August 18, 2023 • 32 mins
Massively Increase Your Net Operating Income™ with The TCO Method™
Andy deep dives into the why and how of process costing and breaks down a few examples that show how important it is to understand what your true cost of doing business is and how it can impact your long-term success.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
[MUSIC]
(00:24):
Welcome to the TCO method, the only show focused on helping you massively increase your net operating income.
I am Andy McQuade. Thank you so much for joining me for today's episode.
And today I want to talk about something I promised for a while, which is process costing.
It ain't sexy.
(00:45):
It's not really fun, but it's important because you need to create a baseline.
You can't live on cash flow alone.
I mean, I guess you can for a while, right up until something like, I don't know, COVID happens.
And then your cash flow dries up, and what do you do?
(01:07):
Take that alone from the government.
So, process costing isn't something that's normally done outside of manufacturing.
Kind of like TCO, total cost of ownership isn't really looked at out of anything outside of like IT or manufacturing.
So, process costing should be important if you're ever going to really understand what everything you do in your business costs you.
(01:39):
And it's not fun, and it's not pretty, but it's kind of important.
And the earlier you understand what everything costs you to do, what every process, what every transaction, what everything costs you to do.
And then you can use this action, what every maintenance call costs you.
(02:01):
The sooner you'll be able to really put a value on time and use that to prioritize and hopefully scale.
This is where a ton of companies struggle.
And it's also why it's one of the fundamental foundational elements of putting the TCO method into the market.
(02:24):
And then you can use that action to affect in your business.
The reality is that to really understand what your time is worth, you need to take a step back and look at what every minute of a working day costs you.
(02:49):
If you have equipment that you buy for your team, iPads, cell phones, laptops, tools, whatever it may be.
Yes, they're tax write offs, I get that, right? Your office space, you can write it off, your utilities, you can write it off.
Here's the thing, you're paying that bill 24/7/365.
(03:16):
Your landlord for that office, assuming it's not you, doesn't just bill you for the time that you're physically in that office.
Your utility company doesn't just bill you electricity and natural gas and whatever else for the amount of time that your people are in the office using it.
If the office is using it, you're getting billed for it.
(03:40):
And now, with smart metering, they're billing you different prices for peak and off peak times.
What you need to do is you need to take a hard look at exactly what all that overhead that you've just written off for the last God knows how many years is costing you per hour.
(04:01):
So you're paying for 24 hours, but your work day is probably somewhere between 8 and 12.
So if you take, let's say, a month's worth of bills and you lay them all out for all the stuff that just goes into overhead.
We're not even talking about your employee's compensation at this point. Just what your overhead is.
(04:22):
How much do you pay every month for your vehicles?
If you bought equipment and you bought it upright, out, out, right, up front at the beginning of the year or whatever.
That's a cost that you're going to write off. And if it's below whatever dollars, it's going to get written off in the first year to begin with, but you still have to include that cost.
If you bought them a thousand dollar phone divided out by 12 months.
(04:47):
What does that work out to be?
You got to break those numbers down to an hourly rate.
Why an hourly rate? Because we're going to eventually tie it into their compensation.
So we can get an accurate view of what that costs you.
This is something that really you'll only see done during like a mergers and acquisitions play when a company is getting evaluated for sale.
(05:16):
So the purchasing company has an idea of how efficient the company they're buying is to see if there's a way for them to take it apart piece by piece and use it to scale.
Okay.
Manufacturing does it because it's all about being lean and mean and just in time inventory and blah, blah, blah, blah.
For what we're talking about to really value what your time is worth to really value what your employees time is worth to really value what every single thing you do should be costing or should be
(05:50):
reflected in how you're pricing and billing your services. This is a really important thing for us. It's mostly about prioritization and efficiency and optimization.
You're not burying a cost of a product into this. If you're a property manager, if you choose to bill your individual property owners, including all the stuff from process costing good on you, but it should be already part of your operating.
(06:17):
You should already be figuring out a way to make money and not just living on cash flow. You shouldn't be robbing Peter to pay Paul. You need to actually generate profit.
So take all your utilities every single thing you rent, your supplies, whatever it is break it down to a single month and then you take all the working hours for a month.
(06:40):
And then you have to work for 30 days a month on average. How many working hours is that I'm not going to break out a calculator and do it because I don't know what off that my head, but you are.
Hopefully, so you've got X number of hours in a month. Your guys aren't working seven days a week. I hope they're probably not working 24 hour days.
(07:05):
Take your process costing base number. You need to take the entire months chunk of all those expenses we talked about everything that goes into your overhead operations that you don't even think about that racks up 24 seven for the entire month.
So if you figure a 30 day months, how many days of actual working time for your crews are in there? Are they working seven days a week? They working 24 hours a day? No, they're not.
(07:34):
They just figure out well, how many working days and then how many working hours are my guys and gals actually working actually delivering value to the company being on call needs to be part of it, but you need to average it.
