Is Your Business On Track? 6 Quick Health Checks…

A big advantage of working from a budget is the ability to check on your progress as the year is progressing.  Most small business owners ignore their numbers, instead making decisions based on  how much cash is in the bank.  If you’re running from a budget, this is good news!   Checking your actuals vs. your goals and you’ll enjoy a big edge over your competition.

The Average Business Owner Takes 2 Years to React to Problems!

Most small-medium business owners don’t use their numbers to watch what’s happening.  Your competitors are likely waiting for the end of the year when their accountant tells them how things went.  Those results should be used to make improvements for the following year, but the accountant takes time to put together the numbers… meaning most contractors not only go a full year without knowing their numbers, but they don’t have the information in time to make adjustments the next year – so another full year goes by before adjustments are made – if they get made at all.  By that time, things have often changed so much, the information isn’t relevant anymore.

 

So Check Your Progress As You Go…

Your budget gives you the information you need to measure your progress and react to your business as things happen instead of after things happen.  In less than 30 minutes a month, you can get a snapshot of your business and actually use the information to make corrections in the areas that need them most.  Here are a few key numbers you should be following in your business…. And the end of July is a perfect time to start by doing this 6-step health check:

Step 1:  Sales Check

The first step to checking your progress is to look under the hood at the engine that drives your business: your sales.  Take careful note of the following:

• How much revenue have you actually invoiced to date?
• How much revenue is sold (in this year), but not yet invoiced?
• Now add those two numbers together (revenue collected + revenue sold, but not collected) and compare to your budgeted sales goals.

= INVOICED REVENUE + NON-INVOICED REVENUE (SIGNED CONTRACTS NOT INVOICED)

First and foremost, you want to ensure you’re going to hit your sales targets.  If you’re way off track, this is going to throw every number in your business out of whack.

 

Step 2:  Productivity Check (Field Labor Ratio)

Next, check your field labor ratio.  This number is your Field Labor Wages divided by your Invoiced Sales.  (If you’re comparing it to your budget, just include wage costs – not the costs of labor burden (payroll taxes, safety insurance, etc.)

= FIELD LABOR WAGES / INVOICED SALES

Run this report after you do a current invoice run and a payroll run.  It’s never going to be perfectly accurate, because you’ll always have work –in-progress, but getting your invoicing and payroll current will help get it close.

NOTE:  if you don’t have your field wages separated from your overhead wages in your accounting – do it! Managing your productivity is critical for a profitable landscape business and sales-to-field labor expenses is a great way to measure how much production you’re getting for every dollar spent on field wages.

 

Step 3:  Waste Check (Material Ratio)

Shows you what % of your sales are spent on materials.  This number should be compared to your budgeted to spot over-spending or waste on materials.  If your ratio is higher than expected, look for incorrect accounting entries, missed billing/invoicing, or any significant changes in the way material costs have been priced on estimates.

= MATERIAL COSTS / INVOICED SALES

 

Step 4:  Management Check (Overhead Ratio)

Your overhead ratio tells you what % of your sales are spent on materials.  This ratio changes based on two significant reasons:  your sales and your overhead spending.  If either one is significantly different from your budget, your overhead ratio is going to change.

= OVERHEAD COSTS / INVOICED SALES

Overhead expenses tend to remain stable year to year.  If your ratio is significantly off from your budgeted (expected) ratio, look for big costs that haven’t occurred yet.  Costs like rent, insurance, etc. are usually monthly costs that are stable, but costs such as accountant fees or marketing can happen in small windows.  If you’re overhead ratio is way off, be sure to look for large expenses that either just occurred or are going to occur in the future before you hit the panic switch and start making changes.

 

Step 5:  Short Term Health Check (Quick Ratio)

If cash is tight, look to your quick ratio to evaluate how likely your business is to meet its short term payment obligations.  This ratio looks at your quickly available assets (like cash and accounts receivable) and divides them by your accounts payable.

= (CASH + ACCOUNTS RECEIVABLE) / ACCOUNTS PAYABLE

A ratio above 1 means you likely have more short term money expected coming in vs. going out.  This is good… you might be cash poor, but if your ratio is above one, at least you can reasonably expect to be able to pay all your obligations.

Less than one means you need to get serious about your business.  Your business might be spending more than it’s making and you’re in danger of not being able to meet your payment obligations.

If your ratio is over 2, and you have lots of cash, you may want to look at ways to put some of that cash to work for you.  Equipment that improves your productivity is a good example of an investment that you can likely afford and that will further improve your finances.

 

Step 6:  Collections Check (Collection Ratio)

Cash is king… and good cash flow is critical to operating a small business – especially if you are growing.  Stay on top of your collection speed with your collection ratio.

= (ACCOUNTS RECEIVABLE / SALES) * 365

The lower your collection ratio, the faster you are collecting your customers’ payment obligations.  This is good, you likely have cash on hand to fund to the business.  If you are job-rich and cash-poor, it might be that your collections are too slow.  A high collection ratio will indicate that you are taking too long to collect your customers’ money, and you are very likely more stressed, less productive, and spending more on interest and bank charges than you need to.

 

Your operating budget is the key to all these numbers.  Without a budget, you have nothing to compare your current results.  That’s why so many small businesses ignore their numbers; they don’t know where they should be anyway.

With a profitable operating budget in hand, you’ll know where your numbers need to be.  And when your numbers are off, you’ll know where and when too.  You’ll be able to react to and fix problems as they are happening in your business, not after they happen.  As you make adjustments on-the-fly, you’ll start to enjoy an enormous competitive advantage vs. your competition, as you can bet the farm most of them run their business on a hope and a prayer, rather than from a plan for profit.

 

Landscape Management Network helps great landscape contractors build great landscape businesses.  For information on their budgeting, pricing, estimating and productivity tools for landscapers, check out the website at www.landscapemanagementnetwork.com and watch the demonstration videos.