Remember the Wendy’s commercial with the grandma staring down at her burger, shouting “Where’s the beef” at the attendant? She was obviously expecting to see something that wasn’t there (a larger beef patty). In the world of landscape contracting, the “beef” is gross profit margin variance. It should always be seen but often is not. Let me explain.
Gross profit margin (or simply gross margin) is calculated by dividing gross profit by revenue. Gross profit is calculated by subtracting direct costs from revenue. Direct costs (also known as Cost of Goods Sold) include field labor, job materials, subcontractors, etc. If you sell a job for $1,000 and your direct costs are $400, you will have $600 in gross profit and a gross profit margin of 60 percent. Gross profit and gross profit margin information is great to see after a job is complete, but it’s only the bun. The beef is the variance. The variance is what matters.
The variance is calculated by comparing actual gross profit margin to the estimated gross profit margin. If a job was estimated with a gross profit margin of 60 percent and the actual is 55 percent, the variance is -5 percent. If estimates are being prepared in alignment with your financial budget, the variance is a direct indicator of how close to budget actual production results are. This is why gross profit margin variance is the beef. It’s the single most important metric, and it should be monitored on a daily basis.
In many companies, the beef (or the entire burger) is simply missing. Job costing reports are absent. Jobs are completed without reporting of gross profit margin, with less-than-optimal results due to the lack of awareness among all the key players (crew leader, production manager, salesperson, general manager, president, owner). Without knowledge of the gross profit margin variance, everyone is operating with blindfolds on, unable to quickly learn and adjust from job to job, to make improvements and drive even more profitability.
A burger without the beef isn’t much of a burger. But a burger with a nice big juicy beef patty is oh so delicious–and rewarding.
Now go forth.
