Managing and maximizing labor will have the single biggest impact on your profitability. Yet too many owners struggle to find, keep, manage and motivate this single most important asset. Your field labor ratio is one of the most important key performance metrics because labor affects profitability more than any other cost in your company. Case in point: You might come up short on some material estimates occasionally, but we’ll bet your 2G hostas have never backed your skid steer into your client’s swimming pool.
Your Field Labor Ratio is the cost of wages for field (non-overhead) staff divided by your sales revenue. The lower this number, the better because it indicates you are spending less on labor for each dollar of sales earned.
So here’s the massive obstacle facing just about every company: Labor is both your biggest determinant of profit and your biggest headache. The following strategies can minimize the migraines and double your company’s net profits.
Revenue per Man Hour is a really simple, really effective number. It tells you how much total revenue (including revenue earned form materials, equipment, overhead markups and profit) is produced each man hour.
Once you know the benchmark revenue per hour you need to hit your sales goal, you simply divide each estimate’s selling price by the number of man hours estimated to get that estimate’s revenue per hour. If it’s higher than your benchmark, that estimate is going to help you beat your sales goal. If it’s lower than your benchmark, then it might not be the best job for your company. Remember: Your most valuable resource is good field labor staff. You don’t want to tie them up on jobs that don’t produce much revenue.
Throughput is the money left in your company after you pay your external vendors. To calculate throughput on a job, you simply take the job’s revenue and subtract your vendor’s costs, e.g.materials, subs, and rentals. The money leftover is called Throughput.
This number is even better than revenue per hour, since revenue per hour can be misleading if you do a lot of work with subs, or you sell high-priced materials at a very little markup. Your revenue looks great, but if most of the sales go towards paying vendors – it doesn’t help your company a whole lot. Throughput fixes that problem by showing you how much money is left in your company after you pay your vendors.
Divide each job’s throughput by its estimated man hours to calculate Throughput Per Hour. The higher this number, the better the job and the lower your labor ratio will be.
Equipment is a fantastic way to reduce your field labor ratio. Your field labor ratio (and revenue per hour) go way up when you leverage equipment to speed up jobs. Not only does each job’s revenue per man hour increase with increased speed or less people, but the time saved on each job can be time earning revenue on a new job. You get benefits to your revenue per hour on both sides.
Trucks: Larger trucks carry a bigger monthly payment, but if you’re hauling/delivering materials with your own trucks, you can save a lot of delivery hours by doubling your truck’s payload.
Skid Steers: Tracked skid steers carry a heftier price tag but they can be used in the wet Spring/Fall when traditional wheeled machines cause lots of damage. With an average monthly lease of about $750 per month, a 3 person crew needs to save one half-day a month for this machine to pay for itself!
Power Wheelbarrows: Cost 100x more than your standard 2 handle, 1 wheel version, but most contractors will say they can’t remember how they did work without one.
Mini-Excavators: Combined with a few work tools (augers, hammers, grading buckets, thumb buckets), they’re the swiss army knife for landscapers. They can get into tight places and dig 20x faster than humans.
Whether you do design/build or maintenance, there’s no profit margin like an upsell margin. Look for materials that get installed with very little labor (patio furniture, lighting kits, decorative structures, art pieces) and work them into your sales processes. These material types typically have strong markups and drive your revenue up with very few labor hours added.
Every accomplished business owner will tell you that knowing your numbers is critical to success. For landscapers, your field labor ratio is the key to maximizing labor productivity. Put the above strategies into practice to improve your field labor ratio and you’ll be well on your way to potentially doubling your net profits.
Mark Bradley is the CEO of LMN. Dedicated to transforming talented landscapers into profitable business owners, LMN provides the business management software and training owners need to grow. To learn more about how you can start transforming your business, FREE, with the LMN software platform, visit www.golmn.com. Interested in attending an LMN workshop? Visit golmn.com/workshops/ to register for a workshop near you.
Disclaimer: The objective of this article is to give general guidance on common financial numbers specific to the landscape industry. It is not intended to provide or act as professional financial advice.