Ray had quit his job as a factory foreman a year or so before in order to go into business for himself. Landscaping was his real calling, but in our part of the country that's seasonal work spanning four or five months. Ray figured he'd fill in as a painter the rest of the year.
There were family ties between my wife and Ray's wife. We had heard he was struggling in his new career and, with several rooms inside our house in need of painting, we were happy to throw some work his way. We didn't even talk price before hiring him. We trusted him to do right by us.
One day Ray was still finishing up when I arrived home from work. He pointed almost apologetically to a receipt left on our dining room table for paint he had bought. It was understood that I was to reimburse him for the paint, for which he took no markup. I struck up conversation about his business and the following came out.
He was charging us $35 an hour, which he said was the going rate for both painting and landscaping labor. He pointed out that most landscape contractors used undocumented immigrant workers and paid them around $8 an hour with zilch benefits. Nonetheless, Ray felt if he charged more than those firms, he'd never get any work.
During summer months his teenage son worked with him. His son's pay came out of the $35 an hour he charged customers. Ray lived about 50 miles away, yet he did not intend to charge us any more than his standard labor rate, even though his battered pickup truck slurped about a third of a tank of gas with each round trip.
Ray had been making $52,000 a year as a factory foreman with good benefits, he confided. He thought he could make more than that working for himself, but the business wasn't going as well as he expected. Didn't have enough customers, was the way he saw the problem.
I liked Ray. That's why I walked him through some basic business arithmetic.
Do The MathSuppose, Ray, you had all the work you could handle. Suppose you were booked eight hours a day, five days a week, 50 weeks a year, allowing two weeks for vacation. That projects to 2,000 billable hours a year. Multiple that by $35 and it equals $70,000 in annual revenue for your little business. Out of that you pay your son for his labor, plus all overhead. Don't forget to include the cost of the benefits you walked away from.
No matter how lean you operate, I told him, there's no way your overhead is going to run much less than 20 percent of your revenues. Now do the math. The only way to improve on his former factory job while charging $35 an hour would be to put steep markups on paint and materials. Ray assured me that's just not done in either landscaping or house painting.
But wait, Ray, your situation is even bleaker. Much bleaker. That's because you don't have a prayer of booking 2,000 billable hours in a year. You'll be lucky to get 1,000 billable hours, and that's only if you spend half your waking hours hustling up work. That projects to $35,000 a year, minus your son's pay and overhead.
Are you beginning to understand why you're having trouble making ends meet, Ray?
Plenty of Rays exist in plumbing and every other trade. They never think of doing this arithmetic before staking out on their own.
Calling It QuitsA few weeks later, Ray and his wife came to our house for a social gathering. Ray asked me to explain to her the same things I'd told him. I ran through the numbers again and opined that Ray would have to at least triple his labor rate in order to make a decent living, or put hefty markups on the paint and plants he provided to customers, or do some combination of labor and material price increases. Or, mimic the big landscapers and hire dirt-cheap labor to do the work while concentrating on marketing the business. Ray had neither the will nor skill to do any of these things, though.
Ray and his wife didn't want to believe he couldn't make a go of it simply by doing good work at prices people were used to paying. Yet, they couldn't find any loopholes in the stark arithmetic. They moved out of town a few months later to pursue a different dream in a distant state. They struggled mightily for a couple of years, but recently I was happy to hear their fortunes had taken a turn for the better as both found steady jobs at decent pay.
Should I feel guilty about having extinguished someone's entrepreneurial fire?