They're working five day weeks. They're working eight hour days and they've got a couple days a month of on call. How many hours does that work out to be for them for a month, not for a week for a month. Now you're going to take the entire dollar amount in all the overhead expenses for the 24 seven 365 bills that you're incurring, including equipment purchases.
(08:19):
You can get that total amount out by 12 months, figure out what it costs every month to pay that thing off. Same thing with tools, same thing with whatever you provide anything you provide for your company to function tools, hardware equipment, space, electricity, natural gas, water, food, all that stuff needs to be part of it.
(08:40):
You need to be considering as part of your process costing and you're going to crunch that entire dollar amount for that month worth of overhead into however many hours you calculate your employees are working in that period of time.
Once you have that number, you're going to include that count. It's a super, it's the most important calculation in process costing.
(09:05):
You can include all that overhead and BS time into every single hour of time that your people are working. I've talked in previous episodes of what is your time worth.
What is your employees time worth? You can't know until you understand what every hour of time is costing you.
(09:30):
You can't control that overhead, it's crunched into eight hours a day or nine or ten or whatever your guys work on average just work off the averages. It doesn't have to be to the penny. It just needs to give you a baseline.
And your costs are going to be different between your different types of employees. Your office employees are going to have a different cost than your maintenance employees are going to have different costs and you're leasing people because they're going to serve a different function and there's different levels of opportunity cost in each one of those jobs.
(09:59):
We're going to get to that in a minute. So once you have that number for all your monthly expenses being broken down to actual hourly overhead, right? If you've got 15 people on your team, you can take the overhead and you can break it down evenly between all 15 people or you can make a job specific.
(10:21):
I really prefer making a job specific because your maintenance guys are going to cost you more than your office admin assistant that answers phones because you're going to be buying those guys tools. You're going to be buying them iPads. You're going to be buying them cell phones. You're going to be buying it. You know, if you do that stuff.
(10:44):
That's the way you're going to be doing something specific to their job as a maintenance guy. The only thing that's probably going to be universal in the costs is the office space electricity, all that fun stuff because everybody's going to be considered using it whether they're in the office or not. That doesn't matter.
(11:06):
You're going to have a hub, a space, a storage area, whatever, a meeting spot, etc, etc, a home base of operations to work from. So in your calculation for each position, maintenance, staff, whatever, you're going to break the overhead down by their job.
(11:28):
Take their hourly rate and it's not their hourly rate. You're paying them in the check. You need to be looking at total comp. Well, what is total comp total comp is the payroll you're paying them.
You have to include the 7% of the social security that the business is paying in for them.
(11:50):
You have to include the income, insurance, disability, 401k match, every single penny that goes into those employees compensation on a 10,000 foot top down corporate level needs to be looked at.
(12:11):
What all those expenses are and you have to even unemployment insurance anything that you're paying into as an employer with W2 employees needs to be calculated.
These numbers change if you're hiring 10,99. It's a different calculation because the office isn't really theirs.
You're not paying their unemployment. You're not paying their workers comp. That's on them to do.
(12:38):
You're going to pay more out of pocket to those 10,99s in cash because they have to take care of all the other stuff. It's still part of your overhead. It's just not part of this particular calculation. We're talking about internal W2 employees right now.
Once you have all that stuff figured out hourly rate is this total comp is this overhead not rating expenses for your job position is this and you break it down to an hourly cost.
(13:07):
Now when a maintenance call comes in from whoever assuming you're not using an app assuming you're not automating things yet. Let's just start simple.
You're going to know if it's a five or 10 minute or 15 minute phone call from your admin leasing manager, property manager, whoever answers that phone.
(13:32):
What's their hourly rate? All in. What's their hour of time costing the company? Regardless of what they're actually doing. You're going to put a value on that. How comes in its 15 minutes?
If they're all in operating cost is $50 an hour. 15 minutes of that time is how much money?
(13:58):
Okay, and then it takes them another 10 minutes to create the maintenance ticket and then it takes them another five minutes to make the phone call to the guy to say, Hey, I've got this going on at this particular blah blah blah go fix it.
And then during that five minute phone call it's just like a meeting. Now you have two people working for you. Both of them with their own individual hourly rates. Both of them with their own individual total comp both of them with their own individual overhead expenses.
(14:26):
You total that up. What's that number? Once you know that number, then the maintenance guy has to do whatever he needs to do.
Phone hangs up. Let's just assume that there's nothing else being done in the office. It's in the maintenance team's hand now.
They got to go to the property. Check it out. Do the thing blah blah. Let's just say it's an hour and a half. Then I take their entire comp all their overhead for an hour and a half.
(14:53):
Oh, did they drive there? Do you own that vehicle? Well, what's that costing you per mile?
Oh, add that to.
Even if you pay them hourly, the vehicle is still right off for you as a business owner at a hopefully you're taking depreciation and hopefully you're taking mileage.
Got to hope so. Anyway, get the add all that up.
(15:16):
You'll mileage. However, you do your thing, whether it's actual expenses or mileage calculation based off of the IRS rate for that year doesn't matter include the number.
Then what does it cost to leave to get the parts?
