Is Fear Keeping You From Knowing the True Cost of Your Machinery?

Mark Twain the great American author once said; "I am an old man and have known a great many troubles, but most of them never happened."

In the thousands of people I have worked with in over 81 different countries, the one thing I often hear and see in many people is fear. Fear of the unknown. Fear of losing the business and success they have enjoyed. Fear of old age. Fear of poverty. Fear of sickness or loss of health. Fear of a recession. Fear of strangers (or slick sales reps) taking advantage of them. Fear of not being good enough. Fear of change. Fear of the loss of respect. Fear of the loss of social position. Fear of not knowing or being smart enough. This list goes on and on.

The one that gets me is the large number of employees and even owners of businesses who are actually afraid of knowing their true costs. If you look, you can see fear expressed in their language. People use many excuses for not costing their machinery. Sometimes fear is hidden. Sometimes fear is directly expressed. Here are but a few:

• "If I included ALL my costs, I would never get a job." (Fear of loss)
• "Cost doesn’t matter, only getting work does." (Fear of loss)
• "These other large contractors and equipment dealers certainly know what their cost is. If they can do it for that price, I can." (insecurity in your ability to calculate cost)
• "My accountant tells me what our machinery cost is." (see my last blog at http://decisivecost.blogspot.com/2008/01/why-your-accountant-may-be-putting-you.html )
• "I make my money out in the field, not in the office." (insecurity)
• "I am too busy to cost." (if you are too busy to know cost, you are too busy to be in business. (Often fear keeps us too busy)
• "I am not good with computers." (Fear of the unknown)
• "If I raised my price, I would not get any business." (Fear of loss)

So permit me to ask the impertinent question. What fears and insecurities are keeping you from knowing your cost?

Steven Bechtel the founder of Bechtel, the worldwide construction and engineering powerhouse once wrote that knowing cost was critical to his success. They considered their cost records to be so important that every night they locked their cost books up in the safe. Do you take knowing your real cost this important?

Running your business based on fears, insecurities and excuses for not knowing true cost are common. This major factor causes many to go out of business. You need to make up your mind that to be successful in the long term, you need to know your true cost.

We need to quit worrying about everyone else’s price. You need to know your own cost. It literally almost does not matter at what price someone else prices his or her services. The FIRST question you must answer is what is your cost? You must know exactly what is the least price for which you can put your equipment to work. Somebody will ALWAYS be willing to take a job for less than your cost! Quit worrying about it and do something that makes your services worth more.

One of the biggest mistakes many people make is assuming that your competitor knows his cost. I can guarantee you that there is only a one in a thousand chance that your competitor knows his machinery cost. I have worked with some of the biggest companies in the world. The big guys can be and often are, as much in the dark as to their true machine cost, as anyone. This happens for two reasons, first because the owners of the company are further away from points of cost, than in smaller companies. The second reason is that larger companies often are highly influenced by accounting practices that do not properly deal with machine cost. (See my last blog at http://decisivecost.blogspot.com/2008/01/why-your-accountant-may-be-putting-you.html

Many businesses are still struggling to know their cost for machinery. For example, can you tell me in 20 seconds or less the following questions?

• "How many hours each of your machines ran last week?
• "How many gallons of fuel did each of your machines consume over the last thee weeks?
• "What are the highest and lowest gallons (or liters) per hour consumed by each machine? What’s the average
• "How many dollars of wear and tear did last week work put on the undercarriage of your tracked equipment?
• "For the project that you are bidding or tendering today, how many dollars in machinery wear and tear, will it cost you, if you win the project? Exactly how was this calculated?
• "If fuel goes up or down seven cents, how did that change affect the cost of each of your machines and the cost of the project you are bidding or tendering today?
• "How much is the cost per hour of the tires on that wheel loader?
• "How does differing conditions of use affect the tire costs? (commonly this can change from on one machine from $6.00 per hour to $89.00)
• "If your hours of use of machine goes down by 250 hours in a year, by how much does your cost per hour change?

So permit me to ask the impertinent question again. What fears or insecurities are keeping you from knowing your cost? Why wouldn’t you want to know your exact cost? This is especially true if you could know your cost for any machine in 2 minutes or less.

Today we (the world) has software that acts as tools to extend your abilities to know things about your business that you never before knew. These software tools do not replace you, they are an extension of you. They works just as an excavator works to extend the work a man can do with a hand shovel.

Have you seen the science fiction writer’s dreams of an exoskeleton suit that a man puts on and it gives him incredible super human power and strength? It turns him in a kind of superman. Software gives you the ability to do things you could not do before, even if you could somehow extend the 24 hours in a day.

Good, well-designed software duplicates Best Practices. It brings into your company the processes that the smartest, most knowledgeable people are using today. It can leap frog your company into doing things your competitor is only dreaming about doing.

