By Paul Taylor
Coming up with ways to spend money in the tree care industry is as easy as feeding 6 inch logs through a 12 inch chipper. The brass tacks question that sometimes goes unanswered until after that new machine is dragging on your rig — and on your bottom line — is: Will that capital investment pay for itself? More importantly, was the purchase necessary to increase gross revenue and net profit?
Thanks to an amazingly innovative group of tree care industry manufacturers, there are always bigger, stronger, faster, taller and more powerful tree machines entering the marketplace. I’ve watched guys at trade shows drool over the waxed finishes on the latest bucket trucks, cranes, chippers and grinders. Some of these same guys will take the drooling a step further by pulling the trigger on purchases amounting to tens of thousands of dollars during these heated moments of iron lust. My recommendation to everyone considering any significant capital expenditure is to first take a cold shower and then spend some time calculating how a purchase will affect the bottom line (balancing cash flow impact with the potential for increased revenue).
In a perfect world, the debt your business takes on will prove to be an investment in future earning potential. It’s important for tree care company owners to be able to distinguish between debt that will add to their business’ bottom line and debt that will steal from it. In general terms, good debt will generate greater profits than it will cost to service. If a company is able to borrow at 7 percent in order to earn 10 percent, the increased debt exposure might be a good strategy. On the flipside, if it costs an entrepreneur 10 percent to borrow money, but the investment only returns 7 percent, his cash-flow is likely to take a hit. In a nutshell, a business will not survive over time if it consistently fails to earn a positive return on its capital investments.
A capital infusion does not automatically guarantee an increase in revenue. Just because you spend $80,000 on a crane doesn’t mean you will be able to maintain enough booked jobs on your schedule to justify adding the new piece of equipment to your fleet — or the employees to operate it. Before you sign on the dotted line, spend a substantial amount of time researching your purchase and developing financial projections that qualify whether or not the buy is likely to pay you back a return that will keep your business in the black and moving forward.
A surefire way to increase the likelihood that a loan will pay you back a maximum return on investment is to focus the bulk of your energy on the return. Be disciplined and only take on loans if you’re confident they will pay you back dividends. If you are considering acquiring a piece of equipment in order to branch out in a new direction, be sure you have a set plan as to how you are going to procure the necessary business to keep the machine producing, and that the business itself will be sustainable in terms of profitability. There’s nothing wrong with relying on your gut to help steer you in the right direction, but there is no substitute for concrete number crunching and thorough planning when it comes time to make your final decision.
I’m just as turned on by horsepower, capacity and tricked-out options as the next guy. But when push comes to shove, I’m not likely to spend additional money on purchases or add-ons that aren’t going to be able to pay for themselves. If the bulk of your business is geared toward light residential pruning and removals, you probably don’t need a 140-horsepower machine that can chip up to 19-inch material. Keep your sites set on equipment that fits your business model, as well as your income structure. If you do decide to expand your operation, make sure you’ve done your homework so you don’t end up biting off more than you can chip. Business debt is one of the most common causes of stress in an entrepreneur’s life, so try not to take on a load that isn’t going to prove worthwhile over the long haul.
I lugged my fair share of brush in the back of a pickup truck before I bit the bullet on purchasing my first chipper. I labored over the decision, but ultimately felt confident my budding tree service was stable enough to support the expenditure. The efficiencies I gained by not having to spend hours loading and hauling brush allowed me to increase the number of jobs I could complete in the same amount of time. When I look back, this decision seems pretty trivial in the grand scheme of my career, but the calculated fundamentals that ultimately guided me in my decision to pull out my checkbook are the same that guide me today when considering much larger deals.
Paul Taylor, founder and former “head monkey” of Arborwear, has been involved in the tree care industry since he bought his first chain saw (before he was old enough to drive a car). He is now involved in a new venture, Long Splice Design, and specializes in the design, manufacture, and sourcing of sewn products. You will also find him a couple days a week plying his favorite trade in the treetops. He can be reached via e-mail at email@example.com