Profit isn’t everything when it comes to running a business but if your business isn’t making a consistent profit, your passion will eventually give way to frustration.
In a recent visit to a friend’s company, there was a disconnect between what the owner believed his sales staff needed to sell and what his sales staff believed was realistic (and even possible). So how do you bridge this gap?
If you start from a ‘rewards’ or ‘profit’ first mentality, the answers are as black and white as the text on this page. With some simple numbers that any company can get their hands on, you can make sure the sales goals directly correspond to the rewards for everyone—for the owner, it’s net profit, for the designers, it’s their wages. In this article, we’ll take you through how to calculate realistic, measurable goals for maximum profit.
On Goals and Growth
When your business is small (you and a few helpers), it’s easier to stay on top of everything. You know how much your jobs sold for and you have a good idea how much time you can afford to spend before you need to move on to the next job. But as a business grows in size, and staff, many owners lose touch with day to day operations in the field.
Because staff are typically paid hourly or on salary (not based on company success), most have no idea what they should be selling (or producing) to justify their wage. And with very few quantifiable goals to work towards, there’s little incentive to work harder…
Setting Goals That Make Sense
Let’s go through the goal-setting process using our imaginary friend Dan’s landscaping business as an example.
Dan would like to finish up the year doing about $1.2M in design-build sales. He has 2 designer/sales people. Dan sells some of the work but he’d like to transition out of sales and is hoping his design staff can pick up the slack. One designer is more experienced and better paid than the other so Dan assigns the following sales goals:
| Position | Annual Salary/Wage | Sales Goal | |
|---|---|---|---|
| Senior Designer | $60,000 | $600,000 | |
| Junior Designer | $45,000 | $400,000 | |
| Dan’s Sales (Owner) | $200,000 | ||
| Company Total | $1,200,000 | ||
This looks reasonable and it adds up to $1.2M, but is it right?
Before we dive in, we just need a few more (very) important numbers.
The senior designer looks at Dan’s goal and says “Dan, it was a struggle to get to the $500K mark. I can’t do $600K.”
Dan wasn’t profitable last year and he knows he’ll never be profitable unless his company sells more work. If anything, in Dan’s mind, the goal needs to be even higher. So who’s right? The answer’s in the numbers.
Let’s start with the Senior Designer’s sales goal…
STEP #1:
Budget the overhead to be covered by the senior designer
Dan’s company has $300K of overhead expenses for his design-build division. That’s a pretty average overhead budget for a company of his size ($1.2M in sales). His designer’s sales goal is $600K, or exactly half of his total design-build sales goal of $1.2M. It’s logical then to assign exactly half his overhead, $150K, to this senior designer’s jobs.
STEP #2:
Estimate Cost of Goods Sold expenses
On average, Dan’s costs to do the work (labor, equipment, materials, subs) consume about 67% of the selling price of the job. This is also in the normal range. Between 60%-70% is typical of a successful design-build company and 45% to 60% is typical for a successful maintenance company.
You can estimate your own Cost of Goods Sold % by dividing your total job costs (field wages + equipment + materials + subcontractor expenses) by your total sales. Note that different divisions can have very different averages. For example, install work usually has a higher Cost of Goods Sold % because of the material expenses involved.
With these numbers alone, we can easily determine if this design/salesperson is overpaid or underpaid using our ‘rewards-first’ process.
| Start With: Senior Designer’s Sales Goal | $600,000 | |
|---|---|---|
| Subtract:Company Reward (Net Profit at 10%) | -$60,000 | |
| Subtract: Senior Designer’s salary | -$60,000 | |
| Subtract: Estimated Job Costs @ 67% of sales goal | -$402,00,000 | |
| Subtract: Share of overhead MINUS the designer’s desired salary (since we already included it above) $150K – $60K | -$90,000 | |
| Result (amount left over) | -$12,000 | |
Uh-oh. That’s not going to work. We’re $12K short. Who’s going to eat that? Overhead is fixed and we can’t just cut job costs – we need those workers and materials. The company has to make a fair profit or we might as well close the doors. So what gives?
The answer is simple. Using a reward-first approach, this designer is worth an annual salary of $48,000. That will offset the $12K shortfall and everyone will be happy—except the senior designer! They insist that they need to make $60K! They’ve got a family, kids, a mortgage and Dan likes this person. So, using our rewards-first approach, let’s set a goal that works for everyone.
STEP #3:
Modify the sales goal so the math works (for everyone!)
In the example below, we assume overhead remains fixed. Overhead costs won’t necessarily change if we increase our sales by a nominal amount, but they will change over time and it should be recalculated each year, at a minimum.
| Start With: Senior Designer’s NEW Sales Goal | $650,000 | |
|---|---|---|
| Subtract: Company Reward (Net Profit at 10%) | -$65,000 | |
| Subtract: Senior Designer’s salary | -$60,000 | |
| Subtract: Estimated Job Costs @ 67% of sales goal | -$435,00,000 | |
| Subtract: Share of overhead MINUS the designer’s desired salary (since we already included it above) $150K – $60K | -$90,000 | |
| Result (amount left over) | $0 | |
Perfect. If our sales/designer wants to make $60K/year, their sales goal is clear (and it took about 5 minutes to figure it out). Dan’s confident that he’s set a profitable sales goal and the designer understands the goal is realistic.
The math doesn’t lie.
Hopefully, the very next thought in this designer’s head is “Wow. If I could sell $900K, I could make $90K!” And for Dan, it would be worth it. Repeat the same process for the junior designer so they understand what they’re worth and the sales they need to generate to reach their desired income potential.
Of course, we need to make sure these estimates are accurate and that the jobs are finished on budget. Put the math to work for your business and watch your profits grow.
Ps. Now that you’ve set goals for your sales and design staff, learn how to set goals for crew and foremen.
Disclaimer: The numbers used in this article are realistic averages but are intended for example purposes only.
Wishing you every success in boosting your bottom line,
Mark
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.