You may ask, "Isn’t software that is specially created for my industry expensive?" Well the answer is yes and no. It is more expensive than mass-market software like QuickBooks and Microsoft. These companies can divide their millions of dollars of development cost over millions and millions of businesses. You need software custom designed for your specific industry.
Every dollar you spend for software should make you ten dollars, in every year that you use and own it. If it does not, you bought the wrong software or you failed to properly implement and integrate it into your business processes. Today many companies (like my company), offer financing and lease-purchase of software. This spreads out your upfront cash cost. Do not let money hold you back.

Many of your machines will cost you over one million dollars during their lifetime for owning and operating cost. If you have 10, 25, 100 or more machines in your fleet, how much can you afford to spend to better manage, control this multi-million dollar cost? $250.?, $500.? $1,000.?

When you buy even a small machine for say $63,497, what difference does another $1,000.up or down, honestly make? If you could buy an option on a machine for $2000. that could make you $50,000., would you buy it? Think of software that helps you manage and control your investment as an option that you add after you purchase a machine for far, far less than $2,000 a machine.

Back to fear. The best way to deal with fear is to confront it in the daylight. Get it out in the open. Admit your fear and honest feelings. Ask yourself what is the worst thing that could happen. Dale Carnegie wrote a timeless and great book called How to Stop Worrying and Start Living (You can review it by clicking here: http://books.google.com/books#id=yCKmKv99NoIC&dq=Dale+Carnegie&hl=en&prev=http://www.google.com/search?hl=en&rls=GGLG,GGLG:2005-31,GGLG:en&q=Dale+carnegie&btnG=Search&sa=X&oi=print&ct=result&cd=1&cad=author-navigational )

Do not allow fear to control your life. Power through. There is wisdom in a multitude of counselors. Bring in an expert who knows your type of business and machinery to help you make more money.

I do not care how much you made or lost in the past, you can do better. It does not matter how you always have done it in the past. It makes no difference how your dad or grandfather did it before you. That was then and this is now. To survive you are going to have to change and your people, policies and processes have to change. Knowing your true cost is part of this change. Move forward knowing the best is yet to come.

Call me. I can help you to know your machine cost.


Dedicated to your success,

Dan Rooks

President

Decisive Systems, Inc.

"The Owning and Operating Cost People"

Phone 941-926-9260

drooks@decisivecost.comhttp://www.decisivecost.com/

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Why Your Accountant May be Putting You Out of Business

(and not even know it)

One of the questions I often ask business owners who have a fleet of machines or trucks is …..Who does your costing? I get many different answers to this question. One of the common answers is "My accountant".

Unfortunately for the client, this is a good indication that unfortunately he may be trouble and most likely does not even know it. We have found that if the owner or senior manager of a business is not involved in critical cost decisions, many problems will result.

Our world today is often run by what our accountants tell us. They have a position of great respect in many companies. We pay accountants a lot of money every year. After all, they understand all that financial stuff. They should know best, how to cost machines. Shouldn’t they?

In this newsletter I am going to pick on accountants. If you are an accountant or CFO, please do not be offended. Keep reading and maybe it will help your practice and your clients success.

Seldom will an accountant tell you why his calculation of machine cost numbers are in error! The truth is that he or she may have no clue that what he is telling you is or might be wrong. His training, tools and methods have served him well in the past. Why would they be wrong now with machine cost? He believes in his accounting system. He did the calculations. He knows they are mathematically correct.

The problem with machine cost is that being mathematically correct and being right are two different things. To be right with machine costing you have to be mathematically correct but also you have to use the correct METHOD to get to true cost. This is why we use Dynamic Life Cycle Costing as the only method to know true cost per hour. Most accountants derive cost based on historical accounting records. The problem with using historical cost is that it is seldom correct when it comes to calculating future machine cost. More about that later

Many accountants have attended cost accounting classes but, perhaps as many as 80-90% of accounting students will tell you that their least favorite class was cost accounting. I don’t blame them. Most of the cost accounting classes that I have seen are poor. They are highly questionable as to their applicability or usefulness to the real world. Worse yet, the accuracy of the finished product when applied to machinery cost is in some cases, just plain wrong.

I fully realize that what I am saying may cause some to strongly disagree. It may appear that I am against accountants. I am not. Good accounting is fundamental to business success. Some of my most valued advisors are accountants. If you are a CFO or accountant please bear with me and let me explain.

The problem with standard Historical accounting methods is that it is very poor at calculating true machine costs per hour. Oh yes, these numbers need to be tracked for historic cost and necessary in calculating cost for tax purposes. But tax cost and real cost are two entirely different things. The numbers may be absolutely mathematically correct. The only problem is that they are wrong if you intend to use them for budgeting, estimating, pricing, bidding or tender purposes. If you use the numbers from your accounting system for machine costing purposes, you are setting yourself up for disaster. Maybe not today, but sooner or later it will cost you a ton of money. Maybe even your company, your retirement program and perhaps your children’s future.

