Gauging Your Business
If proper record keeping is the bedrock of monitoring the health of a business, then profit is the sweet fruit produced after all the intensive planning, long days and hard-earned attainment of a variety of business goals.
According to the Small Business Administration (SBA), record keeping provides the data to prepare a budget, measure profitability, break-even calculations and operating ratios. Among these, measuring profitability is without a doubt the one that generates the most excitement because it's the best scorecard about what a company has accomplished.
Profit is the amount of money you take in from your customers minus the cost of doing business over a particular time period. In simplest terms, profit is what remains after all expenses have been deducted. Lowering costs or raising prices can increase profit, but so can increasing the number of profitable sales.
Sometimes companies need to lower their profit expectations in order to survive. This is especially true during economic recessions. Eventually, when the economy becomes healthier, a company may be able to anticipate higher profits based on more business. Other factors that can influence profit expectations may include the introduction of new services or lower fixed or variable costs.
Fixed costs, or overhead, are expenses that don't vary based on the amount of work done. Examples include office rent, retirement benefits, equipment, utilities and insurance. It pays to keep an eye on all these costs and lower them as much as possible without sacrificing the quality of the services a company produces.
Variable costs are directly tied to the amount of services provided. In the landscape design business, this might include plant materials, masonry, fuel, tree stake kits, drainage materials and similar items used to complete build projects. When possible, you should make every attempt to gain volume discounts on these items and use due diligence in finding low-cost, yet dependable, suppliers for these materials.
When figuring profit, it's necessary to determine the specific resources required to generate revenues. Some of these resources include the amount of manpower required to perform activities and what facilities, equipment, material and supplies are required.
Gross profit margin is the amount earned before selling and administrative costs are factored in. It's figured by dividing the gross profit (sales less cost of goods sold) by the total sales. It's important for landscape contractors to review month-to-month trends to see whether business is improving or weakening. It also helps to see whether gross profits can cover your operating costs.
Different than gross profit margin, your net profit margin should be based on the costs of providing the services you offer and your overhead. It is the amount of profit that comes from every dollar of sales. It's vital that landscape contractors use profit margin statistics to see month-to-month trends and whether enough sales are being generated to hit your profit target.
“Our firm shoots for a 10 percent profit margin,” says Harry Vignocchi, chairman of ILT Vignocchi Inc., a landscaping business in Wauconda, Ill. “We carefully keep track of a variety of statistics to know whether we're meeting our target.”
One of the ways Vignocchi evaluates the success of the company's investment is to determine the costs of the various factors of production and determine the true profit when these costs are deducted from the sales income.
“Our company looks to ensure that labor and materials for maintenance jobs aren't more than 45 percent of every dollar we earn,” says Vignocchi. “Added to this is the approximately 15 percent of indirect costs, such as fuel, equipment and repair costs, and this brings us to 60 percent. The rest is overhead and profit.”
Overhead is the total of all costs of production that cannot be charged directly to the work done, including such things as rent for use of land and facilities, administrative and management salaries, taxes and other items.
“In the area of landscape construction, labor and materials are about 52 percent of costs, so the numbers are a little higher than the rest of our business,” Vignocchi adds.
With $15 million in business per year, ILT Vignocchi serves the residential and commercial marketplace. He's noticed that being big can make a difference as it relates to overhead.
“Bigger firms have more economy of scale when it comes to overhead compared to their percentage of sales,” says Vignocchi. “When a company can spread overhead over a larger number of jobs, it can have an advantage in pricing over smaller companies.”
As Vignocchi's firm did more than three decades ago, after management assembles basic assets, such as land, buildings, equipment and a permanent labor force, it needs to decide how best to use these building blocks to help the business thrive. Once that groundwork is laid, management needs to continually ask whether there are some processes that need to be redesigned to improve the flow of services to customers.
LOWERING COSTS, OVERCOMING FLUCTUATIONS
For instance, a good manager will ensure maintenance teams are using equipment that makes them the most efficient, being routed from job to job properly to decrease fuel usage and unproductive time on the road, and carrying all the equipment necessary to complete their daily tasks so they don't have to return to the company's yard. Proper maintenance also plays a key role in decreasing the amount of time a piece of equipment, such as a mower or truck, is sitting idle and not contributing to the bottom line.
It's also important to remember that business fluctuations caused by the highly seasonal nature of the annual sales cycle can cause problems in reaching profit targets. Short-term financing may be necessary during some periods of the year when expenses exceed income. It's possible that proper financing will be necessary and prepared well in advance before those parts of the year when there's negative cash flow. Adequate planning and good relationships with lenders can help smooth difficult lulls in business.
Companies within the landscape contracting industry vary in size and scope. According to the SBA, business owners should develop both short-term (weekly, monthly) and long-term (annually, three-to-five-year) cash flow projections to manage cash well. A cash flow projection helps prevent any cash crunch from turning into a cash disaster and endangering profits.
ESTIMATING FUTURE PROFITS
Before you figure your actual profits, it's good to get an estimate of what you need to do to reach your profit goals. To do this, you need to know how much you will be charging for your services and how many of these services you will have to sell. In extremely competitive industries, prices are often similar across the board. So the challenge for many firms is to lower their costs as much as possible to produce a higher profit.
Here's an example of how to figure the gross sales required to reach a 10 percent profit margin and a $15,000 profit by the end of the year:
Edgar Wright, president of Wright On Landscaping, decides he wants to make a $15,000 profit in 2004. The cost of fuel and supplies is 50 percent of the price his company charges. Equipment and labor costs add another 40 percent. So the company can expect a profit margin of 10 percent. To figure how much gross sales need to be in 2004, the profit goal — $15,000 — is divided by the 10 percent, or the 0.1 profit margin desired. The gross sales for the year need to total $150,000 ($15,000/.1) to reach the $15,000 income goal.
If Wright wanted to figure out the average amount of jobs per day his company would need to complete in one year to reach his gross sales, he would take the gross sales target ($150,000) and divide it by the average charge for a landscaping project. At Wright On Landscaping, the average job invoice is $1,800, resulting in the necessity for 84 projects to be completed and billed during the year ($150,000/$1,800 = 83.33). To see how many projects need to be completed each week, take the total projects for the year and divide by 52, the number of weeks in a year. The company needs to complete about 1.6 projects each week (84/52 weeks in a year).
While these projections are vital to a gaining a good vision of what a company needs to do in order to achieve its profit goals, there are wide ranges of variables that can affect the underlying numbers. For instance, perhaps five customers file for bankruptcy during the year and can't pay you for services, at least not this year. In this case, you'd need to make five more sales to achieve your profit target.
Whether it's bidding for maintaining a beautiful landscape or figuring profitability, proper measurements and a critical eye for detail are equally important to the landscape contractor who wants to succeed and prosper. With the proper knowledge in hand, the road to measuring profits accurately can soon turn into a smooth ride of success.
Jeff Chaltas is a freelance writer who lives in Shawnee, Kan.
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