An unforgiving economy forces all business owners to take stock of their operations and focus on ways to tighten expenses and clean up sloppy systems, whether that’s efficiency on the job or the way sales personnel follows leads. Rather than running rampant in the field, landscape contractors must stop and ask, “What’s going on at home?”
What do the numbers actually look like?
“I find that a lot of landscape contractors curdle up during hard times,” says Jim Huston, president of J.R. Huston Enterprises in Englewood, Colo. “They retreat within themselves and that’s why they don’t grow.”
| 2007 BENCHMARKING YOUR BUSINESS REPORT |
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“When you’re in a down economy, you have to do everything better,” Huston emphasizes.
In tough times, the tough try harder. And some find that business is even better for it. Across the board, landscape contractors are working harder this year to maintain sales and cover rising costs of health insurance, fuel and supplies. Still, based on results from Lawn & Landscape’s 2007 Benchmarking Your Business study, 66.6 percent of respondents project a revenue increase from 2006 to 2007.
Growing businesses have not landed in that position by accident.
“You have to go from intuition to an analytical approach,” Huston says of managing in a down economy. “You have to ask, ‘What is this getting me in return?’ So, you have to measure performance.”
In this fourth annual report, landscape contractors discuss where to cut back and how to build muscle to maintain their businesses in a challenging market. For the most part, the secret is simply having the knowledge to answer that question, “How are things at home?”
THE BIG PICTURE. The housing market is a dark cloud threatening businesses that rely on new development and contracts with condo and homeowners’ associations in a number of markets. “Forty percent of the houses for sale in Broward County are in foreclosure,” says Jim Ziesler, partner, Greensleeves in Miami, Fla.
There’s a condo boom, but Ziesler sees 40- and 50-story buildings that are mostly unoccupied. “A lot of us here joke around that it is good that they are empty because if they were full, how would we drive around?” he comments.
Ziesler knows that some of these condo associations can’t afford to pay service bills for landscape maintenance. How can they when there are so few tenants paying condo fees? “I’ve been cautious about who I work for,” he says. “I weaned myself out of the developer market.”
Greensleeves installs plants for some of the high-rises in town and provides garden maintenance services, but no mowing. “We moved ourselves out of that market several years ago because there was too much competition for too little money.”
Huston says that the slow housing market has inspired workers out of construction jobs to start up mow-and-blow operations that skew pricing. At the same time, landscape contractors who once focused on installation jobs for new housing developments are now bidding on other municipal contracts.
“I was talking to a client last week in Reno, Nev., who does municipal parks and athletic fields,” Huston relates. “He used to see two other bidders on a project and he would win 50 to 70 percent of the contracts. Now, he sees 10 other bidders.”
Still, Huston says the vacation home market where high-end customers demand installation projects is strong. “Any place where you have a second-home market – resorts, places where people have that dream home – those markets are resilient,” he observes. People with money are still spending it.
Another macro factor in the economic pressure landscape contractors are feeling is good, old-fashioned inflation. Kenny Krenshaw, president of Herbi-Systems in Bartlett, Tenn., suspects companies will raise prices the typical 3 to 5 percent looking forward to 2008. “I don’t know that we will,” he quickly adds.
In comparison to the “misery index” of the 1970s where an average 10- to 15-percent inflation rate accompanied a 10-plus percent unemployment rate and interest rates that neared 20 percent, we’ve got it easy, Krenshaw says. “The economy is in good shape here, at least in my opinion,” he states. “It’s just not on fire.” Then again, Krenshaw also notices that the Memphis, Tenn., area is historically stable because of industry diversity – a healthy mix of rail, river, agriculture, health care and corporations like FedEx. While the housing market suffers the same “mortgage mess” as the rest of the country, Krenshaw doesn’t service that struggling population base, for the most part. “My collections are no different this year than any other year,” he notes.
In Michigan, the picture is different. “Oh, boy,” remarks D.J. Vander Slik, president of D.J.’s Lawn Service in Grand Rapids, Mich. The automotive industry rules this state, and he has noticed more amateurs entering the landscape industry with their $30,000 buyout packages as startup capital, which inundates the maintenance sector with price wars that aren’t worth fighting.
Also, the state legislature passed a new law to tax services, and landscaping is one of them. That 6-percent tax will not please customers, Vander Slik says. “If I want to add a 3-percent increase for cost of living, that’s a total 9 percent.”
