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Plan for Profitability: Using Metrics

The power of regular self-assessment: using metrics to identify problems, implement solutions and plan your company’s profitability in any economy

In our Plan for Profitability series, we need to ask ourselves the tough questions and give ourselves honest answers. This is a question that seems very simple but drives deep into your company’s inner workings: How Can you tell if Your Business is Profitable? The answer lies in having the right information at your fingertips. Merriam-Webster defines a metric as “a standard of measurement”, and that’s exactly what every company needs to be able to answer that all-important question: “how are we actually doing?”

The problem: many landscape businesses don’t have good metrics to gauge and monitor their businesses’ health and profitability.

Unfortunately, the first time that many landscape companies really know whether they’ve made any money at all is when their accountant hands them their tax return at the end of the year. It’s a very risky practice, but one that’s all too common. Instead of comparing their current year’s performance with past years, or better yet, with a budget, many owners will simply manage their business based on their past habits, their emotions or their “gut feel” for how things seem to be going.

To be successful, business owners need to have solid information that’s accurate, current and reliable. Then you can manage your business based on fact. Without good metrics, your only choice is to use a loose system, or no system at all, to decide how to hold people accountable, how to compensate based on performance, and how to improve your day to day business practices. To know if you’re going to be profitable at year-end, you really need to be looking at your financial data on a regular basis, and comparing that financial data to a budget that’s based on solid, reliable information.

The information that you’re using to make your decisions needs to be accurate and current.
Once you agree that you’ll need data to be able to make good decisions, the next step is to put the systems and practices into place that will ensure that the data you’re collecting is complete, timely and accurate. If implemented only half-heartedly, any attempt to gain business insights from your business’ data will be handicapped by information that’s either incomplete, inaccurate or out of date. So it’s very important that everything, every business activity and transaction, be entered into the financial system that you devise, regularly and promptly. Otherwise, if you run financial report like a profit and loss statement, you won’t be able to trust the snapshot that it’s giving you about your business, because important details haven’t yet been entered into the system.

How do you know when you’re in trouble? The first sign is often cash flow problems.
Without metrics, a lot of owners don’t really realize that they have a problem until it’s too late. In some cases, left long enough, the problem could be serious enough to put a company out of business. Often, the first indication that a business isn’t profitable is that it starts to have cash flow problems. It’s the first red flag: you’re struggling to make payroll each week, or struggling to pay bills.

An owner who is in tune with his/her business can look at the metrics and see if this cash flow problem is a profitability issue, an accounts receivable issue, or an overhead issue. As a result of the recession, a lot of businesses’ sales or revenues have declined in the last 3 years, and many haven’t made the necessary adjustments on overhead. Overhead as a percentage of revenue has increased significantly, and that difference is going to come out of profit.

On the other hand, a cash flow problem may be an indication that you have a poor accounts receivable system. In this case, where your business has earned but not collected the money, the solution is quite different than if cash is lacking because of high overhead. To distingish between the two, you need metrics.

Without them, by not looking at all of this data on a regular basis, by the time you realize that there’s a problem, you may not have the financial resources to get out of that situation. For example, a company in this situation could decide it needs a consultant to help correct the problem, but it can’t afford one. Or it can’t make payroll, or pay vendors, or pay its line of credit. It’s a slippery slope that can often be avoided with the right systems and information at hand.

The wrong solution: taking on non-profitable work to try to improve short-term cash flow.
Some companies try to improve the cash flow problem by asking “how can I bring in cash quickly?” and then starting to do work that’s not profitable, or to cut corners, or to do other things that may help in the short term putting a band-aid on the problem, but simply accelerate the decline of the company, because they’re not making good long-term decisions. So their short-term solution may allow them to make payroll this week, but does not fix the real problem. “Why can’t we make payroll?” is the question that will need to be identified and fixed before this company starts to be profitable again. If you take the short cut to get the “Non-Profitable job” you will inevitably run into issues like not being able to pay for materials at the job or pay your labourers to finish the job; it just spirals out of control at that point.

The right solution: understand the metrics.
Solid, reliable metrics will help you identify and correct the real issues that have led to that cash flow problem. They can help you to decide which part of your business is struggling. Is your overhead too high for the revenue you’re currently producing? Or, how profitable are the jobs that you’re bidding on? Or, job tracking may be the answer: if you’re looking at bid vs. actual on a job by job basis, you’ll be able to see very quickly which of your foremen are profitable, and which salespeople are bidding their jobs properly so that they’re produced with a profit, this makes cutting away the fat, the excess money being spent much easier.