Hear are three of twenty reason why historic accounting is not good for forecasting cost.
Many machines are very complex. These complex machines do not have one lifetime. They have a whole group of component lifetimes that start at hour one and expire at different rates or time. The cost in every subsequent year of operation is going to be different than the last. Looking backwards at what happened to cost last year or even over the last three years will yield unsatisfactory machine cost numbers going forward. The older the machine is, the worse this variation becomes.

An easy way to understand this is to think about the car you drive. In the first few years you are in the "honeymoon period" of very few problems once any small glitches from the factory are fixed. In the next few years new problems like brakes battery and alternator may need to be fixed. Fast forward to the 5th to 8th year of ownership and we see all kinds of problems that we did not see in the early years. AC system, power windows, power steering pump, water pump, electronics etc. need attention.

Depreciation for tax purposes often has little to do with real world costs per hour. A machine that has an eight to ten year or more economic lifetime may be written off for tax purposes much faster. What you do for tax calculations often has little to do with reality. This is not illegal. It is smart business practice.

Your actual cost changes. Some examples of changing variables are; fuel cost changes, types of work done with a machine, number of hours of machine use and geological conditions of use. All of these drastically effect cost calculations. Yesterday's cost is not today's cost.

If your accountant is calculating your machine costs here are eight questions to ask him or her about their numbers.

Q1. When you came up with these cost numbers, did you get them based on the accounting books or did you go out to the shop and get the machines’ Owning and Operating Manuals?

If he says he looked in the accounting books, strongly consider throwing out the cost numbers.

Q2. How of much of each track machine’s cost per hour is for undercarriage cost (or final drives, or hydrostatic transmissions)?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q3. How much of each wheeled machine or truck’s cost per hour is for tires cost?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q4. How much of each machine’s cost per hour is for ground engaging tool cost?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q5. Diesel Fuel is one of the biggest expense, when fuel cost change, how does Changing costs affect the cost per hour, mile or kilometer?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q6. How much of this machine’s cost per hour is for future major costs like replacement or rebuilding the engine or changing a hydraulic pump?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q7. How do varying job conditions change your cost per hour or mile?

If he can’t tell you, strongly consider throwing out the cost numbers.

Q8. How many hours or miles/Kilometers is this cost based. What happens if that number changes by this year by 10% or more, up or down?

If he can’t tell you, strongly consider throwing out the cost numbers.

Accurate calculation of your machine cost per hour is critical if you want to know your unit costs like; cost per ton or cubic yard or other units. Your businesses future depends on you knowing cost. Companies that know their cost, stay in business, Companies that don’t know their cost, go broke. This is true for new companies, it is true for companies that are 10, 20, 40, 80 or 100 years old. Your cost is dynamic and constantly changing.

So if you cannot count on your accountant for machine cost, on whom can you count? We have found that good costing of machine is a group effort. Maybe one person heads it up. But getting to true cost involves input from many people both within and outside of your company. Your accountant is as good as anyone to head this effort, providing that he or she has the time and the correct specialized tools. Good costing is like good estimating. It takes time and knowledge to be a good estimator of cost. In most cases it takes the efforts of a dedicated person, who is trained in machine costing. This could be an existing employee.

The correct tools are very important. This is no different than any other job. Seldom will a backhoe do what a hydraulic excavator can do and vice versa. Machine costing takes special tools like DecisiveCost. Spreadsheets can not deal with the required interactions necessary to get to true cost. This is a little like trying to keep company books and accounting with a spreadsheet. It would be a nightmare. (By the way, we have developed a test, if you think your spreadsheet is ok to use to cost machinery. Send me an e-mail and I will send you the spreadsheet test.)

Your machine cost is your cost. You cannot get accurate or dependable numbers out of some book or web site. You have to calculate cost per hour for yourself. There is just too much variation in cost per hour between machine owners. With DecisiveCost you can cost a truck or machine in two minutes or less, once you have set the system up. That book number is somebody’s cost but it is not your cost. After working with thousands of people in over 81 different countries, I can say with some authority that every company’s cost of a machine or truck is unique to that company and the type of work they are engaged in doing.

DecisiveCost is not an accounting system, or a maintenance management system it is a Dynamic Lifecycle Costing system. It is very unique. If you have questions about the accuracy of your current machine costing methods, call me or e-mail me. I can help you. Better yet, I will make you a lot of money and help assure the future success of your business.


Dedicated to your success,
Dan Rooks
President
Decisive Systems, Inc.
"The Owning and Operating Cost People"
In the U.S. Call 800-232-5767I
nternational 941-926-9260

drooks@decisivecost.comhttp://www.decisivecost.com/

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