Budgeting and Estimating For More ProfitMy Budget’s Profit Margin Isn’t Where I’d Like It To Be. How Can I Fix It?
A lot of contractors finish their first budget only to be frustrated with the results – especially the bottom line. You’ve plugged in your sales, projected expenses, projected overhead and made it as realistic as possible, only to find a tiny handful of profit remaining… or, in many cases, no profit whatsoever. We’ve seen many, many budgets set to take a loss. It really shouldn’t come as much of a surprise… especially when you look at the survival rates of businesses who don’t do any financial planning at all. The vast majority of these businesses are not profitable and fail.
So what can you do to fix up your budget? Or how can you start estimating knowing you’re using a profit margin that is healthy? If you’re asking yourself these questions, read on.
There is no one-fix-fits-all solution, but your solution most likely falls into one of the 4 categories below – or even more likely, a mix of these 4. Just remember: Landscape Management Network’s estimating catalog and estimating tool will use your budget to calculate overhead and profit based on the budget you’ve created. Your plan (the budget) will dictate how work is priced. To fix how your work is priced, you need to fix your plan. Here’s how…
Solution 1: Charge More For Your Work
This is the simplest fix from a budgeting perspective… you just need to make sure you’re not charging so much that you’re not competitive anymore. To charge more for your work, all you need to do is increase your budget’s sales numbers… without changing any of your costs. Sounds simple, and it is. Often, someone will call in saying their budget is showing a 2% profit margin, but they want to use 10% for estimating. The solution is simple… increase your sales until your budget’s profit margin is 10%. By doing this, you’re not increasing the amount of work you do (to increase the amount of work, we’d have to increase our costs), instead you’re simply charging more for the work you are doing (your costs stay the same, your sales increase).
As a gut-check, after you’ve increased your sales, go into your Estimating Catalog and check out your hourly rates based on the budget you’ve created. They need to be competitive. If they are too high, you may need to look at one of the other 3 solutions for a deeper “fix”.
Solution #1 Summary:
Increase your budget’s sales until your budget hits the target profit margin. Use the estimating catalog to double-check your labor, equipment and material prices to ensure you’re still competitively priced.
Solution 2: Cut Costs
Ever heard the expression “a dime saved is a dollar earned“? Neither have we, but saving 10 cents of costs is exactly the same as selling $1 worth of services at a 10% profit margin, but with less work. The costs that you need to cut depend on your specific company. Some landscape contractors have field productivity problems – jobs are done too slowly, crews have too much downtime, jobs are constantly going over budget. Other companies have enough equipment to work 4 crews, but they’re only running 2. Other companies, especially in a recession economy, have enough overhead to do 25%-50% more sales, but don’t have the sales to support it.
Every company is different. You need to cut the costs (where possible) that make sense for your company. We’re not experts in your business and can’t tell you what to cut, but we can help confirm your instincts. Each cost budget (labor, equipment, materials, overhead) in your LMN budget has a REVIEW button. (Not an LMN member? Click here for a free, no-credit card trial of our budgeting + estimating software…)
This button will show you the average ratio of costs to sales gathered from industry studies. Use these ratios to confirm your own instincts… if you feel you’re overspending and your ratio is high when compared to the industry, chances are good that this budget is the right place to make some changes. It’s never easy to make cuts, but no one ever told you running your own landscape business was going to be easy…
Solution #2 Summary:
Use the REVIEW buttons on LMN’s budget screens to find out which of your costs are higher than average. Do a gut check – where do you feel you could improve efficiency? Take a hard look at your costs and trim the fat.
Solution 3a: Sell More Work… And Hold Overhead Steady
You’ve got a budget that’s not profitable and we’re telling you to sell more of it? Well, yes and no. Yes – doing more work can help your profit margins… if you can do the work without increasing your overhead costs.
If you increase the amount of work you sell, you’re going to increase your sales (you’ll have more money coming in from the additional work), but you’ll also have to increase your costs (you’ll have more money going out to pay labor, equipment and material costs for the extra work you’re doing). However, there’s an excellent chance you can do that work and your overhead costs won’t change. Your rent won’t go up, your utilities will stay more or less the same, your cell phone plan won’t change, your accountant’s bill is more or less the same… this extra work will increase the profit margins earned by your company.
Let’s take a really simplified example to illustrate the point – and to keep it really simple, let’s just focus on labor hours.
Say each labor hour costs you $20 in wages and payroll taxes. Overhead costs are $100,000 and you plan on selling 10,000 hours this year, so your overhead costs are $10/hour. You’re break-even is $30/hour. If you could sell another 2,000 labor hours this year, would your break-even still be $30/hr?
No. Your labor costs might stay the same ($20/hr), but your overhead is now spread over 12,000 hours instead of 10,000. Your overhead costs are now $8.33/hr ($100,000 divided by 12,000 hours) , so you’re break-even is now $28.33/hr. Assuming your selling price is the same, you’re making an extra $1.67 per hour (extra 6% profit).
At certain times in your business, it’s essential that you invest in overhead expenses in order to grow your company efficiently and productivity. But for many businesses there is room to grow before those investments are necessary, especially landscape businesses who’ve seen their sales shrink due to a slumping economy. The trick here is to try to sell more work while holding overhead costs steady.
Solution #3a Summary:
Increase sales. Increase labor, equipment and material costs (where necessary) in proportion to the increase in sales. (If you increased sales by 20%, chances are your material costs will rise by 20% as well) Hold overhead costs steady.
Solution 3b: Sell More Work… By Increasing Productivity
This method will be the most work, but it’s also the most rewarding. By increasing productivity (the lower your field labor ratio, the better your productivity), the more likely your company is to improve its profits. Improving productivity means that you’re increasing sales without increasing hours worked (and paid)… or you might decrease the hours worked, but hold sales steady.
This is like saying you’re going to get more jobs done in the year by getting faster, more efficient. Materials are going to be better organized and ready when needed. Equipment breakdowns will be reduced and repair turnarounds faster (so the crews are using the fastest, most productive equipment available). Crews know what they’re doing the next day, are planning ahead and are reducing all the hours lost to mistakes, lack of information, or lack of motivation.
If you can shave .5hr a day in inefficiencies and rework, a 3 man crew would have another 300 billable hours that you could fill with sales. That’s about $15,000 per year, per crew. If you have 3 crews, that’s $45,000. There’s some profit.
Ever better, when productivity increases, your pricing gets more competitive. Not because you’re making less money, but because you’re taking less time. Less hours = less cost = lower price = more sales. The cycle feeds itself. Work is easier to sell, and work is more profitable all at once. The more profitable the business, the more reward money is available to compensate owners and key employees. Everyone is happier.
Certainly the journey to improving efficiency is a “longer” one. Watch for coming posts as we’ll share some of the information, meeting agendas, and tools we used to help improve our crews’ productivity and efficiency.
Solution #3b Summary:
Increase sales without increasing labor hours + costs, or hold sales steady, but decrease labor hours + costs. Improve efficiency of your operations, flow of information, quality of work, and motivation/incentive for crews to improve.
All the suggestions above will help you improve your profit margins. If you’re still looking for some help, take your budget to your accountant and get some professional financial advice or shoot us an email at email@example.com and see if we can’t help you get your head around it.