We talk a lot here about the importance of leadership, culture, and exceptional customer service for your company to succeed in the landscaping business. But the truth is you can get all those right and still lose if you don’t get your financials right too.
In short, your company’s financials are the ultimate scorecard, revealing where you need to improve if you want to win.
To help our ACE Peer Groups control and grow their businesses, we work with them to track and manage 13 numbers that we know landscaping companies need to monitor closely if they want to succeed. By establishing benchmarks for those numbers and comparing results, we help our ACEs see exactly where they stand—within their group and the industry as a whole—and where and how they need to get better. From each other ACE members get the support of like-minded business owners and the motivation that comes from a healthy dose of competition with your peers.
To help you start to get a handle on your financials, we’ll focus this week on the top three metrics you must track and manage on a monthly basis.
One caveat first, though: There is no sense measuring and analyzing bad data. Garbage inputs=garbage outputs. If you don’t think or don’t know if you’re capturing your data correctly, you need a trusted CPA to help you get properly set up. How do you find a good one? The best way is to ask other successful business owners whom they use.
What to Track Each Month
Gross Margin. To calculate this percentage, take your total revenue, subtract the cost of goods sold (COGS), and divide the result by your total revenue. The industry goal is 50%, depending on the type of work you do.
Gross margin essentially measures how your production costs relate to the revenue they generate. If your gross margin starts to fall, you may need to look for ways to cut your labor costs through improved efficiency or to dial back on the costs of materials you’re using. Alternatively, you could increase your prices—but do that carefully or you risk losing valued customers.
Profit Margin. To calculate this percentage, take your profit (your total revenue, minus costs and expenses) and divide it by your total revenue. Ten percent is considered the new break-even, so use that as your goal.
Profitability is the ultimate financial metric. Without it you can’t reinvest in new equipment, get the best people to join your team, or give back to your community. If you’re not netting 10%, look for ways to increase your sales volume, reduce your costs of goods sold, rein in expenses, and/or raise prices.
Days Receivable. To calculate yours, divide your accounts receivable balance by your annual revenue and multiple the result by 365 (the number of days in the year).
This metric tells you the average number of days that a customer invoice is outstanding before it is collected. In the green industry, anything below 30 days is great—the more you trim this number, the faster you have cash on hand and, as we all know, cash is king. Some of our ACEs have gotten theirs down to as low as 15, often by accepting credit cards and assigning one person in the company to really drive and own the collections process.
What Gets Measured Gets Improved
Since our industry is seasonal, when you compare your metrics, it’s important to measure them against the same month. This will provide you with a much more accurate and useful picture of where you stand and where you need to go.
We’ll dive deeper into financials in future Great Ideas but, for now, start tracking and comparing these numbers, if you aren’t already, and look for ways to start improving them today. It’s one of the most important things you can do to get better at business.
Happy Father’s Day to all the dads out there and we’ll see you next week!