And then what is it cost to come back and do the install and fix whatever it is that he needs to be fixing? He leaves gets whatever he needs comes back and does the install. Well, what is that cost?
(15:44):
Now you have to add all of the parts and pieces that went into that maintenance call right all the hardware.
Anything that had to be purchased anything that came out of inventory that you already purchased.
Cox, glues, paints, brushes, all that stuff, whatever whatever it is that's going to create your repair cost for that particular problem whatever it is.
(16:09):
And collect that data across your entire company for a significant period of time you should be collecting this data 24 7 365 regardless of if you're doing process costing or not.
I would say probably well over 90% of property managers and operators are not collecting the data in the same in the level that they need to be to really come to a hard number. Why? Because they don't have any processes set up to make it easy.
(16:37):
That's why we're talking about process costing so we can really look at what everything costs us and what not doing stuff costs us.
So we can understand how to optimize and fix our businesses right this is this is part of how you scale this is part of running a better business and it doesn't matter if you're doing real estate or operating a laundromat.
(17:02):
There are things you need to do in order to optimize streamline and maximize your profit from whatever business it is you're doing.
Simply functioning on cash flow is not a good business model because if the cash flow stops and you haven't set aside reserves sufficient to carry you through.
You get what happened during COVID nobody wants that.
(17:28):
You're setting yourself up for failure potentially so let's just say.
That particular fix was I needed the toilet toilet was running you know tank wasn't holding water can't flush anything just going and going and going because it needed a flapper.
But here's where we're going to get into the opportunity cost part of this.
(17:50):
Now as a knowner as a manager you have a choice to put in a toilet with another flapper.
But if the toilet is still good why would you do that just replace the flapper right 15 minute part 15 dollar part.
Okay will you put the 15 dollar part in plus all of that overhead operating expenses total count blah blah blah.
(18:11):
Average flapper lasts for three years.
So you're going to be back doing this again.
Four years five years six years from now.
Okay toilets don't last for six years but it's going to last for four years.
It's frickin porcelain somebody's not hitting it with a sledgehammer it's probably still going to work as long as you keep replacing the parts that fail.
(18:36):
Might be ugly might be pink green blue almond doesn't matter.
It can still function.
So you're going to put a flapper in you know that a leaky toilet costs you more money because of the extra utilities so you add that in there.
You have a choice when you're going to the store to pick up that 15 dollar flapper.
(19:04):
And it's really probably closer to five if you're smart and buying the right kind of thing.
Free packs five packs ten packs whatever.
And you can buy a hundred and fifty dollar toilet it doesn't have a flapper that won't leak.
You drop it in and it's solid for ten to fifteen years without having to go back and do this again.
(19:26):
Now the key here isn't the cost of the physical item.
You're going from fifteen dollars to a hundred and fifty dollars you're talking about a ten x increase in cost for materials.
The labor outlay your total cost of the process isn't going to change except it like this inflation is real.
(19:55):
I think everybody has figured that out over the last two years.
And the cost of labor today is going to be cheaper than the cost of labor for five six years from now when that flapper starts leaking again.
So you have to look at the decision as am I going to spend a hundred and fifty dollars instead of fifteen dollars right now.
(20:16):
To replace that toilet.
So I'm not back here six years from now seven years from now eight years from now.
I'm going to put that toilet in it's going to last me ten to fifteen years.
What I'm talking about has a fifteen year warranty on their guts their internals.
(20:39):
For the part that leaks fill valve is the same in every single toilet basically doesn't really matter what the brand is fill valve is a fill valve is a fill valve they're basically universal at this point.
And they're going to fail and they're going to need replacement every once in a while as soon as the float things stops working away it's supposed to.
But all that being said.
(21:01):
You have a choice to make every single time.
You operate a maintenance process.
Do I put the band aid on it for fifteen bucks and just complete it and worry about four years from now six years from now then when it's going to cost me even more than it did today or do I put something in that I don't have to worry about touching again for ten or fifteen years.
(21:32):
When you know what your process cost is not even looking at the opportunity cost right that's a whole different conversation when you know what your process cost is for that maintenance call for that leaky thing that's costing you more in utilities more in taxes because of sewers if you have them more in maintenance if you have a sub septic because you're filling your your let's feel right.
(22:01):
What is that doing to your business.
Here's where opportunity cost comes in so now you've got this thing that costs you a hundred and fifty dollars.
But you're avoiding right cost avoidance you're avoiding the future cost down the road you're mitigating that.
(22:28):
So over the lifespan of that item your maintenance is now basically reduced to what third how long is the fill valve last seven years ten years I guess if you have really hard water it could be less but it's about seven years so you've basically doubled the maintenance timeframe for that particular item.
(22:57):
So now you've completely negated that entire process cost for your four or six or whatever.
If you turn units you can proactively replace the fill valve if it looks funky.
And then you're good for another seven years you're already in there doing other things so each process understanding what that is understanding what that takes from beginning to completion.
(23:26):
You will help you build the value to the business.
You're not going to record it anywhere it's like opportunity cost you don't record a net loss in opportunity cost on the books.
