Key performance indicators (also known as KPIs)—they sound important because they are.
They are the first level “drill down” metrics in the reporting cascade for a profitable landscape business. The reporting cascade can also be replicated in a business management system—but however you report your KPIs, they are essential for determining if your business is running profitably.
- Rolling Budget
- Business KPIs (Key Productivity Indicators)
- Functional Reports (Sales, Client, Production, Finances)
- Process Dashboards
Key performance indicators
KPIs are used to identify the sources of the variations in your rolling budget so that you can make the adjustments needed to reach your goals. There are six critical KPIs.
- overhead recovery
- client management
- job - service and profit center margins (P&L)
- labor efficiency
- sales management
- work forecast
Let’s briefly look at each of these important KPIs and why they are essential to boosting your company's bottom line.
As the owner of a landscape company you want to know two things as far as overhead is concerned: If you're generating enough gross profit to cover fixed expenses, and whether you can “flex” your pricing because you have expenses covered.
When assessing the client pool, landscape business owners want to know (a) how much recurring contract revenue is under management, (b) what revenue has been lost and why, (c) what is at risk of nonrenewal, and (d) how much upsell revenue you can generate as a percent of current contract revenue. In short, you want to know if the current client revenue will achieve the budget goals.
Gauging customer satisfaction should be a key metric in your business operations. Your customers have their pick of which green industry providers to choose, so retention is an important topic. Ensure that you're engaging them via social media, or even go one step further and offer a video educating your clients on landscape and lawn care.
Job - service P&L management
For profit and loss management on the job and service level, you'll want to know (a) where you make and lose money, (b) the nature of your gross margins in detail, and (c) whether your labor rates and projected labor spending dollars are within budget.
As I discussed in the last post, no cost variance will cost you more than poorly trending labor. I can tell you this from a past client experience—a very painful and costly experience at that. The lesson learned: When labor starts to trend badly, don't wait. ACT!
In regards to labor, your KPI should explain (a) where you are under on job hours, and (b) whether that over/under is due to field performance and/or estimating accuracy. You'll also want to analyze these important metrics down to individual crews and jobs.
An important thing to remember: Providing quality training and onboarding to your people boosts employee satisfaction and helps them feel like they have the tools to excel at their jobs, and makes them more efficient on the job site.
This sales KPI is major variance problem No. 1 (labor is a close second). Therefore, you'll want to know where your new sales are coming from, and (a) if there's sufficient pipeline activity to meet the revenue budget, and (b) if your salespeople are bidding these new customers at the right margin, and their conversion rate from bid to sale.
Finally, you'll want to look forward and perform a sensitivity analysis, also known as asking, "What if?"
Specifically, you'll want to know—based on what has already sold and some of what is currently proposed—whether there will be enough revenue to achieve the budged, if you have too many or too few production crews to match the revenue budget, and if the combination of these two will produce the gross profit dollars required to pay for your overhead.
Bringing it all together
Budget variances point to where the problem is and the KPIs tell us what it is. And dipping back into my bag of clichés, “a problem well defined is a problem already half solved.”
Why do the math and go through all this reporting and analysis? Because everyone has an opinion and a rationale. This is fine by itself, but opinion and rationale provide short-term answers and are no substitute for facts. When it comes to smart budgeting, only numbers matter. So you can listen to the opinions and rationales, then ask, "Can you prove it to me with the numbers?" That's why we do the math.
The next level in a cascading business management software reporting system is a drill down through the KPIs—otherwise known as Functional Reports (e.g., Detailed Sales, Client, Production, and Cost reports). These reports will provide real-time insight into actual transactions essential to correction, action, accountability, and ownership of problems/solutions. These KPIs will provide a smarter approach to your company's project management. I'll discuss these sales-level functional reports for the landscape industry in the next blog post.
To learn more about the next KPI that will help you assess your profitability, read the next post in the Do the Math Series, "Do the Math, Part 4: Sales Management."
To check out the Do the Math series from the beginning, read "Do the Math, Part 1: Reporting for Accountability."