Understanding the Difference Between Income and Profitability in Your Lawn Care Business
If you’re looking to make a profit in lawn care, it’s critical that you know how to read your financial statements. It’s vital to know what you’re data’s telling you before you make decisions that impact your company.
Why You Have To Keep Track of Your Books to Grow Your Lawn Care Profit
So that you can see what we mean, let’s go over the numbers for CLIP Lawn Care. We’ll pick apart the numbers and see what they’re telling us.
Since we are getting close to the end of the season, I’ll show you how things that we changed in real life show up in our income for this year so far (January-September 2015).
First, we’ll go over the income part of their income statement
In 2015 CLIP Lawn Care decided to work harder on selling and pricing mulch jobs and cleanups. They were pricing themselves too low in the market, and it was showing in the efficiency numbers.
Cleanups fell to $35 per man hour (after materials costs are subtracted).
CLIP Lawn Care (CLC) has set $45 per man hour as their rate, so either:
- Their methods were wrong for the properties they were doing (low efficiency), or
- Their price was too low.
After looking at the issue, they figured out that their prices were too low. They raised the prices on their 2015 estimates and continued to promote landscaping jobs.
If you look at the picture below, you can see that Cost Of Goods Sold (COGS) increased by about $12,000. Based on just that information you would think that CLC put down more mulch per job than they did in 2014.
Actually, they did more jobs (20% growth overall).
In 2015 COGS was 7.55% of income. In 2014 it was around 6.94%, that means that it only really changed by .615% when you adjust for growth.
This helps us to understand that this is the right move. They are still able to maintain that same percentage for gross profit 94%+- (gross profit is total sales – Cost of goods sold).
The 94% gross profit says something else about CLIP Lawn Care.
They are a maintenance company that does minimal resale and purchase of materials. They focus on services, not on reselling and installing products. Some large (in sales) landscaping companies will sell a product at 100 dollars, but only keep 50 after they pay for the cost of the product.
I found the numbers for a large landscaping company in the $17 million in sales range (in the top 25 design-build firms according to Landscape Management). To get the same kind of profit as them, they would only need about 7 CLIP lawn care branches. That would be about 4-5 million in sales. That would make them approximately 3-4 times as efficient as the large landscaping company.
I think the take away from this post is to look at your efficiency, not just your growth. Take a hard look at your pricing, efficiency, and materials. Are you fundamentally changing the type of company that you are from a lawn maintenance service to landscaping product resaler?
Now Let’s Look At The Expenses
By default, Quickbooks shows percentage change from last year, and change amount from last year, and a % of income for the current year. This is fine if your company didn’t grow at all last year, but if you grew it throws off the importance of the numbers.
If you are making 20% more in sales than you did last year (about how much CLIP Lawn Care grew), then you will probably be employing more people, printing more flyers, upgrading equipment, etc.
QuickBooks would show that you have a bad change if those numbers went up at all from last year. In reality, what I want to know is if they grew MORE than the 20% that my income increased.
For example, if my payroll was $100,000 in 2014 and goes up to $120,000 in 2015 that is 20% growth. If I am doing 20% more work, then I would expect to pay out about 20% more in payroll costs.
Before we get started here is a quick refresher on terms:
Expense = Cost of a service that a business uses.
% of income = In this spreadsheet it means The Expense/ Total income.
$ Change in relation to income = In this spreadsheet it takes the % of income and adjusts the expense
The numbers in the Change column are adjusted for the 20% growth in income.
Some interesting takeaways:
- CLC ran about 40% in payroll costs. If we can make our employees more efficient then we can be more profitable.
- CLC gives some extras to their employees.
- Good credit card rates and volume discounts are great when you are growing!
Consider your numbers the place to look if you’re determined to grow your business.