You record net losses in real actual losses opportunity cost is not something that you that you tangibly do but here's the thing.
(23:54):
You have a choice four years from now when that toilet leaking again the decision from four years ago is now costing you yet another trip out with inflated prices because labor is more expensive parts are more expensive fuel and travel is more expensive.
(24:19):
And your employee whoever it is at that point could be doing something that brings more value to the business than going back and doing something again that's the opportunity cost number that you need to consider.
In simpler terms faster terms that are easier to quantify 10 years sealed lithium smoke detectors right now in August of 2023 when I'm recording.
(24:48):
I buy those I don't buy them myself I negotiate the price for those for kid a product.
In bulk for about eleven dollars and seventy five cents a piece call it twelve bucks each.
You go online you buy the battery operated nine volt or two double a battery one from wherever.
(25:16):
Let's say it's not five bucks anymore but let's say it's five bucks just for this sake of argument so you've again you've got something that costs five dollars.
With couple double a's in a nine volt or a nine volt and you've got the twelve dollars.
That the battery is what it is and it's just going to craft the bed in ten years or less but call it ten years that you should be replacing them every ten years regardless of which one it is so we're going to.
(25:45):
Equal time span both of them are useless after ten years.
If you want to do it right.
If you don't know why a nine volt battery operated smoke detector is bad after ten years I talk about it all the damn time listen to a different episode where I do discuss it.
So.
Now you've got this.
(26:08):
Two different levels of smoke detector they do the same job.
Smoke detector a that's five bucks that takes batteries.
Your tenants are going to take those batteries out put them in their kids toys you take those batteries out because they're going to smoke weed in their apartment.
You're going to take those batteries out because they're going to smoke cigarettes in their apartment they're going to take those batteries out because it just starts beeping.
(26:31):
Because the batteries are dying and they're too cheap to go buy a couple double a batteries to replace it even if you put that on them.
Insurance wise.
They don't care when a claim comes in if the tenant took the batteries out put them in their kids toys or took the thing and put it in a drawer or put a plastic bag over it because they were afraid to take it off the ceiling.
(26:54):
If that smoke detector isn't working and people die.
You're screwed.
So there's a cost avoidance risk management opportunity cost play there.
And there's a compliance piece because I'm pretty sure every single fire inspector anywhere in the country is going to require at least one smoke detector.
(27:15):
I don't care if you're in frickin po-dunk bumble fuck.
It's still going to be something that should be there by code.
And if you've got a C-A-V-O inspection assuming they do that it should be there as an owner who needs to ensure their stuff it should be there.
So you got that whole argument of cost avoidance and insanity that I just made.
(27:37):
The other thing is that you're going to either be on the hook for replacement batteries every six months to a year because the cheaper battery you buy right you buy the bulk batteries from HD supply their private label Amazon that are private labeled any of those things that have a wacky brand on it.
If those batteries last for six half of what a normal battery goes for you're lucky.
(28:02):
So you're going to be on the hook to replace those batteries every six months.
If you're doing it your teams are doing it number one you got to buy the battery one of those things cost now a bucket piece nine volt batteries probably a buck double a 50 cents a piece maybe.
Okay, so it's not a huge outlay on the material side process costing what is the labor to do that cost you a hell of a lot more than the cost of the smoke detector that's for sure.
(28:34):
Unless you don't value your time unless you don't value your team's time.
So now you're replacing those batteries every six months or every year.
By the time you get to the end of life of that unit here at 10 years you've now spent more money on batteries than the 10 years sealed lithium unit would have cost you upfront just on batteries.
(29:00):
And when you take an annual cost if you're in a multifamily complex where you can do four or five smoke detectors per apartment you can hit apartments in order.
Getting into the units doing the work you're probably 15 minutes maybe 20 minutes per unit depending on how everything goes.
Assuming you can get them all done.
(29:22):
What's your labor outlay for that what is 15 minutes of your guys time cost you.
And opportunity cost wise.
What impact does that have on things they could be doing that actually make you more money.
These are the decisions that you need to make as a business leader as a business owner as an operator.
(29:48):
If you don't know what your time is worth if you don't know what your employees time is worth.
If you don't know what their total process cost is for everything you do in your business.
You will continue to make bad decisions.
(30:10):
Part of that is the scarcity mindset thing the race to the bottom.
The why don't really want to pay $12 for my 10 years sealed lithium kid a smoke detector I want to pay $5 for my generic no matter what.
I want to make a generic no name brand piece of crap that I'm going to put batteries in every six months.
(30:32):
Oh really really.
Anyway.
I think I've made my feelings on this pretty clear I am done.
Ranting for today.
I hope everybody has a great weekend.
Please if you're watching on YouTube hit that bell subscribe if you're listening on Spotify Apple podcasts Google podcasts wherever podcasts are found.
(31:02):
Please leave a comment leave a review.
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(31:27):
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Subscribe every download helps.
I appreciate your time have a great rest of your day.
[Music]
[MUSIC]
(00:24):
Welcome to the TCO method, the only show focused on helping you massively increase your net operating income.
