A reader recently asked us to cover the topic of finances for the “smaller” operator with just a few employees and less than $250,000 in annual revenue. I thought about it and recognized successful finances have nothing to do with size but with organization and discipline. Sound financial management knows no size.
Here are the five most important items for successful financial management for the green industry operator:
1. Pricing for profit. In the service business, pricing is all about gross margin. Gross margin is the percentage of the total sales price left once the direct (variable) costs are subtracted. This can be broken out for both materials and for labor or a hybrid for both. Depending on which aspect of the landscape industry you’re in, gross margins will differ. Turf care, for example, should be about 50 percent or higher, whereas design/build could be at 30 percent to 40 percent. No matter which area you’re in, gross margin is used to cover fixed overhead. Once the fixed overhead is covered (break-even point), any incremental revenue will show a net profit equal to the gross margin. The takeaway here is to make sure you keep your gross margins high. Don’t be a low baller.
2. Efficient use of labor. The efficient use of labor is vital in determining profitability. Let’s say we have a lawn technician who we target to bill out at $100 per hour. Let’s assume:
-Example 1: His drive time is a half hour for every hour, so his real return is $50 per hour.
-Example 2: His drive time is 15 minutes for every hour, so his real return is $75 per hour.
These two examples give us two very different results using the same pricing. The takeaway? Efficiency, or reducing windshield time in this case, is paramount to maximizing profit.
3. Controlling material costs. Materials must be figured into your pricing and used at the rate that you specified in that pricing calculation. Overuse, purchasing materials at higher prices than figured into the pricing calculation, theft and other shrinkage will lead to a dollar for dollar reduction of profit by the amount of the miscalculation or overage. Ordering and using materials at the prescribed amount at the proper cost is a financial control you should practice to maximize profitability.
4. Managing marketing dollars. Cost-effective marketing is one of the most difficult and ever-changing areas to manage. Many business people make marketing decisions completely backward. What I mean is they target a percentage of their revenue for marketing, spend it and never track it. Many folks in the industry say to spend 6 percent to 8 percent of revenue on marketing. The problem is these figures have no relation to the success of the campaign. The proper way to determine your marketing spend is to determine how much you’re willing to pay for a new customer of a particular type. Consider the life of a customer and the profit that can be made over that lifetime. Let’s assume we’re willing to pay $100 for a new customer. We need to find a marketing method that will deliver this cost per sale (easier said than done) and determine the number of new customers we want. The marketing expenditure should have nothing to do with a percentage of revenue, but rather the return on investment of the expenditure.
5. Accounts receivable (AR) management. A business that doesn’t have control of its AR almost always will have poor cash flow and will have trouble meeting its expenses. AR management starts with laying out a formal collection procedure. This procedure starts with an AR aging report with current, 30, 60, 90 and 90-plus columns. At each point along the way a collection effort should be made (i.e. a call at 30 days, a letter at 60 days and at 90 days perhaps a stronger effort). In any event, don’t allow a large percentage of receivables to go over 60 days. The older a receivable is, the more difficult it is to collect. Be firm when deciding to put a customer on credit hold.
All of the above are practices that profitable companies of all sizes adhere to for success. There are many small operators who are very profitable who want to stay small who understand these practices. And there are many small operators who don’t understand them who are unprofitable. However, the larger more profitable companies used and understood these practices when they were small. That’s how they got large.
Featured Photo Illustration: iStock.com/Barcin
