What to do when your budget’s profits aren’t where you would like them to be.
Often, the first budget you create will have an unfavourable bottom line. It may even set you up for a deficit. Don’t panic. This is the case for many companies there’s a reason why so many businesses fail without proper planning and execution! Making the transition to financial preparedness can be a difficult one at times, but it is so worth it. So many business owners don’t plan at all but there are obvious reasons why you should.
Although there is no “fixall” for every budget, we’ll try to touch on solutions for various issues. Keep in mind… LMN’s estimating tool uses your budget to determine the overhead markup and profits on your items.
Solution 1: Charge More for Work
This is the simplest fix from a budgeting perspective just make sure you’re not charging so much that you price yourself out of jobs. To charge more for your work, all you need to do is increase your budget’s sales numbers without increasing your costs. Sounds as simple as it is. Often, someone will call in saying their budget is showing a 2% profit margin, but they want to use 10% for estimating. The solution is simple… increase your sales until your budget’s profit margin is 10%. By doing this, you’re not increasing the amount of work you do (to increase the amount of work, we’d have to increase our costs), instead you’re simply charging more for the work you are doing (your costs stay the same, your sales increase).
As a gutcheck, after you’ve increased your sales, go into your Estimating Catalog and check out your hourly rates based on the budget you’ve created. They need to be competitive. If they are too high, you may need to look at one of the other 3 solutions for a deeper “fix”.
Solution 2: Save More
Have you ever heard the expression “a dime saved is a dollar earned”? We haven’t either… but we can say that saving 10 cents worth of costs is exactly the same as selling $1 worth of services at a 10% profit margin, but with less work.
Cutting costs is something that is personal to your business we can’t tell you exactly which costs you should cut. Some landscape contractors have field productivity problems – jobs are done too slowly, crews have too much downtime, jobs are constantly going over budget. Other companies have enough equipment to work 4 crews, but they’re only running 2. Other companies, especially in a recession economy, have enough overhead to do 25%50% more sales, but don’t have the sales to support it.
LMN has calculated ratios based on industry standards for you to compare to your own numbers, and provided an analysis tool for your budget. These might give you ideas as to how you can make changes or “fix” areas of your budget. This might also guide you as to where you can afford to make some cutbacks. Check out this video from LearnLMN.com that will help you understand your budget analysis.
Solution 3a: Sell More (and Maintain Overhead)
Doing more work will gain you profit, as long as you can do it without increasing your overhead expenses. Increasing the amount of work you sell will increase your sales (you’ll have more money coming in from the additional work), but you’ll also have to increase your costs (you’ll have more money going out to pay labor, equipment and material costs for the extra work you’re doing). However, there’s an excellent chance you can do that work and your overhead costs won’t change. Your rent won’t go up, your utilities will stay more or less the same, your cell phone plan won’t change, your accountant’s bill is more or less the same… this extra work will increase the profit margins earned by your company.
Let’s take a really simplified example to illustrate the point – and to keep it really simple, let’s just focus on labor hours. Say each labor hour costs you $20 in wages and payroll taxes. Overhead costs are $100,000 and you plan on selling 10,000 hours this year, so your overhead costs are $10/hour. You’re breakeven is $30/hour. If you could sell another 2,000 labor hours this year, would your breakeven still be $30/hr?
No. Your labor costs might stay the same ($20/hr), but your overhead is now spread over 12,000 hours instead of 10,000. Your overhead costs are now $8.33/hr ($100,000 divided by 12,000 hours) , so you’re breakeven is now $28.33/hr. Assuming your selling price is the same, you’re making an extra $1.67 per hour (extra 6% profit).
At certain times in your business, it’s essential that you invest in overhead expenses in order to grow your company efficiently and productivity. But for many businesses there is room to grow before those investments are necessary, especially landscape businesses who’ve seen their sales shrink due to a slumping economy. The trick here is to try to sell more work while holding overhead costs steady.
Solution 3b: Sell More (by Increasing Productivity)
This method requires the most work, but it’s also the most rewarding financially. By increasing productivity (the lower your field labor ratio, the better your productivity), the more likely your company is to improve its profits. Improving productivity means that you’re increasing sales without increasing hours worked (and paid)… or you might decrease the hours worked, but hold sales steady.
This is like saying you’re going to get more jobs done in the year by getting faster, more efficient. Materials are going to be better organized and ready when needed. Equipment breakdowns will be reduced and repair turnarounds faster (so the crews are using the fastest, most productive equipment available). Crews know what they’re doing the next day, are planning ahead and are reducing all the hours lost to mistakes, lack of information, or lack of motivation.
If you can shave .5hr a day in inefficiencies and rework, a 3 man crew would have another 300 billablehours that you could fill with sales. That’s about $15,000 per year, per crew. If you have 3 crews, that’s $45,000. There’s some profit.
Ever better, when productivity increases, your pricing gets more competitive. Not because you’re making less money, but because you’re taking less time. Less hours = less cost = lower price = more sales. The cycle feeds itself. Work is easier to sell, and work is more profitable all at once. The more profitable the business, the more reward money is available to compensate owners and key employees. Everyone is happier.
Certainly the journey to improving efficiency is a “longer” one. Watch for coming posts as we’ll share some of the information, meeting agendas, and tools we used to help improve our crews’ productivity and efficiency.
All the suggestions above will help you improve your profit margins. If you’re looking for some extra help, take your budget to your accountant and get some professional financial advice or shoot us an email at support@golmn.com and see if we can’t help you get your head around it.