I am Andy McQuade. Thank you so much for joining me for today's episode.
And today I want to talk about something I promised for a while, which is process costing.
It ain't sexy.
(00:45):
It's not really fun, but it's important because you need to create a baseline.
You can't live on cash flow alone.
I mean, I guess you can for a while, right up until something like, I don't know, COVID happens.
And then your cash flow dries up, and what do you do?
(01:07):
Take that alone from the government.
So, process costing isn't something that's normally done outside of manufacturing.
Kind of like TCO, total cost of ownership isn't really looked at out of anything outside of like IT or manufacturing.
So, process costing should be important if you're ever going to really understand what everything you do in your business costs you.
(01:39):
And it's not fun, and it's not pretty, but it's kind of important.
And the earlier you understand what everything costs you to do, what every process, what every transaction, what everything costs you to do.
And then you can use this action, what every maintenance call costs you.
(02:01):
The sooner you'll be able to really put a value on time and use that to prioritize and hopefully scale.
This is where a ton of companies struggle.
And it's also why it's one of the fundamental foundational elements of putting the TCO method into the market.
(02:24):
And then you can use that action to affect in your business.
The reality is that to really understand what your time is worth, you need to take a step back and look at what every minute of a working day costs you.
(02:49):
If you have equipment that you buy for your team, iPads, cell phones, laptops, tools, whatever it may be.
Yes, they're tax write offs, I get that, right? Your office space, you can write it off, your utilities, you can write it off.
Here's the thing, you're paying that bill 24/7/365.
(03:16):
Your landlord for that office, assuming it's not you, doesn't just bill you for the time that you're physically in that office.
Your utility company doesn't just bill you electricity and natural gas and whatever else for the amount of time that your people are in the office using it.
If the office is using it, you're getting billed for it.
(03:40):
And now, with smart metering, they're billing you different prices for peak and off peak times.
What you need to do is you need to take a hard look at exactly what all that overhead that you've just written off for the last God knows how many years is costing you per hour.
(04:01):
So you're paying for 24 hours, but your work day is probably somewhere between 8 and 12.
So if you take, let's say, a month's worth of bills and you lay them all out for all the stuff that just goes into overhead.
We're not even talking about your employee's compensation at this point. Just what your overhead is.
(04:22):
How much do you pay every month for your vehicles?
If you bought equipment and you bought it upright, out, out, right, up front at the beginning of the year or whatever.
That's a cost that you're going to write off. And if it's below whatever dollars, it's going to get written off in the first year to begin with, but you still have to include that cost.
If you bought them a thousand dollar phone divided out by 12 months.
(04:47):
What does that work out to be?
You got to break those numbers down to an hourly rate.
Why an hourly rate? Because we're going to eventually tie it into their compensation.
So we can get an accurate view of what that costs you.
This is something that really you'll only see done during like a mergers and acquisitions play when a company is getting evaluated for sale.
(05:16):
So the purchasing company has an idea of how efficient the company they're buying is to see if there's a way for them to take it apart piece by piece and use it to scale.
Okay.
Manufacturing does it because it's all about being lean and mean and just in time inventory and blah, blah, blah, blah.
For what we're talking about to really value what your time is worth to really value what your employees time is worth to really value what every single thing you do should be costing or should be
(05:50):
reflected in how you're pricing and billing your services. This is a really important thing for us. It's mostly about prioritization and efficiency and optimization.
You're not burying a cost of a product into this. If you're a property manager, if you choose to bill your individual property owners, including all the stuff from process costing good on you, but it should be already part of your operating.
(06:17):
You should already be figuring out a way to make money and not just living on cash flow. You shouldn't be robbing Peter to pay Paul. You need to actually generate profit.
So take all your utilities every single thing you rent, your supplies, whatever it is break it down to a single month and then you take all the working hours for a month.
(06:40):
And then you have to work for 30 days a month on average. How many working hours is that I'm not going to break out a calculator and do it because I don't know what off that my head, but you are.
Hopefully, so you've got X number of hours in a month. Your guys aren't working seven days a week. I hope they're probably not working 24 hour days.
(07:05):
Take your process costing base number. You need to take the entire months chunk of all those expenses we talked about everything that goes into your overhead operations that you don't even think about that racks up 24 seven for the entire month.
So if you figure a 30 day months, how many days of actual working time for your crews are in there? Are they working seven days a week? They working 24 hours a day? No, they're not.
(07:34):
They just figure out well, how many working days and then how many working hours are my guys and gals actually working actually delivering value to the company being on call needs to be part of it, but you need to average it.
They're working five day weeks. They're working eight hour days and they've got a couple days a month of on call. How many hours does that work out to be for them for a month, not for a week for a month. Now you're going to take the entire dollar amount in all the overhead expenses for the 24 seven 365 bills that you're incurring, including equipment purchases.
(08:19):
You can get that total amount out by 12 months, figure out what it costs every month to pay that thing off. Same thing with tools, same thing with whatever you provide anything you provide for your company to function tools, hardware equipment, space, electricity, natural gas, water, food, all that stuff needs to be part of it.
