So, how’s business?
Answering this simple question requires some real analysis if you’re going to benchmark your operation – really determine how your firm is performing against industry standards. First, you need solid data. Next, you must understand which numbers matter most: what to measure, what to watch. Once you zero in on those numbers, the question is, “Where do I stand? What does high performance look like?” And, of course, diligence plays a strong role in improving benchmarks – continuous tracking, monitoring and planning.
If you own your numbers, measure them and watch them, you can change your business future for the better. The 2015 Benchmarking Your Business Report lays the groundwork for a fresh journey in managing your landscape operation, no matter your service focus or fiscal status. Use the charts as worksheets to begin collecting valuable data. Then begin tracking the key benchmarks we outline here.
Let’s get started.
Own It: We’ll define the benchmark so you can understand exactly what the number means and why it matters to your business. (We’ll also point out why ignoring the number is probably a bad idea.)
Measure It: You’ll learn how to calculate the benchmark, and what the numbers actually mean. How do you know if your performance is outstanding, or outright sad? Don’t worry, we’ll help you gain some clarity so those numbers look more approachable and you can use them to improve your business.
Watch It: Autopilot is not an option. If you breeze through the calendar months without watching these benchmarks, you’ll get surprises. Surprises cost a lot of money. We’ll offer some advice on how often to track benchmarks.
1. Revenue vs. Budget
Own It: This is a comparison of the revenue your business is actually generating to the budget you created. “The purpose is to see if you’re on track with your sales – if your sales are more than what you budgeted or if they are under budget. Then you can determine what to do to get those sales back on track,” says Jim Huston of JR Huston Consulting.
Measure It: Take your budget and line it up with your profit and loss (P&L) statement. From that report, review the various departments in your business and compare actual revenues to the budget. This measurement is important because there are fixed costs you must pay every month. “Your fixed costs will eat up your profits if you are not tracking and hitting that revenue number for the year,” Huston says.
Watch It: Monthly
2. Sales Backlog
Own It: Find out if you have enough sales in the pipeline to meet your revenue goals.
Measure It: This benchmark is easy to overlook only because contractors often do not have a system in place to track backlog. “We use a Microsoft Excel sheet and track it pretty extensively,” Huston says. “I want to know exactly what is sold, and what is pending and what’s in the pipeline.”
That pipeline is critical. For residential installation businesses, aim for about two months of backlog. For commercial installation, backlog might be six months out or more.
Maintenance backlog is a little different since it’s recurring revenue, but Huston advises having contracts for spring sealed in winter. “The backlog you really want to track is enhancements – all the extras,” he says.
Companies can also use software tools to track sales in the pipeline, says Bill Arman, consultant/partner in The Harvest Group. Tracking salespeople is critical. “If you start with the sale goal first, and work your way back to how many proposals must be submitted to get a sale, you’ll have a better understanding of what is required to achieve your goal,” Arman says.
Watch It: At least monthly; ideally weekly, or even daily
3. Accumulated GPM to Date
Own It: Gross profit margin is sales minus direct and indirect costs. So, the money you’ll bring in for all the work you do after you pay bills: materials, labor, subcontractors, rental equipment and so on.
Measure It: Here are the targets: commercial installation, 25%; residential installation, 35%; maintenance, 35%; lawn care, 50%; snow, 50%; irrigation, 50%. All of these gross profit margin benchmarks are “plus or minus 5%.” So, there is some leeway – but shoot for these profit ranges, Huston says.
Watch It: Monthly
“THERE ARE BUSINESSES THAT TAKE ON TOO MUCH OVERHEAD, SO THEY HAVE TO INCREASE SALES. OR, THEY HAVE AN EFFICIENT BUSINESS BUT THEY DON’T HAVE ENOUGH SALES TO SERVICE THE OVERHEAD SO THEIR PROFITABILITY DECREASES.” Jason Cupp, a Kolbe Certified growth consultant
4. Revenue Per Employee
Own It: This is how much revenue each employee should generate, and it is an indicator of performance and profitability on jobs.
