This article originally appeared on LandscapeManagement.net on March 2, 2023 as a part of Grow your Green series. Greg Herring regularly writes for Landscape Management, providing financial analysis and insights tailored to landscape business owners.
Sports metaphors are common in business. One of the most useful is the importance of a scoreboard. How do you know whether your company is winning if you don’t know the score?
As we discussed in my January column, operating profit margin is the best way to measure success in the landscape industry. Operating profit is revenue minus direct job expenses, indirect job expenses and overhead expenses, including straight-line depreciation expenses. Operating profit margin is operating profit divided by revenue — a percentage.
It measures customer satisfaction, management effectiveness and operating efficiency. For companies with revenue greater than $3 million, I recommend you target an operating profit margin of 12 percent and settle for anything above 10 percent as an initial goal. (Smaller companies can often earn higher margins because the impact of an effective owner is much greater for small companies.)
So if a 10 to 12 percent operating profit margin is a win, your income statement is the scoreboard. Your income statement is the most accurate representation of your company’s performance. It helps you see clearly. It also informs your estimating, including labor burden and overhead markup calculations. If your income statement is jumbled, and many are, your pricing will likely be too low.
Here are some steps to take to build your scoreboard.
1. Start with a well-organized chart of accounts. Your chart of accounts provides a structure to ensure an accurate income statement. I recommend not having any costs above the gross profit line not included in estimates. All other costs go below the gross profit line, so you’ll know your overhead costs.
2. Use your income statement to check on the data in your landscape business management software program. As you reconcile bank statements and there is a discrepancy between the numbers in your business management software and your accounting software, you can be confident that the accounting software is correct. For our clients at The Herring Group, we compare the numbers in their income statement with the numbers in Aspire every month. The numbers should be very close. (By the way, if you don’t have software like Aspire, you manage your business the hard way.)
3. Use the correct depreciation number. Get a GAAP or straight-line depreciation estimate from your tax accountant — not tax depreciation. It’s better to have an estimate than nothing, but don’t use a tax number.
4. Accrue payroll expenses at the end of every month. You want to avoid three-payroll months (for companies that pay every two weeks) or five-payroll months (for companies that pay every week). Accruing payroll expenses will reduce the volatility of your gross profit margin and operating profit margin.
5. Don’t forget overhead in your growth plans. It is common for landscape company owners and managers to believe they can grow their businesses significantly without growing overhead. According to my Landscape Industry Benchmark Report, big companies are not more profitable than small companies. If your revenue doubles, plan on your overhead expenses doubling.
6. If you have significant snow revenue, ensure you make money on the green side. Simply look at your income statement beginning in March or April (depending on when your growing season starts) through October. When you add your operating income for those months (after depreciation), was your company profitable? Was the profitability greater than 10 percent of the revenue for those months? It should be. You work hard in both the snow and landscape seasons. You want to win 12 months out of the year.
Wanting more info on income statements? Read my past blog about how trended income statements can help you predict your company’s future.