(08:40):
You need to be considering as part of your process costing and you're going to crunch that entire dollar amount for that month worth of overhead into however many hours you calculate your employees are working in that period of time.
Once you have that number, you're going to include that count. It's a super, it's the most important calculation in process costing.
(09:05):
You can include all that overhead and BS time into every single hour of time that your people are working. I've talked in previous episodes of what is your time worth.
What is your employees time worth? You can't know until you understand what every hour of time is costing you.
(09:30):
You can't control that overhead, it's crunched into eight hours a day or nine or ten or whatever your guys work on average just work off the averages. It doesn't have to be to the penny. It just needs to give you a baseline.
And your costs are going to be different between your different types of employees. Your office employees are going to have a different cost than your maintenance employees are going to have different costs and you're leasing people because they're going to serve a different function and there's different levels of opportunity cost in each one of those jobs.
(09:59):
We're going to get to that in a minute. So once you have that number for all your monthly expenses being broken down to actual hourly overhead, right? If you've got 15 people on your team, you can take the overhead and you can break it down evenly between all 15 people or you can make a job specific.
(10:21):
I really prefer making a job specific because your maintenance guys are going to cost you more than your office admin assistant that answers phones because you're going to be buying those guys tools. You're going to be buying them iPads. You're going to be buying them cell phones. You're going to be buying it. You know, if you do that stuff.
(10:44):
That's the way you're going to be doing something specific to their job as a maintenance guy. The only thing that's probably going to be universal in the costs is the office space electricity, all that fun stuff because everybody's going to be considered using it whether they're in the office or not. That doesn't matter.
(11:06):
You're going to have a hub, a space, a storage area, whatever, a meeting spot, etc, etc, a home base of operations to work from. So in your calculation for each position, maintenance, staff, whatever, you're going to break the overhead down by their job.
(11:28):
Take their hourly rate and it's not their hourly rate. You're paying them in the check. You need to be looking at total comp. Well, what is total comp total comp is the payroll you're paying them.
You have to include the 7% of the social security that the business is paying in for them.
(11:50):
You have to include the income, insurance, disability, 401k match, every single penny that goes into those employees compensation on a 10,000 foot top down corporate level needs to be looked at.
(12:11):
What all those expenses are and you have to even unemployment insurance anything that you're paying into as an employer with W2 employees needs to be calculated.
These numbers change if you're hiring 10,99. It's a different calculation because the office isn't really theirs.
You're not paying their unemployment. You're not paying their workers comp. That's on them to do.
(12:38):
You're going to pay more out of pocket to those 10,99s in cash because they have to take care of all the other stuff. It's still part of your overhead. It's just not part of this particular calculation. We're talking about internal W2 employees right now.
Once you have all that stuff figured out hourly rate is this total comp is this overhead not rating expenses for your job position is this and you break it down to an hourly cost.
(13:07):
Now when a maintenance call comes in from whoever assuming you're not using an app assuming you're not automating things yet. Let's just start simple.
You're going to know if it's a five or 10 minute or 15 minute phone call from your admin leasing manager, property manager, whoever answers that phone.
(13:32):
What's their hourly rate? All in. What's their hour of time costing the company? Regardless of what they're actually doing. You're going to put a value on that. How comes in its 15 minutes?
If they're all in operating cost is $50 an hour. 15 minutes of that time is how much money?
(13:58):
Okay, and then it takes them another 10 minutes to create the maintenance ticket and then it takes them another five minutes to make the phone call to the guy to say, Hey, I've got this going on at this particular blah blah blah go fix it.
And then during that five minute phone call it's just like a meeting. Now you have two people working for you. Both of them with their own individual hourly rates. Both of them with their own individual total comp both of them with their own individual overhead expenses.
(14:26):
You total that up. What's that number? Once you know that number, then the maintenance guy has to do whatever he needs to do.
Phone hangs up. Let's just assume that there's nothing else being done in the office. It's in the maintenance team's hand now.
They got to go to the property. Check it out. Do the thing blah blah. Let's just say it's an hour and a half. Then I take their entire comp all their overhead for an hour and a half.
(14:53):
Oh, did they drive there? Do you own that vehicle? Well, what's that costing you per mile?
Oh, add that to.
Even if you pay them hourly, the vehicle is still right off for you as a business owner at a hopefully you're taking depreciation and hopefully you're taking mileage.
Got to hope so. Anyway, get the add all that up.
(15:16):
You'll mileage. However, you do your thing, whether it's actual expenses or mileage calculation based off of the IRS rate for that year doesn't matter include the number.
Then what does it cost to leave to get the parts?
And then what is it cost to come back and do the install and fix whatever it is that he needs to be fixing? He leaves gets whatever he needs comes back and does the install. Well, what is that cost?
(15:44):
Now you have to add all of the parts and pieces that went into that maintenance call right all the hardware.
Anything that had to be purchased anything that came out of inventory that you already purchased.
