Before you gear up QuickBooks and print out a profit and loss statement (P&L), here are some key numbers to watch and a few tweaks you’ll want to make to that report to be sure it is giving you a true picture of how your business is doing.
Remember, a monthly sit-down with your P&L should be a ritual you establish and maintain for the sake of your company’s success. Jim Huston, green industry financial consultant and owner of J.R. Huston Consulting, shows us how to get a quick, accurate look at the vital signs.
Before You Begin. Prior to digging into a P&L analysis, keep in mind a couple X-factors that can throw off your numbers rather significantly. One is depreciation, which generally runs 3 to 4 percent of sales. Two is over- or under-billing. “Say you do a $100,000 job in July and accrue the expenses, then send out the bill and get paid in August,” Huston says. “July looks like you lost a ton of money, and in August it looks like you made a ton of money.” Be sure to account for these variances.
Also, be sure you are running an accrual report as opposed to a cash report. A cash report does not include accounts receivables and payables. “Run a profit and loss statement on the accrual basis to get the revenue and expenses in the same period,” Huston says.
Finally, consider the way your P&L is formatted. “It’s probably not necessary to break down revenue by division, but if you are a business doing more than a half-million then you ought to think about separating out construction vs. maintenance and winter work,” Huston says.
Above-the-Line Expenses. First, identify sales, then all of the direct costs related to producing a job. Those are materials, labor, labor burden, subcontractor expenses, rental equipment, equipment that you own, etc. “Some people call these cost of goods and services (COGS),” Huston says. “Once you subtract those from your sales, you have identified your gross profit margin.” That’s a big deal, because gross profit margin indicates a company’s worth, he adds.
Below-the-Line Expenses. These expenses include general administrative overhead: office salaries, owners’ salary, advertising, computers, etc. “After overhead categories are subtracted, what is left is your net profit,” Huston says.
So, you obtain a gross profit margin number by subtracting your direct costs from sales; then the net profit margin is realized by next subtracting your overhead. (Check our profit margin benchmarks in Pricing for Profit)
Compare P&L to Budget. Now time to compare your P&L and budget. For example, your residential installation division shows a gross profit of 35 percent. Your P&L shows a gross profit of 25 percent. “You want to compare that P&L to your budget to see if your expenses and revenue are in line with what you planned,” Huston says.
There’s a big difference between reviewing your P&L and comparing your budget vs. actuals (that P&L). If there is a discrepancy, you can begin asking why and drilling down into your numbers to learn whether certain expenses are out of line. What adjustments can be made to boost profit and meet your budgeted goals? By looking at numbers monthly, any gaps can be managed immediately rather than allowing them to grow into serious profit deficits that go uncovered until year-end.
A small number of landscape companies reach $1 million in annual sales. Why don’t more entrepreneurs in this industry build million dollar companies? One reason is that they do not have a clear plan for getting there. It’s like putting together a puzzle without having the puzzle box top.
I started working with a contractor in Idaho four years ago. He was making approximately $300,000 a year, but by implementing good pricing, job costing and marketing, he increased his sales dramatically and will be around $1.2 million in sales this year.
As important as pricing, job costing and marketing were, he built a high-performance team to include a construction manager, a maintenance manager and a landscape installation designer / sales person.
To build a $1 million landscape installation business, you need to have a road map (the puzzle box top) with mile markers, intersections and, most of all, a clear destination. We’ll use benchmarks, critical numbers and business pressure points to illustrate how to get there.
This includes materials, labor, labor burden and equipment costs but no costs for subcontractors. Second is crew size. The vast majority of installation crews contain three people – a crew leader and two laborers.
Combining the two critical numbers, this crew should generate at least $300,000 in annual revenue. They often will generate more but, if they are working a nine-month season, $300,000 is the minimum they should generate. Third is general and administrative (G&A) overhead. G&A overhead for any landscape company less than $5 million in annual sales should total no more than 25 percent of sales.
Stage 1 ($300,000+): At this stage, the entrepreneur is working in the field with two full-time crew members. She is marketing the company, designing and selling jobs, and doing the office work. Sales should be a minimum of $300,000 (3 x $100,000). G&A overhead should be roughly $75,000 ($300,000 x .25). Half of G&A overhead goes into the owner’s pocket as her salary for doing office work. At this stage, the entrepreneur is supervising two laborers.
Stage 2 ($600,000+): At stage two, the entrepreneur has to have two crew leaders running a three-man crew. Revenue should total at least $600,000. The crew leaders must be able to do their jobs with minimal supervision. Otherwise, the entrepreneur is creating a baby-sitting service. The entrepreneur cannot be one of the crew leaders for she has to market the company and sell enough work to keep two crews busy full time. It’s also essential that the entrepreneur hire a part-time office helper. G&A costs should be around $150,000, half of which go to pay for the office helper and entrepreneur’s office work.
Stage 3 ($1 million:) At stage 3, the entrepreneur has three, three-man crews. If she has crew leaders who can work with minimal supervision, she should be able to do $1 million in annual sales. Some (or all) of the design work will probably be subbed out and a full-time office manager will need to be in place. G&A overhead will be in the $250,000 range, of which, $125,000 goes to salaries for the office manager and the entrepreneur’s office work.