Another important metric: what is our non-billable percentage? Every company has man hours that you pay your field people where you’re not actually earning revenue – things like training, company meetings, working on the equipment, working on the facility, warranty and punch list items. Things that are necessary, but the question is, how much time are you spending on those non-billable items? It’s a cost that you have to be looking at. A lot of companies are in the 20-30% range of the field payroll that they pay out that is not billable. So they’re not earning revenue with 20-30% of their field payroll. You want to be able to reduce that number as much as possible. Of course, you have to have meetings, do maintenance, do safety training, work on your equipment and keep your facility looking good. They’re all necessary, but are they being abused? Are you spending too much time on those non-revenue-producing activities?

Accounts receivable is another very common issue. In this case, it’s not that the company is not profitable, it’s that you’ve done the work, you’ve paid your payroll and vendors, but you haven’t collected the revenue for that project. A very common situation, it relates to poor accounts receivable systems, or to projects not being completed 100%, or to things like poor payment schedules where you are essentially bankrolling these projects. You should always be using the client’s money to fund any project that you’re working on, by collecting bigger deposits or front-load the contract a little bit so you’re always slightly ahead of the customers with regards to the direct expenses on that project. The better reputation your company has or better rapport you have with your customer the more you will be able to front load the contracts.

Of course, you don’t want to be discharging one debt by incurring another. You want to be using the deposit and other money that you received from a job strictly for that job. A cash-poor company will often take the money from one job’s deposit and use it for next week’s payroll, so when it comes time to start the work on that job, they don’t have the money to order materials or pay any sub-contractors.

Do you need software to see these metrics?
A smaller company, like the owner-operator who knows what’s going on with every aspect of the business, can probably get most of its metrics from financial statements and spreadsheets. Where it becomes challenging, and when you really need to use software, is when the amount of data becomes too much for one person to handle by themselves. Analysing a company is largely based on job costing, and the sheer volume of data from a larger company – one that’s working on jobs, tracking different job functions, getting good averages, being able to look at standard production rates – requires specialized software for job costing, bidding and estimating, simply because of the large volume of data involved.

Another important requirement, one that only software can meet, is the ability to manipulate all of that data. There are certain ways that you’ll want to group that data to give you the information that you want. For example, you might want to look at job profit by foreman, or by salesman, or by supervisor. Or compare your residential division’s profitability to your commercial division’s profitability. As soon as you get into that kind of analysis and start to manipulate the data, you need specialized software. When you start to look at the details of bid vs actual, and you discover that your costs were too high for a job, with the right software you can look at the details to determine where the problem arose. Reports that allow you to drill-down to the information that you need are essential for looking at multiple levels of data all at once, so you can analyze and assess all of it very easily. These are features that you’re not going to get from financial statements or spreadsheets.

Once you’ve corrected the initial problem, how do you stay on track?
To keep to a corrected course of action, owners and managers have to stay involved, which means that they have to be looking at this data on a regular basis. Also, they have to trust the data. Some business owners will make excuses or rationalize why things are the way they are, if the figures don’t agree with their own gut feelings. Typically, these excuses are external – it’s the economy, the competition, the customer, or the over-charging vendors – and such owners are not willing to look internally at their own systems, performances and people to see who is really Accountable. That’s what all of this data is for: to highlight the problems and solutions clearly, to give a point of reference for what or who is accountable.

However, the information has to be accurate, and you have to be looking at it regularly. For example, one of the key challenges with job costing information is, how do we make sure the field information is accurate? The foreman fills it out, and he gives it to a supervisor who’s been on that job site who can verify that the information is accurate before it is given to the data entry person. When the information comes in, the owner knows that the supervisor has looked at it, it’s consistent with what was actually done in the field, they trust that information and they trust that they’re doing that every day. However the owner should be randomly checking some of this information, going out into the field to have a look at some progress, looking at the work dailies, and looking at the reports generated. The key is to really understand what is happening in your business on a day to day basis. It’s the only way you’ll know there’s a clear connection between what’s happening and what the data is showing you.

If you’re looking at it on a regular basis, the trends of your data are more important than the actual data itself. The data is always the history of what’s just happened, and you can’t do anything to change that. For example, on your non-billable percentage, if you’re at 30%, there’s nothing you can do about the past. The key question for any business owner is, how do I improve that number? What do I have to change? How do I make sure that that trend is improving?

You have to understand the data.
Identifying trends in the information that you get is not always an easy task and owners or General Managers without formal training may have difficulty looking at the information and really knowing what the data is saying. A large part of the challenge is to be able to look at job cost information and group things in a certain way, for example like grouping our Job Types together so we can see how each crew is doing while building retaining walls, are we over-estimating hours under estimating hours, is one crew better then another, does one crew need training? These answers lead to other questions we can ask ourselves about our business like “What types of work should we be doing?“ “Who’s selling good work?” “Who’s producing good, profitable work?” You have to be able to understand how to read the reports, not only so that you can hold people accountable, but also so that you can have a performance-based compensation system. Some kind of profit sharing is an effective way to compensate the people who are making profits for the company, and also to make sure you’re not giving the people who are not making profit compensation that they don’t deserve.

