Why are you in business? To maximize the value of your firm, period.
There is no other reason. In maximizing the value of your firm, you create a great place to work, increased salaries and benefits, job security and a company that does business in a socially responsible manner. Have you ever seen a business in financial trouble that can provide these benefits for employees and customers?
And to maximize that value, you must focus on two ideas: The more time you sell, the more money you make, and the more profitable that time, the more money you keep.
Know what you sell. At the recent Real Green Systems Users Conference in Orlando, I challenged attendees to maximize the value of their businesses in 2013. I based my roadmap for growth on increasing profitable recurring revenue.
In the lawn care and maintenance business we sell time. We use that time to identify a customer need, provide a solution to that need, set up the customer on a service contract and do the same thing over and over again until a route or several routes are built.
Once you understand that what you sell is your technicians’ time, that time becomes very valuable. So everything that is done to effectively route customer calls will maximize the amount of time that can be sold. It’s all about recurring business.
In building the value of your firm, this recurring service model ensures that not only are you selling time in the present but also that there are predictable revenues in the future as well. So it makes sense that the most valuable asset in a landscape business is the customer list. Those customers that use your service on a recurring basis year after year provide the most value.
Long term, this list can be compared to machinery in a manufacturing business. It must be oiled by providing great service. Routes must be tight to maximize output from the machine. In the short term, the list can be compared to a life insurance salesman setting up a book of renewable policies that generate current income.
Some math. So we need a plan that includes growing the customer list as well as selling more to existing customers. After all, this customer list is the asset that spits out the profits. But remember, you are not in a high-net-margin business, but rather a moderate net margin business that generates high profits from selling to many customers who use your services on a recurring basis.
In order to satisfy the growth plan, the first year, would require 200 customers, 240 in year two, 288 in year three and 345.6 in year four. The required cash to fund this growth would be $50,000 in year one, $60,000 year two, $72,000 year three and $86,400 in year four. In all, you will need $268,400 to execute the plan.
Find the money. So where does the money come from to execute the plan?
Depending on how much growth you want, this money can come from operations or outside financing. In the example above, it’s likely that if the rest of the operation is efficient that the funds can come from operations.
Any growth plan based on the above company size that is more aggressive would probably require outside financing.
The above discussion provides a basis for growth. But growth is only half the challenge. Profits are the second variable when it comes to maximizing the value of your firm.
The tool that I use to do a sanity check on profitability is a benchmark of revenue per customer.
Speaking from experience
Hitting a $1 million in revenue is quite an accomplishment, so we asked a couple of contractors to tell us about it.
“It took me about six years to hit my first million-dollar year. The trick to reaching that milestone was realizing when I needed to replace myself with someone else. At around $400,000, I added an office manager so that I could focus more on field operations, bidding and strategic thinking. At around $600,000 I added an operations manager. At around the $1 million mark I added my first sales manager.
I find that most small business owners wait until the pain is almost unbearable before they add another overhead person. It requires some ego-wrangling to let yourself believe that someone else can do what you do, that they can "take care of the baby" you raised.
Here’s the amazing thing about crossing that $1 million mark. It’s not all that different. There weren’t less headaches, just different ones. Being a $1 million business does come with its share of advantages, especially in smaller markets. But to think that it’s the finish line is a mistake. It’s just the starting gate to the next million.”– Terry Delany, GroundSERV, Fayetteville, Ark.
Our construction projects skyrocketed in 2004. We began targeting newly certified landscape designers. Most of them did not have their own crews to install their master plans and had not yet developed a relationship with a contractor.
We helped them learn the business, and they not only gave us all their installation work but referred other landscape designers to us. As their businesses grew, so did ours. – Eileen Michaels, A Yard & A Half Landscaping, Waltham, Mass.
Most companies look at revenue for the entire company or revenue for a branch and determine profitability from there.
This can be a disadvantage because it doesn’t immediately reveal unprofitable customers or other parts of your business that are sapping profitability.
My suggestions on how to look at profitability are to:
- Look at dollars generated per hour, dollars generated per square foot of coverage per customer, or dollars generated per customer per year
- Benchmark that number
- Try to increase that average each year
Conclusion. Building a lawn care or maintenance business is a difficult endeavor. I think as a collective group as well as the atmosphere that Real Green created at their user conference a commitment to execute on the challenge was born. The three days we spent in Orlando were relaxing, entertaining and thought provoking. Most attendees left with “their batteries recharged” as well as a renewed commitment to growing their businesses.
Daniel S. Gordon is a New Jersey-based CPA. He runs Turfbooks, an accounting firm that serves landscapers. Email him at firstname.lastname@example.org.
Get a better ruler
For more practical advice on how to identify and track key benchmarks, read our 2012 Benchmarking Your Business Report. You can download it here: bit.ly/LLbenchmark2012