Cox, glues, paints, brushes, all that stuff, whatever whatever it is that's going to create your repair cost for that particular problem whatever it is.
(16:09):
And collect that data across your entire company for a significant period of time you should be collecting this data 24 7 365 regardless of if you're doing process costing or not.
I would say probably well over 90% of property managers and operators are not collecting the data in the same in the level that they need to be to really come to a hard number. Why? Because they don't have any processes set up to make it easy.
(16:37):
That's why we're talking about process costing so we can really look at what everything costs us and what not doing stuff costs us.
So we can understand how to optimize and fix our businesses right this is this is part of how you scale this is part of running a better business and it doesn't matter if you're doing real estate or operating a laundromat.
(17:02):
There are things you need to do in order to optimize streamline and maximize your profit from whatever business it is you're doing.
Simply functioning on cash flow is not a good business model because if the cash flow stops and you haven't set aside reserves sufficient to carry you through.
You get what happened during COVID nobody wants that.
(17:28):
You're setting yourself up for failure potentially so let's just say.
That particular fix was I needed the toilet toilet was running you know tank wasn't holding water can't flush anything just going and going and going because it needed a flapper.
But here's where we're going to get into the opportunity cost part of this.
(17:50):
Now as a knowner as a manager you have a choice to put in a toilet with another flapper.
But if the toilet is still good why would you do that just replace the flapper right 15 minute part 15 dollar part.
Okay will you put the 15 dollar part in plus all of that overhead operating expenses total count blah blah blah.
(18:11):
Average flapper lasts for three years.
So you're going to be back doing this again.
Four years five years six years from now.
Okay toilets don't last for six years but it's going to last for four years.
It's frickin porcelain somebody's not hitting it with a sledgehammer it's probably still going to work as long as you keep replacing the parts that fail.
(18:36):
Might be ugly might be pink green blue almond doesn't matter.
It can still function.
So you're going to put a flapper in you know that a leaky toilet costs you more money because of the extra utilities so you add that in there.
You have a choice when you're going to the store to pick up that 15 dollar flapper.
(19:04):
And it's really probably closer to five if you're smart and buying the right kind of thing.
Free packs five packs ten packs whatever.
And you can buy a hundred and fifty dollar toilet it doesn't have a flapper that won't leak.
You drop it in and it's solid for ten to fifteen years without having to go back and do this again.
(19:26):
Now the key here isn't the cost of the physical item.
You're going from fifteen dollars to a hundred and fifty dollars you're talking about a ten x increase in cost for materials.
The labor outlay your total cost of the process isn't going to change except it like this inflation is real.
(19:55):
I think everybody has figured that out over the last two years.
And the cost of labor today is going to be cheaper than the cost of labor for five six years from now when that flapper starts leaking again.
So you have to look at the decision as am I going to spend a hundred and fifty dollars instead of fifteen dollars right now.
(20:16):
To replace that toilet.
So I'm not back here six years from now seven years from now eight years from now.
I'm going to put that toilet in it's going to last me ten to fifteen years.
What I'm talking about has a fifteen year warranty on their guts their internals.
(20:39):
For the part that leaks fill valve is the same in every single toilet basically doesn't really matter what the brand is fill valve is a fill valve is a fill valve they're basically universal at this point.
And they're going to fail and they're going to need replacement every once in a while as soon as the float things stops working away it's supposed to.
But all that being said.
(21:01):
You have a choice to make every single time.
You operate a maintenance process.
Do I put the band aid on it for fifteen bucks and just complete it and worry about four years from now six years from now then when it's going to cost me even more than it did today or do I put something in that I don't have to worry about touching again for ten or fifteen years.
(21:32):
When you know what your process cost is not even looking at the opportunity cost right that's a whole different conversation when you know what your process cost is for that maintenance call for that leaky thing that's costing you more in utilities more in taxes because of sewers if you have them more in maintenance if you have a sub septic because you're filling your your let's feel right.
(22:01):
What is that doing to your business.
Here's where opportunity cost comes in so now you've got this thing that costs you a hundred and fifty dollars.
But you're avoiding right cost avoidance you're avoiding the future cost down the road you're mitigating that.
(22:28):
So over the lifespan of that item your maintenance is now basically reduced to what third how long is the fill valve last seven years ten years I guess if you have really hard water it could be less but it's about seven years so you've basically doubled the maintenance timeframe for that particular item.
(22:57):
So now you've completely negated that entire process cost for your four or six or whatever.
If you turn units you can proactively replace the fill valve if it looks funky.
And then you're good for another seven years you're already in there doing other things so each process understanding what that is understanding what that takes from beginning to completion.
(23:26):
You will help you build the value to the business.
You're not going to record it anywhere it's like opportunity cost you don't record a net loss in opportunity cost on the books.
You record net losses in real actual losses opportunity cost is not something that you that you tangibly do but here's the thing.
(23:54):
You have a choice four years from now when that toilet leaking again the decision from four years ago is now costing you yet another trip out with inflated prices because labor is more expensive parts are more expensive fuel and travel is more expensive.
