Over the years I have heard many thoughts on how much profit an independent waste company owner should put into a bid, or a customer’s quote. Some say “I determine my cost and mark it up 10%, 15% or 20%.” I have heard some owners who said they take their operating cost and double it to get to the profit level they want to see in their business. The worst case is by default: an owner prices at or below Local Larry’s Lowball Hauling Service, with no regard for their profitability, just to get or keep the business.
With few exceptions a waste company owner’s largest asset is in their company. While they might have retirement accounts and investment accounts, their company could have an investment of debt, equity or both ranging from $2MM to perhaps $100MM, depending on the size of the company. When I look at some waste companies’ financial statements I see a return on assets in the range of 5%-10%. Remember, dividend yields from a conservative defensive stocks portfolio can be in the range of 4%-5%. With these underperforming returns on assets, waste company owners have a high level of risk. Owners sometimes deal with recalcitrant CDL drivers, 60,000-pound missiles running up and down the streets and highways, well-financed competitors, not- so-smart competitors, local, state and federal regulatory agencies, banks and demanding customers. It’s enough to make you wonder why you are in the waste business to begin with!
Institutional lenders and investors like to see waste companies perform at a 5-year payback on their investments. That means a 20% annual return on assets deployed in the business. If you invest your money (no debt) in the business, your profit should equate to 20% on your asset base. However, if you use debt, you subtract the cost of your capital. For example, it your debt structure averages 5%, you should look for a return on assets of 15% (20% – 5% = 15%).
Now the fun part – let’s assume that you have a one-truck operation and you have a $600,000 investment with your cost of capital at 5%. Your targeted profit for the year should be $90,000 ($600,000 X 15% = $90,000). If your business is front load, you would estimate the annual number of lifts per year and divide that into your targeted profit. For example, if you project that over the course of a year the front load truck will complete 25,000 lifts (some owners use container yards), you would divide the number of lifts into the targeted profit ($90,000 / 25,000 = $3.46 profit per lift). This means that your average minimum profit per lift has to be $3.46. If you look at this for other lines of business, you would use the primary operational metric for that line of business; residential-homes, roll off-hauls, portable toilets-pump outs and landfills-tons. Obviously, other factors can be considered in determining your targeted profit and profit per lift, but this exercise is the basis from which to start for determining your targeted profitability.
At the end of the day remember you are a business owner, you have a large amount of capital deployed in your business and either you or your lender should be demanding an industry average return on assets. This approach is analytical and ties to real operating and financial results in your business. Don’t follow Local Larry.
I hope this is useful to you.