She has to be able to hire or train three crew leaders, and an office manager. These people will implement the systems. Systems are second. An entrepreneur has to build the systems to control the business (field production, accounting, estimating, job costing, etc.).
Third, she has to be able to increase company marketing efforts in order to keep three crews busy.
However, it should make the route easier to follow. It should also tell you when you are off course and how to get back on course. As someone once said, “Half of getting to your destination is knowing the right road to take to get there.”
JIM HUSTON runs J.R. Huston Consulting, a green industry consulting firm. See www.jrhuston.biz; mail email@example.com.
I was in Las Vegas last month at the WaterSmart Innovations conference. You can read more about the news on page 8. I got to catch up with a lot of folks, but a conversation I had with Warren Gorowitz from Ewing stuck out.
We were talking about conservation and technology and their relationship to the managed landscape, and about the (sometimes) negative perception of landscapers by many at the conference who came from water authorities and regulatory agencies.
And Warren said this: “Plants don’t waste water. People do.”
I told him he should put that on a bumper sticker, because he’s absolutely right. The water problem isn’t going away – the weather’s only going to get drier and water more expensive. And there are three basic solutions to that problem: technology, science and human behavior.
We can spend all day talking about turf versus shrubs versus rocks and the various ET rates at a job site, and how to best monitor that site’s water use in real-time, but a person decides what to install in the landscape, and how that landscape gets its water. A stand of turf doesn’t waste water – it uses just as much as it’s given. And suppliers can develop all the coolest technology to track water use and report it and we can spend millions improving the water infrastructure in the country, but at the end of the day, people – landscapers and HOA boards and homeowners – are the ones with their hands on the spigot.
Doug Bennett, conservation manager at the Southern Nevada Water Authority and the brainchild behind the WaterSmart conference told me this story. One of SWNA’s projects examined irrigation system efficiency for Las Vegas homes. The average distribution uniformity of the 220 systems tested in town was about 40 percent. So the agency came in, improved those systems and got that DU average up to about 60 percent.
Bennett went back a few years later to see what kind of water savings those homes had seen since the system improvements. Here’s what he found: nothing. No savings at all.
The homeowners used the same – if not more – water. Human behavior strikes again.
So we have a people problem. But don’t throw up your hands yet. Landscapers are well-positioned to help during the water crisis. They are still the main stewards of their customers’ green spaces, and called on to make improvements meant to save water. Think drip systems, water audits and wholesale landscape renovations.
You combine the technology and science and human behavior to solve the people problems.
I worked for Sterling Landscape all the way through high school. John Sterling was from California. He told me that if you want to pursue a degree in landscape architecture, they have the best schools in the country.
And so, when I was 19, I drove down to the Bay area. I've never left.
My original intent was to come to California, get my degree and then go back to Boise and start my own company. Cagwin & Dorward was really what kept me here. I thought, “I'm probably never going to find a better company to work for than Cagwin & Dorward.” So I stayed.
Thirty-four years. We have a way of describing the culture at Cagwin & Dorward: It really feels like family. We probably have over 100 employees that have been with the company for 15, 20 years plus.
Four of the seven current owners of Cagwin & Dorward, myself included, all started at the very bottom of this company.
When you’re 19, oftentimes your goals aren’t real high. But my thought back then was, if I could get a job working in the office, I will have considered myself successful in this company.
We recognize that the customer may not always be right, but they're still always the customer. Tom Cagwin’s philosophy was, “Just make it right with the customer.” His point always was that maintaining our reputation is more important than a few thousand dollars.
We need to continue to keep growing the business so that we can provide opportunities for people to move from an entry-level gardener all the way up to become one of the owners of the company.
I just took over in August of this year. Dennis Dougherty was the former president and CEO. He had been with the company for 41 years. He started as a gardener as well.
We get constant solicitations to sell. But we made the decision long ago that Cagwin & Dorward will never sell. We'll always be a privately held company, and we will always be Cagwin & Dorward.
Several of our really good friends sold their businesses to LandCare, which was then rolled up into TruGreen. And some of them sold to TruGreen. I never really understood why. I mean, obviously, there was a tremendous amount of money involved, but I think being in business should be about more than just making money.
One of the things that I take a tremendous amount of pride in is that we have a very, very good reputation in our marketplace.
We're seeing signs of the recovery in Northern California. I think it's been getting better for the last probably two or three years. A lot more customers are starting to spend more money on extras.
They’re also becoming more aware of the cost of water. In a lot of areas, the cost of landscape water for customers has almost doubled in the last five years.
We were always judged in the past based on how green the landscape was. There was a lot less emphasis put on the cost of water, and much more emphasis put on the appearance of the landscape.
We're starting to see that shift.
It’s providing us with opportunities, not only opportunities to educate our customers, but to work directly with them on budgeting and irrigation retrofits and landscape renovations.
As the population continues to grow and water becomes an even more limited resource everywhere, there’s not going to be enough water to continue to keep putting in landscapes with – or even maintaining landscapes with – vast amounts of turf where it serves absolutely no value other than aesthetic value for the property.
In the next five to ten years, there'll be a lot less emphasis and focus on new construction and more emphasis on landscape renovation for our existing customer base.
The continued growth and success of your company is going to be highly dependent upon hiring good people. You need to make the effort and the investment to train them. You need to treat them well so that they'll stay, and your growth as a business is going to be highly dependent upon good people who care.