option at end of lease. Also, when leasing, you only pay interest on the value you use, not the entire initial value. In your case, leasing appears to be your best option. Lease for 1-3 years and negotiate the purchase price at the end of the lease. If the business fails, your lease eds and you do not exercise your option to purchase. If the business is good, exercise the purchase option (or no because you decided you wanted a new or different machine).

 

[mowingman]

Noticed this mentioned above, and it is a great comment. Loss or damage to the rental machine can cost you a lot of money, among other things. The places I rent from require I have an insurance policy to cover any loss or damage to the rental. OR, I have to pay extra for their "Loss or Damage" waiver. I ALWAYS pay the extra fee for their loss/damage waver. It is well worth the price.
Some years ago, we had rented a Fecon mulcher. The landowner told me he wanted a certain area of very thick brush cleared. I walked the area as best as was possible, but still hit a concrete and cast iron sewer manhole cover. It tore the mulching head up to the tune of about $16,000. That repair only cost me a $1000.00 deductable, as I had paid for the loss/damage waver. Just another cost of doing business.

 

[Hummed46]

TLDR: Leasing for two years buying on a 3-year loan, and then selling at 3500 hours after five years is your best option and will save you about $9,100 bucks.

I went back and actually looked at my spreadsheet. I was a little off just going by memory.

I calculated the resale prices using about a hundred price/year/hour combinations pulled from various machinery dealers and then applied a multiple linear regression model to calculate fair values based on you using your machine 700 hours per year on average.
7 year-old machine with 4900 hours = $19,129 fair market value
5 year-old machine with 3500 hours = $35,124 fair market value

To calculate present values and account for the time-value of money I assumed that rather than buy the equipment, you could just plug your money in 10-year US Treasury bonds, which historically have been considered the "risk-free" investment and are commonly used as a benchmark in finance. I used 2.89% (although in the name of accuracy, today's yield is 2.86%). More on this below.
I assumed you got favorable rates on your loans...3.250%. Yes, I know most times you can get 0% interest financing, but not everyone has an 800 credit score.

I would show you the actual quote but the numbers are set up using a date formula that removes them and tells you you need an update after several days. They lock their sheets with a password so I can't even remove it. Luckily I did copy the information over to excel before the quote expired:

Side note: Now you guys have the lease factor numbers, so you can calculate your own lease payments on any Bobcat CTL by multiplying the lease factor times the sale price if you know it.


Three cases here...In case 1, you lease a machine for two years and then buy it for $39,681. Your loan is 5 years, and at the end of seven years you sell the piece of equipment for $19,129 with 4900 hours on it.
In case 2, you buy the machine outright for $84,429, tax not included, and make payments for five years. You sell it at the end of year 5 for $35,124 with 3500 hours on it.
In case 3, I figured it would be better to show a lease and purchase option over a five year span since a seven-year old CTL might get to be pretty beat up. From both nominal and real cash flow perspectives, this actually looks to be your best option. You lease it for two years then exercise your option to buy. You make payments on it for three years and then sell it at the end of year five.

If you want to know what you'll pay in any given year cash-wise, look at the row titled "Nominal cash flows by year". If you want to know what everything is actually going to COST you, adjusted for time and considering that you could've just dumped your money somewhere else (the opportunity cost), look at the bolded line titled "Real cash flow (NPV)".


One final note - I didn't include maintenance because all cases have the same maintenance expense. PM is covered a few posts up. I also didn't include tax...You won't pay sales tax on the lease, but you'll pay property tax to the state. When you buy the machine outright I'm assuming you'll have to pay sales tax. Thankfully, you can deduct other tax on a one-for-one basis prior to calculating net income.

 

[Hummed46]

Gentlemen, I think we've hammered out the cost of financing the actual machine. Fuel expense can be figured out from tables but for practicality I've just gone with 5gph at local prices. That seems to be the consensus. I also think preventative maintenance has been worked out pretty well.

Is there anyone with direct experience on major replacements and repairs? How much is the big stuff going to cost? I think if we can get that piece figured out and I can build another part of the spreadsheet, I'll post it for all to view and we can get a little closer to the true cost of ownership. I think this thread is turning into something that would be pretty helpful for a lot of CTL/skidsteer owner/operators and when it's all said and done I'll be happy to share my model with everyone for them to modify to their own needs.

Anyone have some good data on major repairs? Maybe for a longer period like a year?

Thanks,
Matt