Understand your gross margins

Understand your gross margins

The Grow Show teaches you how to make more money.

September 30, 2010

Grow Show: Understanding Gross Margins on the Way to Earning More Money

Today’s Grow Show podcast from The Harvest Group begins a new three-part series called: How to make more money. To hear the podcast, click here.

Here’s what the series includes:
Part One: The Basics of Gross Margin: What is Gross Margin?
Part Two: How to Increase Your Gross Margin  
Part Three: Even More Ways to Increase Your Gross Margin

Part 1 will focus on sales and pricing. This podcast will help you understand exactly:
•    What is gross margin?
•    Why is it so important?
•    Best practices to help increase gross margin

There are many ways to make more money. We’ve boiled it down to three basic concepts:
•    Lower your costs  
•    Raise your revenue
•    Or, a combination of the two

Since raising prices is probably not high on the list of your options, we will begin with how to lower your direct costs and improve your gross margins.

Gross Margin really is the “financial furnace” for the organization and provides the best opportunity to make more money for your organization.

Let’s first define gross margin. In the maintenance world it goes like this:

Gross margin = revenue less direct costs

Direct costs = Labor plus burden + materials

Burden = Payroll taxes (unemployment insurances, federal and state; FICA, Social Security, Workers Compensation)
Payroll taxes are usually 20 to 25 percent of payroll/hourly rate. So, if you are paying a guy $10 it really is costing you around $12.50.

Set Gross Margin Goals

Determine the goals for gross margin with each revenue stream, and a total combined gross margin. Here are some examples of gross margin goals.
•    Maintenance 45 to 50 percent
•    Irrigation 50 to 55 percent
•    Extras 50 to 55 percent
•    Trees 55 to 60 percent
•    Snow 60 to 65 percent
•    Combined gross margin for all of the above 50 to 55 percent

Now determine where you currently stand with gross margin in each revenue stream. This way you can pinpoint the areas needing the most work in gross margin improvement.

Identify where you are low in gross margin. Is it maintenance? Extras? Or both?

Now, if you have the capability, see what jobs are lower performers. And if you really have the capability, are you losing with maintenance or extras? We suggest that you if you don’t already have the ability to job cost that you get a cost tracking system into play that can separate gross margins at the job level:

Job Cost tracking, it’s a must do “Best Practice”

So the key things to remember here:
•    Set gross margin goals
•    Know where you stand now with gross margin in each of your revenue streams
•    Have job cost tracking in place

Sales and Pricing:

1 – Get the right jobs to begin with, have a selection criteria in place. Consider some areas like these:  Financially stable, value driven, performance based, loyalty, size, location, market type, interest in landscape, budget for extras, win-win attitude.
Lesson Learned: Get the right jobs under the right conditions. Know when to say NO.

2 – Keep the keeper jobs and lose the loser jobs. Do a regular job review.
Lesson Learned: Sometimes having the wrong jobs under the wrong conditions really prevents us from getting to the right gross margin.

3 – Have an estimating process that includes several triangulation methods like: price per sq ft comparison, measure and use production rates and field estimate (man hours or crew hours).
Compare to similar jobs you already have.

4 – Know your costs, know your costs, know your costs. Determine your average hourly wage.
Here’s how: Add all of your wages together from foremen down, add burden and divide by the number of guys to get your hourly average wage.

5 – Know how to price with proper mark up to achieve the desired gross margin.
Divide costs by the desired gross margin reciprocal  
Costs= Labor plus burden + materials

Example Labor w/ burden is $13.50   

Visit www.harvestlandscapeconsulting.com for more information on best business practices.