How to Calculate Your Landscaping Overhead Costs

How To Calculate Your Landscaping Overhead Cost

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Unfortunately, running a business has its costs. As the saying goes, ‘you have to spend money to make money’, and any business owner knows exactly how true that is! Every business owner has to deal with expenses, including overhead costs. This rings just as true for landscaping businesses; a landscaping business’ overhead costs may be different from those of a yogurt shop, but you’re going to have overhead costs either way, and you’re going to need to know how to calculate what they are!

To calculate your overhead costs, you’re going to first need to categorize them. As a landscaping company, your only real non-overhead cost will be labor, materials, and equipment purchase, maintenance, and rental. Some examples of overhead costs include:

  1. Rent
  2. Travel costs
  3. Utility bills
  4. Office Supplies
  5. Advertising costs
  6. Maintenance costs, for your vehicles, equipment, or office
  7. Legal, accounting, and banking fees
  8. Taxes

You will then need to add them up for your selected period- typically, this will be a month. This will be your overhead cost! If you would like to find your average costs, simply add them all up and divide by the number of categories you’ve decided upon. You can also break it down further by associated job or customer cost to find how overhead varies between particular customers.

You can also divide this number by the amount of money you gain from sales, and convert the number to a percentage, and you have your overhead rate! While this isn’t exactly as helpful to know in most situations, you may sometimes find yourself having a use for it- for example, if you are looking to sell your landscaping business, the potential buyer may want to know your typical overhead rate.

Different Types of Overhead Costs

How to Calculate Your Landscaping Overhead Costs

As if accounting wasn’t complicated enough, there are several different types of overhead costs! This is why many people hire bookkeepers and accountants- so that specialists can handle the financial aspects, while you focus on operating the business administration aspect and providing customers the best landscaping and lawn care service you possibly can. Thankfully, there are not that many different types of overhead costs- thankfully, there are only three! Let’s go over them now:

Fixed Costs

Fixed costs are costs that have zero change. From month to month, or week to week if that’s the metric of time you prefer to go by, these costs reliably do not change. This will typically include things like mortgage payments, annual salaries, insurance payments, and asset depreciation. You may have to exercise some discretion here, as certain utility bills- such as waste disposal, or your internet bill- can be fixed, while other utilities may not. Government fees can fall under this category as well, whether they are local or federal, or even recurring or one-time. 

Rent, typically, can fall under this category as well, though rent typically gets raised after a certain amount of time. However, you will be fully aware of when this rate may rise, even if you don’t know how much. It is perfectly safe to consider renting a fixed overhead cost, though you may personally choose to do otherwise. The same goes for annual salaries; if somebody gets a raise, the charge, by its inherent nature, will change. However, this is still a fixed cost, as they are receiving the same amount for an extended period.

Variable Costs

As you may have assumed from the existence of fixed overhead costs, variable overhead costs exist as well! This type of overhead cost is dictated by business activity and volume and can vary in amount from period to period. In some periods, you may not see these charges at all! It simply depends on how often they are necessary, or how often you choose to use them.

Variable overhead costs are typically administrative, being things like shipping and office supplies- those new reams of printer paper have to be paid for somehow, right? Legal and marketing fees will also fall under this category.

In any other industry, especially in an office environment, many equipment maintenance costs could be considered overhead- but not for a landscaping business, where properly functioning equipment is essential! An office can probably go a day or two without a printer, but you’ll get nowhere without a lawnmower. You can’t exactly go around cutting grass with scissors!

Semi-variable Costs

Perfectly in the middle ground, semi-variable costs are always present, but in varying amounts. Remember those utility bills we talked about under ‘Fixed Costs’? Those non-fixed utility bills fall perfectly under here, such as your water and energy bills! Other costs include travel expenses and hourly wages.

Biggest Overhead Cost In A Landscaping Business

Why Should I Calculate My Overhead Costs?

How to Calculate Your Landscaping Overhead Costs

There are plenty of reasons you should know your overhead costs, the first of which is the fact that it is basic accounting! If you don’t know your overhead costs, you should have a bookkeeper who can draw up the numbers for you at a moment’s notice.

Knowing your overhead costs can help you price your services! If you don’t know your overhead costs, you could be mowing lawns and installing sprinklers for far too little money, resulting in you not being able to recuperate your costs. This could, for obvious reasons, lead to your landscaping or lawn care business closing down- if a business operates at a deficit, you’re not going to be able to pay the bills or your employees! If you plan and figure out your overhead costs, you can learn exactly how much money you would need to stay afloat.

You can also use your overhead costs to calculate your net profit. Calculating your net profit is another trusted way to find out just how much money your landscaping business is making! To do this, all you will need to do is pick a time frame- this will vary depending on why you are figuring out your gross profit and who, if anybody aside from yourself, wants to know it- and subtract all your expenses, especially overhead, from your gross profit. If the resulting number is negative, you’re not making enough money, and it would be time to either up your prices or pursue more customers. If the resulting number is positive, congratulations! Everything seems to be in order.

You may want to use your overhead costs to determine your net profit, as certain banks and other financial institutions may want to know how much money your landscaping company is making before giving you a loan for anything from a new office to new equipment. Alternatively, if you are in the process of selling your business, the potential new owner may want to know what your overhead costs and net profit are. It may seem like more work for you, but put yourself in their shoes- it’s important to know the company’s financials!

The best reason to figure out your overhead costs, however, is to minimize them! Everybody likes saving money, and to save money, you have to find out where you’re spending it in the first place. Once you’ve tallied up your overhead costs by category and dollar amount, you can spend some time sorting through the larger expenses and seeing what seems excessive or superfluous. Once you’ve come up with a few potential changes and solutions to any extra spending that may be happening, you’ll be able to implement them and find your overhead costs going lower- meaning your net profits will rise! After all, who doesn’t want more money for their business?

Conclusion

How to Calculate Your Landscaping Overhead Costs

In conclusion, overhead costs are easy to calculate! Most of the effort will be in categorizing and breaking down all your costs that aren’t directly related to making a profit. Once you have that taken care of, all you have to do is decide what period you’re working with, add up those costs you’ve tallied up, and you have your overhead costs! For larger amounts of time- a good example would be about a year- you can turn the overhead cost into an overhead rate so you can accurately predict future overhead costs, even on individual jobs, and price your services accordingly. But that’s just one of the reasons you should know your overhead costs- it can also help your landscaping business get a loan, or even help you persuade a potential buyer to take the business over!

How Much A Landscaping Business Makes A Year (On Average)

Frequently Asked Questions

Can I claim labor as an overhead cost?

No. Labor costs- whether your own or your employees- are directly responsible for the production of income and therefore are not overhead costs.

How can I tell the difference between overhead and non-overhead costs?

Sometimes, it can be a little tricky- while most expenses are clear-cut and can be categorized easily, certain expenses may toe the line a little. In these cases, you’ll just have to use your best judgment- and if you own and operate a landscaping business, the odds are that you’ve built up a skill in decision-making, so you can do it!

To learn more on how you can start your own landscaping business, check out my startup documents here.

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