Why Tracking Profit Matters (1 of 2 for Owners)
July 27, 2022
This is Part 2 of our 7-part series on Reporting for your Lawn Care, Landscape, or Tree Care business. Based on your role in the company, we’re deeply diving into why reporting matters and what reports you track. These articles are for you if you’re an owner, CEO, or company president. We’re talking about profitability in this blog. What does it mean to be profitable, and why does that matter?
What does “profitable” mean?
Investopedia says, “Profit describes the financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity in question.” Or, stated more simply in the same article, “Profit is the money a business pulls in after accounting for all expenses.”
Once you’ve paid all the taxes and expenses (mortgage or rent, utilities, subscriptions, loans, salary, materials, etc.), how much money is left over? That’s your profit.
Types of profitability
Let’s define a few terms. There’s “gross profit” and “net profit.” Gross profit means you take the topline sales revenue and subtract your direct costs (material expenses associated with that specific job). Then, divide the remainder by your top-line sales revenue and multiply by 100. This formula gives your gross profit as a percentage.
For example, if you sold a patio job that was $10,000 and the stone, pavers, gasoline for saws, and polymeric sand you used all cost $5,500, that would leave you with $4,500. If you divide $4,500 / $10,000, you get 0.45. Take that 0.45 X 100, and you’ll get 45. That means your gross profit margin is 45% on that job.
Now, net profit takes that a step further. It takes your gross profit margin and subtracts all the remaining expenses. So, in our example above, you’d use that $4,500 you have remaining and deduct your indirect costs (all the rest): your direct labor costs, hourly overhead rate and labor burden, taxes, etc. Let’s pretend that comes out to $3,700. Then divide that by the topline revenue for the job, and multiply by 100 again.
So the math would look like this:
$4,500 (gross profit) – $3,700 (indirect costs) = $800
$800 / $10,000 = 0.08
0.08 x 100 = 8
You would have made an 8% net profit margin on this job. That’s a profitable job.
Why does being profitable matter?
Some of you may be asking, “Why does it matter? Why is this important if I’m paying my bills and making a living?”
The purpose of any business is to make money. If you’re in this to give money away, you should be running a non-profit organization, not a company.
Being profitable has lots of excellent benefits. Here are some of the reasons you should be concerned about your profitability.
You need to grow your business infrastructure
Growth is the goal of any business at any stage of its lifecycle. It is rarely advisable to try to “hold the line” in terms of growth, and “downsizing” should be done rarely and strategically.
With that said, how much should you grow? That will vary depending on your company’s size, age, and plans for the profits you generate.
At some point, you’ll outgrow your current facility. You’ll need to buy new computers, place advanced orders for materials, and make other general investments in your company’s growth.
The time to find out your bank isn’t going to lend you money isn’t the moment you need that money. You need to begin to plan for that right now to borrow that money in the future.
And you’ll need to grow your fleet
New computers or laptops and new facilities aren’t the only types of investments you’ll need to make. This is the Green Industry. Our vehicles and equipment are the engines (sometimes literally) that drive our businesses forward.
You’ll need to buy a new heavy-duty truck, a new excavator, or a new bucket truck. Again, you need to know ahead of time that you’ll have the available credit with your bank (or perhaps pay for it outright using capital from your profits) before you need that equipment.
Banks favor businesses with significant profitability. Paying attention to this now means you’ll be a lot less stressed when it comes time to make purchases in the future.
You need to attract great talent
Let’s be honest about the state of the labor market and our industry. We’re slow to adapt to the current market conditions because our industry is very competitive. Paying a lower salary allows some of us to submit lower bids.
We all know, deep down, that the current model isn’t sustainable. Indeed, we need to reinvigorate the workforce. Part of that includes showing them a pathway to advancement or giving them purpose in their work.
But at the end of the day, you’ll also have to pay them. If nothing else, it reduces your expenses by not having to recruit and re-train new employees constantly. The upside is that paying your people well and having them stay longer also improves the quality of your services since you’ve built loyalty with your workforce.
I’ve had a business owner tell me, “I’ve gotta take a guy that’s only doing $15 an hour work and pay him $20 an hour! That’s not sustainable!” I understand that this is distressing for a lot of business owners.
