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In past webinars, Kevin Kehoe has discussed a variety of key performance indicators (KPIs) that landscape companies need to measure to ensure they’re hitting their sales targets—and ultimately, to increase their net profit to 10 percent.
He recommends using a strategic planning sheet to input your current performance figures in each area of your budget, including your current labor and overhead leverage figures. Once you’ve updated your current performance numbers, that strategic planning sheet will provide you with a roadmap to increase sales by division, increase labor cost, and provide the correct revenue mix and margins to reach your target goal of 10 percent. To review how the strategic planning worksheet works, watch the webinar here.
Once you’ve got your revenue goals mapped out in a strategic planning sheet, the next step is to develop a budget. The budget is the essential KPI to track revenue and margin.
Core assumptions for budget planning
Kevin recommends keeping these core assumptions in mind as it pertains to planning your budget.
Revenue mix matters. The mix of revenue you have in each of your divisions (maintenance, construction, enhancements, irrigation, lawn care, tree care, etc.), the relative growth in each division, and how these divisions grow together all have a big impact on your net margin.
Divisional pricing is a huge factor in producing a net profit. Divisional pricing is how pricing in each division drives things such as estimating factors, including base labor costs and pricing that’s driven by overhead allocated recovery.
As your revenue grows, your overhead will also grow—but they cannot grow at the same rate. There must be a minimal spread between your revenue and your overhead—typically about 2-3 percent. The major overhead numbers that you must manage are staff and equipment, and both of those should be under capacity at all times.
Once you have your month-to-month budget created, that’s not the end. “You’re not managing the budget,” Kevin says, “you’re managing the transactions in your business.” Reporting on key performance indicators will help you understand how the transactions in your business help you reach your revenue, profit, and margin goals.
He offers the following four KPIs to report on to accomplish this:
Budget KPI
The budget is the strategic planning sheet broken down into monthly revenue, gross profit and gross margin, and net margin goals for each of your divisions. This allows you to look back and forward in the year to determine if your current revenue and profits will help you meet your year-end goal.
Production KPI
The production KPI shows the revenue, gross profit, and gross margins for the work that has been sold and delivered. An end-to-end business management software like Aspire would allow you to not only view the overall revenue, gross margin, and gross profit for each division but also drill down into all the jobs within this KPI. Reviewing your production KPIs would clarify if your current revenue and margins have been under or over your monthly goal for work that has been sold and completed
Forecast KPI
The forecast KPI is the revenue, gross profit, and gross margin for the work that has been sold but not delivered yet. Some additional and helpful numbers for this report would include hours, labor cost, and material cost, so you can track the labor and expense to expect.
Sales KPI
The sales KPI is your sales pipeline; the work that hasn’t yet been sold but is likely to close within the next 60 days. The sales KPI report would allow you to compare the revenue that is currently in the pipeline to the end-of-year goal and determine if you’ll meet your target revenue, profits, and margins.
Once you have a handle on these KPI reports, you can have clear and productive conversations with your sales and production staff and make necessary adjustments, such as selling more jobs to reach your year-end revenue, profit, and margin targets. Examining these KPIs and looking ahead to work sold and work in the pipeline will inform you if you have a surplus of work and a shortage of staff, and you can focus efforts on recruiting. A business management software like Aspire Landscape can also assist with drilling down further into the individual jobs in each report so you can examine the hours, labor cost, material costs, gross profit, and gross margins of each job and determine the profitability of jobs and clients.
Breaking down your strategic planning goals into a month-to-month budget by division takes time, but they’re the first steps on the path to hitting your target of 10 percent profit. Reporting and understanding these budget, production, forecast, and sales KPIs will ensure that you stay on that path.
To watch the entire webinar, "Benchmarks and KPIs: The Road to Higher Profits," click here.
If you liked this article and would like to read more about how KPIs can help you reach your net profit goals, read our article, "Utilizing KPIs to improve your landscaping business's profitability."