As the coming years pose continued uncertainty for landscaping businesses, it’s difficult to know how each company will be affected.
Many landscape contractors find themselves struggling with labor shortages, cash flow challenges, decreased profit margins, and increased startup costs.
However, as the environment continues to evolve, there are steps business owners in the landscaping industry can take to set themselves up for success—and they begin with data.
In an Aspire Software webinar, co-founder Kevin Kehoe discussed this issue and explained how he utilized data to help entrepreneurs, small businesses, startups, and other landscape professionals in the green industry during his consulting years.
How landscaping businesses should prepare for the future
As the saying goes—before you can know where you’re going, you need to know where you’ve been.
In looking at metrics from the past year, for example, how did your investments pay off? Were you able to pursue new certifications, business ideas, or marketing strategies? Did you experiment with different planning processes, create templates to maximize efficiency, or document a detailed business plan,?
All landscapers make investments in three key areas: labor, overhead, and equipment. These investments all impact productivity—labor directly performs the work, overhead supports labor, and equipment makes labor more productive. To calculate your return on investment, or leverage rate, simply compare productivity to revenue.
Let’s take a closer look at one of these investments, for example: labor. If your labor is bringing in an estimated $36.36 worth of revenue but is costing you $16, your leverage rate is 227%. In essence, for every dollar you spend on labor, you’re getting $2.27 in revenue.
The question on everyone’s mind when looking at this example is, “Is that good?” According to Kevin Kehoe, the answer is a resounding “no.”
For a landscape or lawn maintenance company, a reasonable benchmark is $2.50; for a construction company, an appropriate goal is over $4. The key is to maximize your leverage rate to the best of your ability, because ultimately a higher leverage rate means a larger net profit.
Why utilize leverage rates?
Knowing your leverage rate not only helps you understand how you are performing but also enables you to determine if you need to make changes in your business.
During the webinar, Kevin used a model to simulate a landscaping company with a service mix of construction, maintenance, enhancements, irrigation, and arbor. From there, he calculated the leverage rates for each division and their impact on the company.
It’s important to note here that leverage rates will vary by service, with maintenance typically having the lowest leverage rate and construction or enhancements having the highest. One may think that because maintenance has the lowest leverage rate, they should do less maintenance work; however, that’s not the case, because in many instances, maintenance work can lead to enhancements and other jobs.
So, what is the key takeaway from this model?
By drilling down into each leverage rate, you can identify whether your divisions are hitting their goals. Going back to our labor example—where we found were only receiving $2.27 for every dollar spent on labor for the maintenance division—if the goal is to achieve at least $2.50, we have identified that we’re not meeting our goals.
Tips for improvement
There are several ways to improve your labor leverage, including decreasing your overall costs or improving your margins. An increase in prices for your landscaping services is a great example.
Year over year, your costs rise. It’s important to make sure your prices reflect your changing costs to ensure you are making a profit. Increasing prices won’t affect your labor costs but will likely increase your overall revenue.
Another way to improve your labor leverage is to reduce your labor hours—in particular, indirect time—without decreasing revenue. Indirect time is a hidden profit killer that wreaks havoc on your bottom line. While it’s impossible to completely eliminate, you can begin by identifying where improvements are needed as well as planning initiatives to reduce lost or wasted time.
By analyzing your data and understanding how leverage rates affect you as a landscape business owner, you can better prepare for the year ahead.
Your marketing plan may do a great job of attracting new business from commercial clients or homeowners interested in your lawn care services, but in order to increase your profit margin for those clients you need to boost your leverage rate.
You can start making positive changes by setting goals for each division. Goals inform your entire team of your expectations and reinforce the need to become more efficient.
Whether you are a multimillion-dollar company or a $100,000 operation, knowing and understanding your numbers and how they affect your business will keep you profitable for years to come.
To view the “Critical KPIs for planning” webinar with Kevin Kehoe, click here.
At Aspire, we understand that when you’re running a landscape company, it’s important to have the right tools for the job. That’s why we’ve developed an all-in-one, cloud-based solution with the functionality you need to keep your entire lawn care business running smoothly—and profitably. If you’re ready to take your company to the next level, contact us today!
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