Numbers to watch

Features - Cover Story: Benchmarking your Business

Know where to focus your attention on that P&L so you can scan financials and make faster, smarter decisions.

November 1, 2012
Kristen Hampshire

When the right numbers are at your fingertips, you gain better control over where your business is going. You can gauge whether you’re on track to hit the destination you plugged into your budget, or you’re veering toward a detour that will stall your performance.

“It’s like a dashboard,” Steve Pattie says of benchmarks and key financial reports. “Am I running out of gas here? Do I need oil here?”

Pattie, CEO of The Pattie Group in Novelty, Ohio, says the problem is, many landscape professionals wait until November to analyze their financials for the year. They spend the prior months plugging away, selling and doing, too busy to deal with deskwork. By the time they realize that the numbers aren’t stacking up favorably, it’s too late to act.

At The Pattie Group, weekly management meetings take place where this simple question is asked: What is the biggest problem you have in your department? And then, how do we solve it? “That is how you keep from being the Titanic,” Pattie says. “You have to move quickly. I don’t care if you are a $500,000 or $5 million company, you have to move fast to solve problems.”

Cut overhead fast

Don’t delay in trimming areas that can help your bottom line.

The phones aren’t ringing like you hoped. Sales are behind big-time, and if you don’t make some adjustments, your profit will take a serious dive. There’s a reason why the balance sheet gets its name. When numbers are out of whack, it’s your job to review areas of concern and make changes to reset the equilibrium.

Overhead is a tough area to cut, but it represents about 25 percent of your costs. (The other 65 percent is direct costs, and the remaining 10 percent should be profit.) Of that 25 percent, 12 percent is paid out in office salaries including the owner’s take-home pay. The rest includes expenses like your building, advertising phones and other operational expenses. If you need to trim back overhead, here are some ideas.

Pare down part-timers. If sales drop, part-time help in the office could be the first to go, Huston says of making difficult personnel decisions. Or, another option is to reduce full-time office staff to part-time hours.

Take a paycut. When overhead is too high, the owner takes a pay cut, plain and simple, Huston says.

Weed out weak links. Keep your team sharp and avoid a mass layoff by evaluating the team every year. Steve Pattie, CEO, The Pattie Group, Novelty, Ohio, suggests an exercise introduced by business guru Jack Welch. Say you are allowed to keep one person in your department – who is it? Now, say you can keep one more. Continue this exercise to identify the weakest link in every department. “Every company has dead weight,” Pattie says. “Is everyone really looking around them in the department to see where the inefficiencies are?”

The extras. Do you really need a meals and entertainment budget? Steve Rak at Southwest Landscape Management in Columbia Station, Ohio, decided: not really. “When things started getting tight for the maintenance business, I cut the meal budget to save money,” he says.

Also, Rak cut employee uniform expenses in half by moving from a uniform company to T-shirts. “We ask employees to purchase their T-shirts, and we still pay for half of the laundering fee for pants,” Rak says. The total savings adds up to a couple hundred dollars each month.

Work the phones. Talk to providers such as your phone company and find out if you’re getting the best “bundle” deal. Be sure to cut unnecessary telephone lines – those costs can add up.

Understanding your numbers and how they compare to industry benchmarks will help you quickly identify those problems that need attention. And you don’t have to hole up in your office for hours every day to figure this out, says Jim Huston, president at J. R. Consulting. “We don’t want to make a bureaucrat out of you,” he says. “We want you to know what you are doing and whether you are on track so you can go out in the field and make it happen.”

This is possible by zeroing in on key indicators in your financials. Ultimately, Huston says, an owner should be watching whether the company is following this mantra: price it right; produce it right; produce enough of it. That boils down to watching sales (volume), gross margins and overhead.

Sell it, do it. Pattie doesn’t need to pull up his financials to figure out if sales are lagging on the design/build side of his business. He listens for the phones. In fact, he analyzes how these calls progress from query to close. In essence, he is monitoring new sales – ensuring that the volume is there to reach the company’s budgeted goals. (Huston points out, “If you don’t have enough volume, you can’t pay your overhead costs and other expenses.”)