That’s the real power of job costing, why it’s so critical to the day to day production side of the business, which can be very accurately tracked using that job cost information. This becomes more and more important as the business grows, and the owner becomes less and less involved in the production side of the company.

You need to make time for regular information gathering and data analysis.

Some owners will say they’re far too busy to do all of this analysis. The reality of the situation, however, is that owners have two hats to wear: salesman and owner. As owner, you simply must be working on your business as well as in your business. A lot of owners focus only on what’s urgent, not what’s important. The sales part is a day to day job function and responsibility. But owners also need to be looking at this metrics information on a consistent and regular basis, so they have a good handle on what’s happening to their company, particularly to the things that they’ve become less involved in. It’s absolutely critical that the owner dedicates a certain amount of time each day, week, month to look at the information, the fundamentals, and even visiting job sites, talking to customers and talking to your management people. It’s not just data – you’ve got to get some internal and external feedback on what’s happening within your company.

After they look at the numbers, what common things will a company change in order to become more profitable?
The specific strategy that’s best for your company will emerge from the numbers that you see. Among the things that your metrics may reveal as potential areas for improvement are the following:

  • They may show a lack of efficiency out in the field, such as one crew consistently showing higher overtime or underestimating labor. Possible solutions could include better supervision or raining for that crew, setting daily goals for the crew to reach their allotted labor hours without going over, or changing or reducing your crew sizes.
  • The metrics may show an excess of equipment inventory, which could mean it’s time to sell off some of your equipment,
  • High inventory costs could be an indication that you should reduce your material inventories, or find better ways to maintain your perishable inventories, like plant material.

Further strategies for profitability: the power of good reports.
Looking at your company’s overhead, you will want to look at which of your sales people are meeting their sales goals, and which are selling profitable work. You may also analyze the type of work you’re doing and identify which of those are also generating the most profitable work. You can also look at your overhead numbers, and if they’re out of line, look at things like advertising. For example, how much of your advertising is actually generating leads that result in profitable work? In other words, how much of your advertising is ego-based, and how much of it is performing well? Do you have a system in place to tell whether or not your advertising is working?

Another option is to cut overhead salaries, particularly if revenue has declined. You may switch your salespeople from salary to commission, cut back overtime hours, and/or cut back on some benefits. Some expenses, such as office supply expenditures and cell phone usage, can be cut back to a certain extent. Others, such as education and consulting, are important to maintain whenever possible.

The systems that you put in place in lean times will serve you well in prosperous times too.
Businesses need to focus on the long term, particularly when it comes to overhead. All companies go through peaks and valleys, and you need to invest in your company when times are tough, so that when the economy or your marketplace turns, you have the capacity to handle that additional volume, in a way that remains profitable. You don’t want your business to be growing so quickly when the economy turns that although you’ve added all kinds of new business, you’re actually losing more money than when the economy was struggling.

Companies that have poor systems in place may be able to get away with it when the economy is doing well. The problem is that when you have a company that is not continually improving, continually striving to get better, that’s exactly the type of company that can’t respond quickly enough to a downturn in the economy.

On the other hand, the owner that has a culture of continual improvement, in good times and bad, is the company that will likely survive in any economy. And in good times, it can not only be more profitable, but it can also grow while maintaining that profitability. Once you have the right systems, people and measurements in place, you have the foundation to be able to maintain your profitability, quality, and reputation as you increase your revenue numbers.

Summary: a self-assessment checklist
Every landscape company wants to be more profitable, and in this article we’ve outlined some of the ways that metrics can be used to regularly assess – and improve – the financial health and profitability of your business practices. Here’s a summary of the key points to keep in mind when applying these principles to your own business:

  • You need a system that will give you the metrics – that is, the standards of measurement – by which you can assess the financial health and profitability of your company.
  • The information that you’re entering into that system needs to be accurate and current.
  • Cash flow problems are often the first sign that you’re not running your business profitably.
  • Don’t take on more non-profitable work to try to improve short-term cash flow problems.
  • Make sure you understand what your numbers are telling you.
  • Check your non-billable percentage. Is it too high? Are there ways to reduce it?
  • Check your accounts receivable practices. Do your payment schedules ensure good cash flow? Are you using the client’s money or your own to fund the project?
  • Stay on top of your numbers by checking your metrics on a regular basis: daily, weekly, monthly.
  • Make sure the data that your system needs is being entered on a regular and timely basis.
  • Analyse your job costing to determine which crews, jobs, supervisors and salespeople are responsible for your best and most profitable work and base this on metrics.
  • Make the changes in your business practices that will correct the problem areas revealed by your metrics don’t just band-aid the obvious issue.
  • Use your metrics to promote a culture of continual improvement within your company.