Making a profit requires a plan. Earning a profit, of course, is the result of many things: good customers, good people, hard work and, yes, luck. But good customers, good people and hard work are all part of a smart plan. Every smart plan must answer three basic questions. First, how much profit must we make? Second, what customers do we want? Third, what people do we need? An annual plan has three tangible elements: (1) a financial plan, (2) a sales plan and (3) a people plan.
THE FINANCIAL PLAN (BUDGET)
The budget is the first step in the planning process. It answers the question, “How much profit must we make?” The best budgeting process is “bottom-up — zero-based.” A bottom-up budget forecasts profit first, then works up to the sales/revenue budget last. Zero-based means every expense is budgeted from a clean slate, instead of as an increase/decrease over the prior year. There are 10 steps in the process.
- Step 1: Project net profit
There is a profit requirement for every business. It is based on two factors: the asset investment and the growth rate. To run a healthy business, you need to earn at least a 20-percent return on total asset investment. Calculate the profit requirement by multiplying the total asset value (from the balance sheet) by 20 percent. In rapid-growth scenarios (more than 15 percent per year), a higher return rate is needed to avoid running out of cash. For faster growth rates, use Table 1 on page 22 as a guide to determine your return rate.
- Step 2: Project overhead (G&A) expenses
You must know and control your costs. In this step, zero-base-budget all overhead office costs (see Figure 1, left, for a list of these costs). Project spending for each expense item and document the reason for each.
- Step 3: Project overhead (indirect) expenses
Just as you did with the office (G&A) expenses, zero-base-budget (indirect) yard and equipment costs — including equipment depreciation (see Figure 2, left, for a list of these costs). Again, make a projection for each expense item and document the reason for each.
- Step 4: Calculate gross profit dollars
Total the dollar value of Steps 1 through 3. This equals the gross profit dollars required to pay for overhead expenses and the required profit. This is the key number in the plan. High-profit companies, while they are concerned about making the “sales number,” manage to gross profit dollars.
- Step 5: Project gross margin
The gross margin is the percentage gross profit dollars are of sales dollars. Gross profit is what's left after paying job costs. Job cost, also called direct cost, includes labor, materials, subcontractors and equipment rentals. This percentage is easily attainable from past years by looking at your actual accounting reports. Projecting this percentage is something of an art and includes forecasting pricing changes, material costs and labor cost changes, as well as factoring in labor efficiency. Note that there are financial benchmarks on the Web site www.kehoe.biz to help you.
- Step 6: Calculate sales/revenue
Divide the gross profit dollars by the gross margin to determine the sales/revenue budget. This is a target and it assumes that all jobs will produce the desired gross margin. While this may not be true of every job, on average, it is the most likely scenario.
- Steps 7-9: Calculate direct expenses
Using historical cost-of-sales percentages from the past two years for materials, rentals and subcontractors, multiply this percentage by the sales/revenue budget from the prior step. This creates a budget for every item except direct production labor.
- Steps 9-10: Calculate direct-labor expenses/production hours
The final budget number is direct-labor costs: foreman and crew. This is a “plug” number that completes the budget. The formula is total direct costs less the materials, rentals and subcontractors cost from the prior step. The last step is determining allowable labor hours. Divide the labor cost by an average wage rate to determine production hours. The production hour budget helps establish crew sizes and staffing requirements.
THE SALES PLAN
The sales plan is the second step in the smart planning process. It answers the question, “What customers do we want?” There are three elements to the sales plan: (1) the 80/20/30 analysis, (2) the price matrix and (3) the “high value” prospect list. We will discuss two of these elements: the 80/20/30 analysis, and “high value” prospect list. The discussion of the pricing matrix is complex enough that it requires a separate article. For more information, visit www.kehoe.biz.
