Industry leaders explain how to evaluate your profit margins for financial planning.
Q: I am a growing company with a current annual sales volume of just under $200,000. I need help with evaluating what my profit margins are and with financial planning. I am finding that the larger my company gets, the more difficult it is to put money away for the replacement of depreciating equipment. Where does that money come from? I want to pay my employees more, and offer more benefits, but simply cannot afford to at this time.
Also, we live in Ohio, which has a reasonably long off-season, and my employees would like to be able to make a full-time income with my company. If I cannot offer them the income level they need, they will leave me for greener pastures. How can I expect them to be loyal when they have their own futures to consider? How do I manage growth and pricing? Am I charging too much/too little?
A: This owner has a policy of paying cash for his equipment and tools. It is a good policy but could limit his growth opportunities because he does not have the correct equipment to handle his new clients. He is primarily a residential maintenance service provider and has the ability to grow his volume in this segment. We discussed various forms of short-term financing so he can acquire the equipment the needs to grow.
We discussed his margins, and I suggested to him that he was not earning an acceptable margin compared to other PLCs in his size range. Residential maintenance should generate a 50 percent gross margin. I explained his gross margin can be determined by taking the company’s total sales revenue, minus its cost of operations, divided by the total sales revenue, expressed as a percentage. This is an important issue, and we reviewed his financial reporting system, pricing and job productivity.
We reviewed his employee productivity, and I helped him design a job time study that will benchmark the time his crews spend on each job. This is very useful once implemented and continued through a 120-day schedule. I offered to help him review and analyze his time study once it’s up and running. After we discussed productivity, he realized his crews were not completing jobs in a timely and efficient manner. The time study will go a long way in helping him increase his gross margin.
Paying employees a livable wage and figuring out how to retain them is always a concern for small-volume contractors. The best solution is to pay employees for increasing their productivity and for producing more work and revenue. We discussed benchmarking each crew, challenging the crew leader to increase his crew’s productivity or revenue and offering an incentive for the increased business.
Incentivizing employees accomplishes two important factors in landscape management: increasing profitable revenue and keeping valued employees by giving them the opportunity to earn more. By offering crew leaders an additional .50 cents per hour for producing more work and company profit, it creates a powerful incentive for them. We also discussed offering crew operators a similar incentive. Once he implements this process, his employees will want to stay with the company and help the company increase profit.
He was also concerned about his pricing. We discussed his fixed and labor costs, and it was obvious he needs to raise his prices on many of his jobs. His foremost concern was losing customers, and we talked about how to ask a customer to pay a little more.
Satisfied customers will pay more if the increase is addressed from their perspective. Once a customer is convinced you are a low cost service provider, they will understand when you ask them to pay a little more because they know you are operating efficiently and providing their service at the lowest possible cost.
Rick Cuddihe, Landscape Industry Certified Manager, President, LaFayette Property Maintenance
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