Measure It: First, figure out revenues for each division by man-hours, Huston says. And be sure to take subcontractor costs out of the equation, because they can make it look like you’re producing less revenue per employee, Huston says.
For example, an installation crew member generates $100,000 per year (you’ve divided projected revenue for this division by crewmembers in the field producing the work). If your season is nine months long, that person should generate approximately $11,000 of revenue per month. A three-person crew should bring in $33,000 of revenue per month.
Watch It: At least monthly
5. Efficiency: Hours Budgeted/Hours Worked
Own It: Measure efficiency in your business by reviewing the hours budgeted by a job, and comparing that to the actual hours spent. By dividing the hours budgeted by hours worked, you’ll get an “efficiency rating,” says Marty Grunder, green industry consultant.
Measure It: Contractors at all levels can understand this basic math. “If a job took longer than budgeted, that’s not good,” Grunder says. “This is one of the first (benchmarks) we think about: time. It’s something everyone in a company can understand and an owner can find ways to improve.”
Grunder tracks efficiency on a board so every employee can see. Jobs budgeted for 15 or more man-hours go on the board. “We put the actual hours next to the budgeted hours so we can see how everyone is doing,” he says. “It’s full transparency.”
Grunder recommends shooting for 105% efficiency. “That means, on average, you are about 5% under what you bid, which should lead to improved profitability, provided you hit the materials estimate correctly,” he says. “There’s a lot more that goes into a successful company than these two things, however, it’s a great start and something everyone in the company can understand and rally around.”
Watch It: Weekly
6. Cash Flow: Short-Term Assets vs. Liabilities
Own It: Want to find out if your business has positive cash flow? This is the number to hone in on: short-term assets vs. liabilities. The operative word is short-term. We’re not talking about long-term liabilities like the cost of your facility, trucks and equipment. “We’re talking about accounts payable, taxes, your line of credit and credit cards,” says Jason Cupp, a Kolbe Certified growth consultant.
Measure It: Cash flow is not only how many dollars are in your checking account. What many contractors overlook is the fact that many of those dollars are “claimed” by debts not yet paid. “They may be pushing out payables to 90 days, or have a huge credit card balance they are not paying back,” Cupp says. “So, in fact, they have negative liquidity even though there’s money in the checking account to make payroll.”
Track short-term assets vs. short-term liability by adding up all of these liabilities – what you owe vendors, banks, etc. Compare that number to actual cash in the business. If your liabilities exceed assets, then you’ve got negative cash flow – even if the bills aren’t due yet and money’s in the bank.
Here’s how you figure out your assets-to-liability ratio. If you have $100,000 cash in receivables, but you owe vendors $250,000, your ratio is 2.5. “This is not good,” Cupp says.
On the other hand, if you have $100,000 in receivables and owe $60,000 to vendors (an acceptable ratio), your ratio is 0.6. “That means 60% of cash coming in your door will service short-term debt,” Cupp says. The lower the debt ratio, the better.
Watch It: Monthly
7. Equity Compared to Previous Year
Own It: This is essentially the book value of the company. “Business owners want to increase their equity year over year,” Cupp says. That happens by paying off debt, increasing profitability and watching the numbers. A positive equity trend over the years indicates continued improvement. If you ever want to sell your business, buyers want to see this upward trend.
Measure It: There isn’t an ideal number here – it’s a matter of watching performance and ensuring that equity increases every year. “You want positive numbers,” Cupp says, adding that he takes depreciation fees out of this figure.
Watch It: Monthly – but take a good, hard look at year-end.
Own It: COGS is your cost of goods sold, and the benchmark is a percentage of sales. Say you made $100,000 in a month and spent $55,000 (materials, labor, subcontractors, workers’ compensation, fuel). Divide COGs by the revenue, in this case $100,000, and you’ll get a percentage that tells you how efficiently your business is running.
