By Harold Fox
What is your company’s real identity and what does your company really do? Most of you will answer you are an irrigation, lawn care, landscape maintenance or design/build contractor. But how do you get your work? Marketing, right?
Fact number 1: Your business is a marketing company.
Your marketing company sells green industry services. Those services must consume labor to fulfill the obligations your sales create. Simply put, you sell labor to fulfill your sales success, which leads us to…
Fact number 2: What you are really selling every day is time by the hour.
When you focus on the most productive marketing methods and billing all of the hours listed in your payroll reports, you can grow sales and profits. This is important to you, because without knowing how much time you are selling and what that time costs you, all other numbers, prices, systems, equipment and technology are ineffective.
Many great, useful business education articles have been written in landscape industry publications about knowing your numbers, raising prices, overhead recovery, bidding, budgeting and profit. Inevitably, the terms lowballing or lowballers come about. I have the feeling some companies may not know how high they can, or need to, set their profit and success bars. Here is some definition as to when a company is in financial risk or not generating optimal profit, to help those in need discover solutions.
You might have financial risk if…
- You are selling three out of four leads or better. This does not imply your work is not good to excellent, but consumers really do recognize ridiculously cheap. They just are not going to tell you what they know.
- You scramble for money to make a payment or a payroll, often by cutting your price on the next bid even further to turn fast cash.
- Your vehicles or equipment are tired or unreliable, and you don’t have the money to buy new, make a down payment, or the cash flow for an installment loan.
- Your bank account balance always looks like a flat line on a heart monitor.
- The taxable profit for you and your company is not at least 15 to 25 percent of sales, or more. That range might be 20 to 25 percent, or $40,000 to $50,000 for a sole proprietor or LLC and a $200K operation – and that is a minimum range. Or, if a $1 million corporate company or LLC, you might think $100K owner compensation and $50K profit for a total of 15 percent of sales.
- You can’t contribute to a retirement investment plan, or are not investing in other post-retirement income generation.
Most business owners will know all six of these answers without looking at any accounting reports or asking their accountant. So what do you do to turn your finances around?
Think of yourself as a marketing company that sells time, with the passion and desire to succeed. Many business owners have walked in your shoes, then sought help and knowledge, which turned life around. Success can be yours if you make, then execute, the right decisions.
Your company will never be any better than its pricing methods
You must have a vision for what you want your company to achieve for you, and have as a public identity. That means setting goals for 5, 10 or more years, and at business sale or retirement. Why is this important? I’m saying this because you can go nowhere meaningful without knowing what direction to take, and a plan on how to get there.
Accounting software, field service software, new equipment and GPS tracking for crews will never fulfill their return on investment potential if your pricing is not optimal. Your company will never be any better than its pricing methods.
Foundation work to create success
Your smartphone clock is your best friend. Use the stopwatch function to time every task you put into a service or job quote. How long does it take to redefine 100 feet of bed edge; mow a smaller lawn with a walk behind, or a larger one with a zero-turn rider; unload and spread a cubic yard of mulch; dig up and replace a sprinkler head or valve; string trim 100 feet of paving or bed edge; or plant 100 pieces of ground cover, a 2.5-inch tree or 10 two-gallon shrubs. Every task you do needs a production time, and you need to know that time to profitably price your work. Also important is to time production under the variable job conditions you encounter in the real world. It is quite different to install a cubic yard of mulch in open beds where it can be dumped and spread with a rake compared to pitchforking into smaller areas.
Success is in the details
- Build a new, goal-oriented sales and cost budget from your historical profit and loss statements.
- Develop production cost per man hour from your P&L statement and payroll reports. Make sure you only use production labor and production equipment costs. Include the hours you do field work or directly supervise job sites. Do not include subcontractors or job materials.
- Add up the rest of your non-production expenses such as phones, rent, marketing, business licenses, office help, software purchases or subscriptions, etc., to determine overhead.
- Add together overhead, full labor costs (payroll plus labor burden) and production equipment costs, then divide by the number of crew payroll production hours, plus your own field hours.
This will give you a simple calculation and result for overall cost of operation per crew hour. It’s not the ultimate answer to knowing your numbers, because not every crew may be the same size, and some may use grossly dissimilar equipment resources, and/or require differing amounts of supervision on your part.
If you do not have some of the listed items in your overhead expenses, find out or estimate what they cost and include them. This will ensure you have enough money in the future to add these expenses as you grow, and not create sticker shock for your customers with a big price hike. Plan and build for the future as if you own it now.
Success means ditching denial and fear
Too often in my 45 years in the green industry I have personally heard, or read in industry forums, contractors saying they can’t bid, charge or get “that much money” for a given service. There are only three reasons that could be: your work isn’t worth more money; you are trying to run a business in demographics that don’t support your services; or you have never asked or bid a service at a higher, more profitable price.
Let’s throw reasons one and two out the window on the assumption your work is industry best, and your clients have plenty of discretionary income. Having calculated your production costs and times, then comparing them to what you are charging for some services can be a shocking revelation. The first tendency is to deny the calculations and justify by thinking you made a mistake, or that a professional like myself doesn’t know what they are talking about or how it is on the street.
The second tendency is being fearful of losing clients or bids because your new and proper pricing is too high. Your cost numbers are not lying. Your old pricing methods that lack a system are leading you off course. Charging what you hear the other guy charges or making something up out of thin air or gut instinct is not a pricing and success system.
How to avoid the fear factor of charging more money
Have confidence that it is highly unlikely every job you price is priced wrong. Before learning what your costs are and comparing costs versus revenue on your jobs, you simply didn’t know the difference between a profit maker and a profit taker. If you use your new cost information and look at some past bids, you may have also overbid some jobs that could have been done profitably for less money.
When you come to grips with your numbers being right, and fear of the unknown is the only thing holding you back, success can be ridiculously simple.
- Raise prices on your money-losing clients and services without apology or justification, and let the chips fall where they may.
- Define your profitable customers and services, then target those types of clients and push those services.
Most often, contractors are pleasantly surprised at how few clients quit or complain when they are delivering great customer service and quality work. They knew you were too cheap to start with. Get financially healthy and live.
Harold Fox was a lawn care and irrigation contractor servicing residential and commercial clients in southern New Jersey for 43 years. He is a past president of the Irrigation Association of New Jersey. Fox sold his company and retired in 2015. He can be reached at firstname.lastname@example.org.