This article originally appeared on LandscapeManagement.net on February 22th, 2024. Greg Herring regularly writes for Landscape Management, providing financial analysis and insights tailored to landscape business owners.
The Herring Group recently completed its 10th Annual Landscape Industry Benchmark Report. So, what story does this year’s report tell? You will find some interesting statistics below, but the big idea is that most companies can be a lot more profitable than they are.
Before we get into just how much more profitable landscape companies could be, here’s some background on our Benchmark Report, sponsored by Aspire, Ewing Outdoor Supply, Unlimited Labor and Weathermatic.
This year, 144 companies with revenue between $1 million and $140 million participated. Total revenue for participants was $1.9 billion over a 12-month period that ended on Sept. 30, 2023 — almost as much as BrightView’s revenue.
To produce the report, we obtained income statements from all participants and formatted them to make them comparable. Participants received an Excel file with every participant’s summarized income statement — anonymized to maintain confidentiality. Then, each company created its own groups of peers based on revenue mix and size. Using that group of peers, management can see where they are winning and where they can improve.
Key results
At The Herring Group, we use operating profit margin to measure profitability. Operating profit equals revenue less direct job expenses, indirect job expenses and overhead expenses, including straight-line depreciation expense. Operating profit margin is operating profit divided by revenue. This indicator measures customer satisfaction, effectiveness of management and efficiency of operations. We encourage companies to plan for an operating profit margin of 12 percent and settle for anything above 10 percent as an initial goal.
Our 2023 report shows a weighted average operating profit margin of 6.4 percent, up from five percent last year. Companies with an operating profit margin above 10 percent averaged 13.3 percent, up from 12.8 percent last year. Companies with an operating profit margin below 10 percent averaged 3.5 percent, up from 2.9 percent last year. That’s a big gap. Nearly one out of every three companies had an operating profit margin greater than 10 percent.
Which group are you in?
If you are in the high-profit margin group, congratulations! You are setting a great example for the industry. Hopefully, your example helps eliminate some of the foolish pricing that exists in the industry.
If you are in the low-profit margin group, do you want that situation to change?
Getting to a higher profit margin usually requires:
- Making a commitment and rejecting excuses.
- Understanding your costs.
- Pricing to hit your profit margin goal.
- Understanding which divisions and services produce the highest operating profit margins and adjusting that mix of services.
- Managing actual labor hours to match estimates.
- Understanding which contracts are most profitable and least profitable.
- Being disciplined in determining renewal pricing.
It’s not all about the money. In our work with clients, we find that a higher operating profit margin is correlated to a greater life margin for the owner. Life margin is the excess time and energy that no longer must be invested in the company.
When analyzing the participants exceeding 10 percent, I noticed the following:
- Companies of every size and in every region hit the goal.
- Companies with and without snow hit the goal.
- Companies that grew fast and those that grew slow hit the goal.
Here are a couple of other interesting statistics:
- High-profit companies’ average total payroll expense (direct and overhead) as a percentage of revenue is five percentage points lower than the average for low-profit companies.
- High-profit companies’ average gross margin is 4.4 percentage points higher than the average for low-profit companies.
- All other expense lines that we measured were roughly comparable.
As you contemplate the start of a new season, now is the time to develop your plan and seek commitment from your team to reach the goal in 2024.
To be notified when registration opens for next year’s Herring Group Landscape Industry Benchmark Report, visit here.
Strategic Planning
Once you address your GIGO problem, the next step is to formulate your data reporting strategy.
Start by determining what information is needed at each level. Owner/executives, managers and field personnel will need different reports for different uses on different timelines. Consider what information will create understanding and motivate your team members to act to achieve the results you want.
Then, think about the best way to convey this data — spreadsheets, charts, graphs or dials. Visuals are often the default and can help create understanding and motivation, but spreadsheets clarify the next steps. Scoreboards are also an effective format. People are familiar with the concepts of winning and losing, and most people want to win. In areas where you may want to create friendly competition, such as with crew leaders and account managers, displaying data on TV screens can be helpful.
Taking Ownership
As part of your strategy, you will want to appoint someone to own the reporting process and set a budget. Creating and managing automated reports requires coordinating people with many types of expertise—someone with a vision for the reports, someone with knowledge about your software system and how to access the data within it, someone with database expertise and a development expert, etc.
You also will need a plan to implement this new data-focused approach in your business, including training your team members and incorporating it into your everyday practices and culture.
Ready, Set, Go
Once you are confident in your data integrity and data strategy, you can begin executing your automated reporting program.
While it may seem complicated to set up automated reporting, it is more important than ever to forgo managing based on instincts alone and instead find a way to put relevant data into your team’s hands as soon as possible. I can assure you that your competitors at private-equity-backed landscape companies are focused on automated reporting.
When it comes to automated reporting, you have three choices — do it yourself, hire a firm to help you do it or do nothing. Which do you choose?