Measure It: No matter the size of your business, COGS should be less than 60%. If COGS is off-mark, you’re either not charging enough for services, or paying people too much – and you’re not efficient. A small maintenance business might have a COGS of 35% to 45% of sales, Cupp says. “A large company with a lot of employees and other divisions besides maintenance might be 50% to 55% percent of sales. And a construction company will typically be more than 50%.”
Watch It: Monthly
9. Overhead Cost to Revenue Percentage
Own It: This number will tell you what it costs to run your business.
Measure It: Find out by figuring out your overhead (rent, loans, owners’ salary, office staff, computer system, utilities) – any cost required to keep the lights on. Overhead should be about 25% to 35% of revenues, Cupp says.
If you add cost of goods sold to this figure – say 50% or 60% – you can determine net profit. So, 25% overhead as percent of revenue plus 60% COGS equals 85% in expenses, leaving you with a 15% net profit margin.
“You want overhead to stay static as you grow,” Cupp says. Increasing sales and maintaining overhead will ultimately increase your net profit if cost of goods sold are in line.
“There are businesses that take on too much overhead, so they have to increase sales. Or, they have an efficient business but they don’t have enough sales to service the overhead so their profitability decreases.”
Watch It: Monthly
10. Extras Sold
Own It: How are you enhancing your recurring revenue with add-on sales? Every maintenance contract represents a sales opportunity, and that’s what percentage of extras sold in relation to maintenance sales will tell you, Arman says.
Measure It: For a standard commercial maintenance business, Arman likes to see 30% to 35% of recurring revenue in enhancements. A company servicing high-end residential clients might have enhancements up to 80% to 100% of recurring revenue.
For example, a maintenance contract on a commercial account that brings in $100,000 of revenue per year should also produce $30,000 to $35,000 per year in enhancement revenue. That enhancement number can double the overall revenue on an account that’s high-end residential, taking a $100,000 recurring revenue property to $200,000 total revenue for the year including enhancements.
Watch It: Monthly
11. Accounts Receivable Aging
Own It: “You can do everything right: You can have a safety program, enhancement sales and grow the business every year – but if you don’t collect the money, it’s for naught,” Arman says. Accounts receivable aging is what clients owe you – and how long they’re taking to pay you.
Measure It: You’re not the bank. When clients drag out payment beyond 30 days, you’re essentially giving them a loan. The first key to controlling accounts receivables is to bill on time – don’t wait until the end of the month. “If you have a $5,000 maintenance contract for July, you should be billing that the first week of July or even the last week of June to get the cash flow,” Arman says.
Bill enhancements immediately. And take advantage of technology like electronic funds transfer (EFT) or automatic withdrawal payment plans. “Cash flow can tear away your profit margin,” Arman warns. “We like to see accounts receivables at less than 30 days, and no more than 60 days,” he says.
Watch It: Weekly, or more often
12. Liability (Cost of Lost or Damaged Property)
Own It: When a vehicle or piece of equipment is down, how much does that cost your business? By tracking the cost of damaged vehicles and equipment, you can flag hiring and training problems. (Is one employee racking up major repair bills?)
Measure It: Focus on the big bloopers – especially if damage is out of disregard for your equipment and tools, Arman says. There isn’t an exact number or percentage to watch here, but keep the number on your radar and connect the dots if liability increases. “This information can be part of your review and training process,” Arman says.
Watch It: Monthly
13. Net Profit and Your P&L
Own It: Net profit is the number that tells you whether you’re making money – or spending more than you produce. “We’re in the business to do two things: grow and profit,” Arman says.
Measure It: Most landscape maintenance and construction companies are 8% to 12% net profit, and some successful maintenance firms are netting up to 20%. “Tree companies tend to be more profitable, as well as companies with snow blended into the mix because gross margins on snow are higher,” Arman says. (Review our benchmarking charts on pages 14 to 15 for specifics.)
Watch It: Monthly
“TREE COMPANIES TEND TO BE MORE PROFITABLE, AS WELL AS COMPANIES WITH SNOW BLENDED INTO THE MIX BECAUSE GROSS MARGINS ON SNOW ARE HIGHER.” Bill Arman, consultant/partner in The Harvest Group