Once again this winter, I had the opportunity to visit a wide variety of different states and provinces, and met landscape contractors of all different types and sizes. There is still a common theme prevalent in our industry…
“Hey guys, let’s all work our tails off this year. If there’s some money left – and nobody’s sure that there will be – but if there is, we’ll see if we can share it around.”
Every company should start the year with a budget – planned/forecast sales and expenses that, when executed, will result in a fair profit. Without a budget you and your employees are in the same boat.
Without a budget, you’re all condemned to the same fate … work hard, then a little harder, and hopefully something will be left to share.
All these questions can be laid to rest with a budget. Once you know what needs to happen in order to be profitable, you can confidently present it to your crews. Without it, you have no plan to present.
You don’t need to share all your information. You can use percentages to keep things simple. Stick to easy-to-digest information like “Payroll costs are 25% of sales.”, “Equipment costs are 15% of sales.”, “Overhead is 22% of sales”**. You certainly don’t need to dive into each one and explain costs like rent, or insurance, or especially people’s salaries. This information is confidential and can be kept confidential by using percentages.
Most landscape contractors plan for a modest profit, something between 5% and 15%. This kind of profit is hardly something to keep secret and you might argue that it needs to be shared. If you’re 1 day over on a 2 week job, profit is gone. The margins are slim and everyone should be aware of just how slim they are.
Overhead is rarely explained properly to most owners, let alone crews. Explaining overhead will help everyone understand the ‘hidden’ costs of doing business. If you’ve followed step 1, you’ve already explained ‘how much’ overhead is (e.g. 22% of sales**). Now it’s time to identify (in a nutshell) where that 22% is going.
By the time you’ve factored all these costs in, there’s typically 10% profit left (often less!). If you’ve estimated 10 days on a job and they take 11, there’s no profit left.
To keep it simple, overhead is every cost that doesn’t get included on an estimate. That means every single cost in the company that does not get itemized on a job is an overhead cost. This includes costs like: advertising, office supplies, office salaries, insurance, tools and shop supplies, rent/mortgage, computers and IT costs, property taxes – every single expense that doesn’t get “counted” when adding up the actual costs of an estimate.
Once again, you don’t need to breakdown each cost by type. It’s good enough to outline the total costs (e.g. 22%) and then list through a series of examples explaining what goes into that percentage. That’s all the detail you need.
Now we can start into the good stuff … Everyone in the room is focused (more or less) on how they can be more successful through this meeting. What your company can afford to pay in wages is, more or less, determined by your budget. Your company’s budget helps you determine that you can spend X percent of your sales dollars on wages. The company cannot be successful (and won’t be around long!) if you keep increasing wages without increasing sales.
Therefore, the key to increasing wages is to increase sales. In the field employees’ language, that means increasing production. If they can get more work done in the same time frame, we can afford more in wages. For instance, if your company’s ratio of labor expenses to sales is 25%** and your crew’s wages add up to $100K, they need to be able to complete $400K worth of work in a season. If they can’t, they might not be worth the $100K you are paying them. On the other hand, what if they can work efficiently and complete $500K worth of work? Well, now they’re worth $125K. With the increase in production, they’re worth more (higher wages) and you’re much more profitable. Both sides get what they want.
Is it unrealistic to think a crew could increase its production by as much as 25%? Not really. We’ll focus more on that in Step 4.
Your employees are out in the field – out in hot, wet, cold, muddy and every other kind of weather under the sun doing physical labor. They are paid $15/hr, or $18/hr, but the word’s out that you’re charging $45/hr or $50/hr for their time to your customers. When you look at it from their perspective, you might see why they’re not too concerned with taking too long on a job…. After all, in their eyes, you’re making 100% profit or more on their time and labor.
To keep it simple, overhead is every cost that doesn’t get included on an estimate. That means every single cost in the company that does not get itemized on a job is an overhead cost.
But, of course, you’re not. The price you charge for labor needs to include:
And for many people reading this article – your labor rate also needs to include the cost of your trucks and equipment! By the time you’ve factored all these costs in, there’s typically 10% profit left (often less!). If you’ve estimated 10 days on a job and they take 11, there’s no profit left. If you estimate an hour on maintenance work and your crews take 1h 6min, there’s no profit left. The margins are that tight and it’s worth your time to explain that urgency to your crews. Eliminating those little overages here and there is what’s going to help you both make more money.
Share information. You’re not only keeping your staff in the loop, you’re showing your staff that being profitable is important. For the sake of everyone’s job, and everyone’s standard of living, it is.