(24:19):
And your employee whoever it is at that point could be doing something that brings more value to the business than going back and doing something again that's the opportunity cost number that you need to consider.
In simpler terms faster terms that are easier to quantify 10 years sealed lithium smoke detectors right now in August of 2023 when I'm recording.
(24:48):
I buy those I don't buy them myself I negotiate the price for those for kid a product.
In bulk for about eleven dollars and seventy five cents a piece call it twelve bucks each.
You go online you buy the battery operated nine volt or two double a battery one from wherever.
(25:16):
Let's say it's not five bucks anymore but let's say it's five bucks just for this sake of argument so you've again you've got something that costs five dollars.
With couple double a's in a nine volt or a nine volt and you've got the twelve dollars.
That the battery is what it is and it's just going to craft the bed in ten years or less but call it ten years that you should be replacing them every ten years regardless of which one it is so we're going to.
(25:45):
Equal time span both of them are useless after ten years.
If you want to do it right.
If you don't know why a nine volt battery operated smoke detector is bad after ten years I talk about it all the damn time listen to a different episode where I do discuss it.
So.
Now you've got this.
(26:08):
Two different levels of smoke detector they do the same job.
Smoke detector a that's five bucks that takes batteries.
Your tenants are going to take those batteries out put them in their kids toys you take those batteries out because they're going to smoke weed in their apartment.
You're going to take those batteries out because they're going to smoke cigarettes in their apartment they're going to take those batteries out because it just starts beeping.
(26:31):
Because the batteries are dying and they're too cheap to go buy a couple double a batteries to replace it even if you put that on them.
Insurance wise.
They don't care when a claim comes in if the tenant took the batteries out put them in their kids toys or took the thing and put it in a drawer or put a plastic bag over it because they were afraid to take it off the ceiling.
(26:54):
If that smoke detector isn't working and people die.
You're screwed.
So there's a cost avoidance risk management opportunity cost play there.
And there's a compliance piece because I'm pretty sure every single fire inspector anywhere in the country is going to require at least one smoke detector.
(27:15):
I don't care if you're in frickin po-dunk bumble fuck.
It's still going to be something that should be there by code.
And if you've got a C-A-V-O inspection assuming they do that it should be there as an owner who needs to ensure their stuff it should be there.
So you got that whole argument of cost avoidance and insanity that I just made.
(27:37):
The other thing is that you're going to either be on the hook for replacement batteries every six months to a year because the cheaper battery you buy right you buy the bulk batteries from HD supply their private label Amazon that are private labeled any of those things that have a wacky brand on it.
If those batteries last for six half of what a normal battery goes for you're lucky.
(28:02):
So you're going to be on the hook to replace those batteries every six months.
If you're doing it your teams are doing it number one you got to buy the battery one of those things cost now a bucket piece nine volt batteries probably a buck double a 50 cents a piece maybe.
Okay, so it's not a huge outlay on the material side process costing what is the labor to do that cost you a hell of a lot more than the cost of the smoke detector that's for sure.
(28:34):
Unless you don't value your time unless you don't value your team's time.
So now you're replacing those batteries every six months or every year.
By the time you get to the end of life of that unit here at 10 years you've now spent more money on batteries than the 10 years sealed lithium unit would have cost you upfront just on batteries.
(29:00):
And when you take an annual cost if you're in a multifamily complex where you can do four or five smoke detectors per apartment you can hit apartments in order.
Getting into the units doing the work you're probably 15 minutes maybe 20 minutes per unit depending on how everything goes.
Assuming you can get them all done.
(29:22):
What's your labor outlay for that what is 15 minutes of your guys time cost you.
And opportunity cost wise.
What impact does that have on things they could be doing that actually make you more money.
These are the decisions that you need to make as a business leader as a business owner as an operator.
(29:48):
If you don't know what your time is worth if you don't know what your employees time is worth.
If you don't know what their total process cost is for everything you do in your business.
You will continue to make bad decisions.
(30:10):
Part of that is the scarcity mindset thing the race to the bottom.
The why don't really want to pay $12 for my 10 years sealed lithium kid a smoke detector I want to pay $5 for my generic no matter what.
I want to make a generic no name brand piece of crap that I'm going to put batteries in every six months.
(30:32):
Oh really really.
Anyway.
I think I've made my feelings on this pretty clear I am done.
Ranting for today.
I hope everybody has a great weekend.
Please if you're watching on YouTube hit that bell subscribe if you're listening on Spotify Apple podcasts Google podcasts wherever podcasts are found.
(31:02):
Please leave a comment leave a review.
Subscribe even if you don't listen to every episode every subscription every download that we get helps us keep the show going.
Leave me a comment on the episode I will respond send me an email podcast at tco method dot com if you think anything I said was stupid or if you agree with me want to be like yes that's exactly right.
(31:27):
I'm on all the social media stuff I'm any equate.
I am on instagram and twitter and.
Threads which is dead and linked in is the best place because I'm always on LinkedIn.
Subscribe every download helps.
I appreciate your time have a great rest of your day.
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