You’ve got to pay for that salary one way or another. You must raise your prices to the point where you can pay your people appropriately, or it will eat into your profits. As a result, you will make less money.
Good talent doesn’t come cheap. Great talent commands an even higher price. If you’re great at training and have the time and patience, hire a less skilled person and train them. If you need the help now, you’ll have to pay them what the market says they’re worth right now.
Other Reasons to Monitor Profitability
There are many other reasons to monitor your profits, besides the fact that you’ll need to grow your business. Here are other top reasons to keep an eye on your profit reports.
It shows you problems
Let me tell you a story about a guy named Dave. Dave works for a full-service landscaper. He is a Designer, and he comes in during a time of transition. The company went from having two full-time Designers to just Dave (the other left for another job, and many of you understand how difficult it can be to replace a good Designer).
Dave has a PHENOMENAL year. It’s the first time anyone has sold as much design/build work as he did in company history. His Spring was exceptionally productive and set up backlogs well into the Fall.
The problem became that he wasn’t very thorough with takeoffs (you might also hear this referred to as a quantity survey). He was exceptional (truly) at selling customers on a concept, a vision, if you will.
He could not translate that into a concrete number for the cost of the materials. Crews would get there, and the plans would just call for a “patio.” How many pallets worth of pavers does the staff need? Two? Five?
As a result, some of these projects came back with gross profit margins in the 20% range. In case you weren’t keeping up with the math earlier, that means the business likely lost money on these jobs.
In this case, the problems uncovered were underbidding on the work and not being detailed enough on takeoffs.
Keeping track of the profitability of each job and each service line is critical. It shows you problems you won’t see until it’s too late.
Working capital is the money you need to run the business when you don’t have as much income. “The business must leave money in the bank account during the good times, so that there will be enough money to pay expenses during the slow times, e.g. Christmas closures or quiet months,” says Ben McAdam, owner of Profits Collective.
If you don’t have a profitable business, you’ll be forced to do stuff you may not want to do – like snow removal. I worked in a large regional landscaper where the owner hated snow work passionately. So, we only offered it to commercial customers where it was a deal-breaker. (Even then, it had to be approved by the Operations Manager.)
He simply structured the business so that the company could meet all its financial obligations without that extra income. Part of the way that happened was that the company was very deliberate about being profitable throughout the rest of the year.
Attract Investors or Buyers
Maybe you want to run the company until you die. Most people don’t.
At some point, you’re going to want to bring on a partner to help the company grow, or you’re going to want to sell it.
In either event, good numbers showing lots of significant profitability make the company more attractive to people with more money. They want to know that they’re making a good investment.
Keeping your jobs and departments profitable years before you reach this point in your business ensures a steady stream of investors or potential buyers when you’re ready for them.
Enhanced Ability to Give
I’ve known a lot of business owners in the Green Industry. And I can’t think of a single one who kept all the profits without giving back to the community. In fact, for many of them, this is a great internal motivator to running a healthy business.
I’ve known business owners who gave to their local school districts for new uniforms or donated time and materials to improve an athletic field. I’ve also worked in companies where businesses donated a portion of their profits to religious charities. Corporations I’ve worked for in the Green Industry donated to causes like Habitat for Humanity and local food banks in cities where they have offices.
You have a passion project. Whatever that is, you’ll be able to resource it better if you’re running a profitable business. If that project, non-profit, community, or religious organization is what drives you, you’ll monitor your profits closely.
Hopefully, you’ve seen many good reasons to keep track of your profits.
You’ll need to grow your business at some point.
You need to see potential problems with your business before they become major roadblocks.
Working capital allows you to keep your financial obligations when times are slower.
You’ll be able to attract investors or buyers when you’re ready for them.
The ability to contribute to your passion projects is facilitated by having healthy profitability.
Hopefully, you’ve seen lots of good reasons to maintain your profitability. If you’re not, you’ll be lucky to meet payroll and keep the lights on.
Go back and read Part 1 in this series – Why Good Reporting is Critical
Read Part 3 in this series – Know WHAT You’re Selling (2 of 2 for Owners)
Download the FREE guide: Reporting Basics for Landscaping and Tree Care Companies