Many landscape business owners focus on building their revenue to build their wealth. There can be a correlation, but it’s not a direct one. To make a good return on your investment and earn an above average income, it’s critical to focus on the bottom line and work backward.
The fallacy of 10 percent
A study I conducted among my consulting and peer group clients showed the average company earns 8 percent net-to-owner and the top 25 percent earn 16 percent net-to-owner, with some niches earning 18 percent.
Net-to-owner is defined as owner’s salary plus net profit (calculated on an accrual basis) after straight-line depreciation and after the costs of owner perks, which vary from company to company and are sometimes quite large. Keep in mind these are averages. Some contractors are earning less, and some are earning much more. My questions for you are where are you now, and where do you want to be?
Growing up in the industry I heard experts claim owners should earn 10 percent. I find this target to be dull and misleading. First off, where did this number come from, and was it meant to be a standard or a minimum goal? Why not earn more than 10 percent? The problem with setting low goals is that you may hit them (but not exceed them).
Put earnings in your wallet
Have you ever wondered why your profit and loss statement indicates you’re earning good profits, but by the end of the year you’re not able to take that money out of your business and put it into your wallet? It’s a common problem. Here are six reasons it can happen.
1. You’re running your budget on a cash basis, and you’re not budgeting enough for equipment depreciation and thus profit.
2. Your receivables are too high; too many clients owe you too much money.
3. You’re financing your clients’ purchase of your products and services; you’ve become their bank.
4. Your accounts payable are not up to date, thus your net profit is not accurate.
5. You’re not taking out enough personal income each month and you’re waiting for the end of the year, hoping you have enough left.
6. Your equipment has too many breakdowns and management costs, and it’s sucking the profits from your business.
Avoid bad accounting advice
I often hear from contractors about the (bad) advice they get from their accountants. Accountants commonly inform clients at year-end that they’re going to “make too much money,” so they may want to buy some equipment.” This recommendation is flawed. Here’s why.
-Your accountant inadvertently is promoting the over investment in equipment, which takes additional time and money to maintain, pay for and manage. This move reduces future profit and also reduces the value of your business by reducing your “return on assets.”
-This mentality shifts your focus from making investments throughout the year, when they might be needed, to the end of the year, when you may have missed a window of opportunity.
-It shifts your focus from investing in people or training to buying equipment. You need a balanced approach.
-End-of-year equipment buying reduces your personal income, so there’s less in your wallet.
The higher your net-to-owner, the higher your valuation will be when it’s time to sell your business. If you want to put more in your wallet and/or the wallets of your employees, then you must start with the end in mind; look for both “time” and “cost” savings; and benchmark yourself, division by division, against your own results and against high-profit companies.
Focus on raising your net to owner, and you and your company will win.
Web extra
Visit LandscapeManagement.net for insight on how one contractor used Scott’s tactics to bulk up his wallet.
Scott, who has a master’s degree in business administration, is an author and consultant. He facilitates The Leader’s Edge peer groups for landscape business owners. Reach him via GetTheLeadersEdge.com.