For example, if Pattie gets 500 calls, those are divided among four salespeople so each gets 125 leads. Of the true leads in that batch, about half are written up into estimates. From those, the company will sell 30 to 35 percent.

Those sales numbers are compared to the company’s annual goal, and Pattie works backward, dividing that volume by the number of salespeople, to determine how many jobs each salesperson should close each month.

On the maintenance side of the business, the key sales indicator is renewal rate, Pattie says. He assumes a 10-15 pecent loss each year. So if the company’s goal is to go from $1-1.3 million in sales – figuring in that loss of about 15 percent – the company needs to sell $450,000 more this year in maintenance jobs.

With these targets in mind, Pattie can look at weekly sales reports and determine whether the company is on track.

The amount of sales volume a company needs depends on a company’s overhead structure, Huston explains. He analyzes a firm’s history and projects a realistic volume for the year – a reasonable increase in sales given the market, economy and other factors. “I’m going to look at the profit and loss (P&L) statement from last year, all of the expenses and then put together a budget,” Huston explains, noting how the budget is essentially a roadmap. “Then, I’m going to ask the owner, ‘How much money is each crew generating?’”

A volume benchmark for a two- or three-person design/build crew is $600,000-900,000 per year. That means each crew member needs to generate about $300,000 minimum each season (assuming a nine-month working year). Maintenance crewmembers should generate about $55,000 per person per year for a fulltime employee, Huston says.

Strike a balance. You can sell a million jobs, but if you aren’t pricing them properly and producing them efficiently, you’re no better off. “If you’re having a bad year, it’s usually because sales are too low and/or you’ve had some bad jobs that ran over in hours,” Huston says. Then, the ratios get out of whack. Your equipment, labor and other costs are higher than they should be. And the point here or there really adds up.

“Construction labor should run 20 percent plus or minus 2 percent,” Huston says. “So if it’s 25 percent, something is wrong. The crews in the field aren’t producing.” Maintenance labor should fall in the 30 to 30 percent range.

All these costs figure into a company’s gross margin. This shows how much a company is earning after costs. It’s a good indicator of how profitable a company is at a base level.

To understand how the wrong price or poor production can affect gross margins and your financial big picture, consider this: Your direct costs are about 65 percent of sales. Overhead is about 25 percent of sales. That totals 90 percent, leaving a 10 percent profit for you at the end of the day.

“If your equipment costs are a couple percent higher, labor is a little to high, etc., the next thing you know, you don’t have a lot left over,” Huston says. “This is why benchmarks are so important to review so you have some simple rules of thumb to monitor.”

For a fast look at whether your company is going to have a profitable year, Huston suggests eyeing the bottom line. What is your monthly debt? What is the annual debt? “In a seasonal business, you usually start in the hole in March, April, May and June,” he says. “But gradually, you should see that negative number on the bottom get up to zero where you are at your break-even point. After June, in the months of July, August, September and beyond, you should see your net profit on the bottom start to grow.”

In over your head?
Companies get into trouble and have “a bad year” when overhead and sales volume are not in proportion. It’s easy for overhead to get too heavy, especially when sales aren’t rolling in as expected. Sales feed the business. If the business costs you more than you can feed it, then there’s a problem.

Ultimately, keeping the business balanced between expenses and income means watching costs, and getting out to sell and do the work.

“If your sales look good and your production looks god and the bottom line is on track month to month, you know your net profit is improving, then it’s pedal to the metal to sell more and produce more,” Huston says.


Get organized

Start improving the way you manage and review numbers.

1. Update records. Regularly update all expenses and income, and keep those numbers updated so the information you gather is timely. “A lot of times, contractors will work and jobs don’t get billed until the end of the month,” Huston says. “Not all invoices are put into the accounting system. So, revenues are inaccurate and expenses are inaccurate.” Stay on top of bookkeeping, or hire someone to help out.

2. Compare numbers. Review the benchmarks provided in the charts on pages 14 and 15 and see how your numbers compare. Be sure that your chart of accounts is organized in the same manner because where numbers appear (below or above the “top line”) will affect outcomes.

3. Start at the bottom. Review the bottom line and look at monthly debt and annual debt. This is a big-picture look at how your business is doing.