3 Minute Read

Key performance indicators (also known as KPIs)—they sound important because they are.

They are the first level “drill down” in the reporting cascade for a profitable 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. 

Big Picture

  • Rolling Budget
  • Business KPIs (Key Productivity Indicators)
  • Functional Reports (Sales, Client, Production, Finances)

Little Picture

  • 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 one and why they are essential.

Overhead recovery

As a landscape business owner, 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.

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Client management

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.

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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!

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Labor efficiency

In regards to labor, your KPI should explain (a) where you are over or 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 trends down to individual crews and the jobs.

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Sales management

This 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 you're are bidding the right stuff at the right margin, and closing at an acceptable rate.

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Work forecast

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.

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Bringing it all together

Budget variances point to where the problem is and the KPIs tell me 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 a rationale 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 insight into actual transactions essential to correction, action, accountability, and ownership of problems/solutions. I'll discuss these sales level functional reports 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."

 
Kevin Kehoe

Kevin Kehoe