You choose the kinds of customers with whom you want to do business. The best customers are those who yield you a fair profit. Therefore, unprofitable relationships must be made to be profitable or be severed. Start with your current customer list and rank it in terms of annual sales dollars, largest to smallest (see Table 2, left). Segment the list into three sections. The top 20 percent usually are your biggest and best customers. These are keepers. They, in fact, probably account for 80 percent of your profits. Your plan must be to renew and secure this group for the budget year.
The next 50 percent of that list is probably a “mixed bag” of profitable/unprofitable mid-size customers. Your strategy must be to renew and secure the profitable segment of this group for the budget year. The last 30 percent of the list are the smallest customers, who typically account for less than 5 percent of your overall profits. Your plan for this group is to raise prices 10 to 30 percent. If the customers push back, then it is probably best not to renew this group of low-profit customers and, instead, replace them with “high-value” prospects.
“HIGH-VALUE” PROSPECT LIST
The second part of the sales plan focuses on the list of customers you want, but do not yet have. These customers are desirable because they satisfy several key criteria. First, they are geographically close to you. Second, they are located on existing service routes and can “fill in” to create account density. Third, they are larger and more established, forming a geographic anchor account, around which you can build additional business using truck signage as an inexpensive marketing tool. Fourth, they are likely to purchase more “extras” and provide a greater volume of referrals.
This high-value prospect list should have at least 50 “targets.” The goal is to close five to eight of these “targets” every year. Using a short and focused list increases the odds of this kind of success. Since the financial value of your business is largely based on the quality of your customer list, by building or revising the list every year, you are increasing the worth of the most valuable asset you own.
THE PEOPLE PLAN
The people plan is the third step of a smart planning process. It answers the last question, “What people do we need?” Too many people balloon overhead and destroy profit, and too few people cause overload and produce inefficiencies that destroy profit. There are two components of the people plan: (1) the staffing calculator, and (2) the organization chart.
The basic structure for a grounds maintenance business is shown in the Diagram on page 24. Although the organization chart gets revised with every new financial and sales plan, nothing really changes in the basic structure. Only the talent requirements change. It is very likely that positions need to be added and veterans either promoted, left in place or removed if they no longer fit (they can't, or haven't been doing the work). The structure doesn't change, the people do. Your plan must match the right talent to the business need. Not the other way around, where a job is made to utilize a particular talent for a person. Every box on the organization chart has a specific job description. We do not have the space in this article to discuss specific job descriptions, but further information is available on the Web site www.kehoe.biz. The staffing calculator determines the number of people you need.
The common denominator used to determine staff-ing levels is the sales budget. The larger the company, the greater the staffing needs. Start with the sales budget and divide it by the staffing benchmark to determine approximate staffing needs for each position (See Table 3 on page 22). For example, a $2 million sales budget (for a maintenance business) requires two account managers. There are additional staffing benchmarks on the Web site www.kehoe.biz to help you. Once staffing levels are determined, go back and review the zero-based budget assumptions to assure that everyone in the structure is accounted for in the plan.
These steps of the planning process can get you headed in the right direction. The process is essential if you want grow and increase profits. The plan provides a “vision” and a “blueprint” for you to follow during the year. It also helps you make the right decisions and the tough decisions early before they can cost you lots of money. When you start a journey, you always end up going a lot farther, with a great deal more accuracy, when there is a map in the car.
Kevin Kehoe is the owner of Kehoe & Co. (Laguna Niguel, Calif.).
- Computer expense
- Dues and subscriptions
- Interest expense
- Insurance (Health, General, Life, Liability and Workers Comp)
- Office expenses (supplies and postage)
- Rent/facility costs
- Salaries/burden (administration, management and sales)
- Professional fees
- Telephone and radios
- Training and education
- Supervisor labor/taxes
- Small tools and supplies
- Fuel and oil
- Repair and parts
- Show wages/burden
- Equipment leases
|SALES GROWTH||RETURN RATE|
|CUSTOMER LIST NUMBER OF ACCOUNTS||PERCENT OF PROFIT|
|STAFFING CALCULATOR POSITION||REVENUE / POSITION|
|Foreman (3 man crew)||$150,000|
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