Meanwhile, weather put the kibosh on phone calls in spring and late summer at Estate Gardeners in Elkhorn, Neb. Michael Becker, president, said “sales are way off” this year. But he doesn’t blame the economy. “I’m under the impression that people are sick and tired of being sick and tired.”
Becker credits the 24/7 culture, political burnout and anxiety about the future for why customers can’t seem to make a decision to sign a contract.
“They’re taking their time and not making any big spending decisions,” Becker says of clients in the greater Omaha, Neb., area. The sales cycle is much slower, he thinks, because people are shopping around. “We used to get a contract within 30 days and now it takes two to three months for people to decide.”
Huston notices that a high-pressure economy also causes landscape contractors to second guess their gut reactions to issues from pricing to equipment purchases. “It really shakes up your intuition,” he says.
REACTING TO CHANGE. The way landscape contractors measure performance and respond by making spending choices ultimately determines their success. This is especially the case in a competitive market.
Not knowing the numbers is the biggest mistake a business owner can make. “We run off our intuition, and in good times, the assumption is that everything is going to keep getting better, so maybe you buy a piece of equipment and you can keep it busy and billable,” Huston says. “The problem is, you get into bad times and this won’t necessarily work.”
Rather than buying a new zero-turn mower because business “feels” busy enough to support it, an owner must do the math. Same goes for hiring employees, investing in technology and purchasing trucks, trailers and even work boots for staff. “You have the big picture and the little picture,” Huston explains.
The big picture includes measuring whether there are enough jobs lined up to meet the annual budget. Is the firm on track to meet sales goals?
Next, owners must address efficiency on those individual jobs. “If you bid out six hours, you want to make sure that job comes in on budget,” Huston says. “That is your biggest variable – hours bid to actual hours on the job.
“You have to price it right, bid it right and produce it right,” Huston adds.
The problem is, some contractors focus on cash flow rather than long-term profitability. Huston describes a case in which a landscape contractor’s suppliers called constantly to collect. The contractor couldn’t pay. His wife wondered when he would bring home a paycheck, but his business was in no position to make a salary withdrawal. When the contractor bid on a maintenance contract for a fraternity house, Huston assisted with the numbers and estimated that $96,000 would cover the costs and provide about $10,000 in profit – a healthy 10-percent margin.
“This guy was in dire straits for cash flow,” Huston describes. “He was hemorrhaging and everyone was screaming at him for money.”
The general contractor knew this contractor was in debt, so he said, “Do the job for $76,000 and I’ll give you a check for that amount today.”
“This is an unfair scenario,” Huston continues. “The contractor thinks, ‘I will have that $76,000 in my hand and I can get these suppliers off my back and take home a paycheck.’ I told him he would dig himself in a deeper hole tomorrow.
“This happens all the time in a down economy,” Huston relates. “People are concerned about bringing cash in the front door regardless of what the job costs and how profitable it might be.”
Slashing prices is no way to react to change. However, carefully trimming overhead costs that are not in balance with sales numbers will help owners reel in expenses. That way, the work produced feeds the business rather than chipping away at hard-earned profit and sinking the company into debt.
Huston offers this formula: Overhead = 25 percent of sales. Labor = 50 percent of overhead. So, a company that does $1 million in sales should average $250,000 in overhead expenses. This includes rent, computers, salaries, etc. Of this, $125,000 pays for labor. This includes executive management, salaried labor and part-time staff. Everyone.
“Now, let’s say you get into this tough economy and, bingo, you can get the sales and you are at a half-million in sales,” Huston suggests. “If you don’t reduce overhead from $250,000 to get it in line with the $500,000 in sales, you are in big trouble.”
Smaller companies with revenues less than $200,000 are the most nimble in tough times, Huston says. “The owner will work harder and put in longer hours. He’ll probably grow in a down economy.”
But companies with more layers of labor must struggle with the decision to cut quality labor that is so hard to find, or ride out the rough year. “The company that is $1.5 million or more has heavily invested in a team,” Huston describes. “This firm has more overhead, more people, and you hate to lose people so you hold on to them hoping the economy will turn around.”
Stick to that 12 percent labor rule, Huston emphasizes. Be sure that paychecks are half of overhead expenses, and that overhead is just 25 percent of sales.
This formula worked for D.J.’s Lawn Service. Owner D.J. Vander Slik increased revenues by 25 percent so far in 2007, with 10 percent growth in summer work and 50 percent in snow.
“We were able to keep our controllable expenses at the same percentage of sales (as last year),” Vander Slik explains. He budgeted overhead based on last year’s revenues and despite growth, he maintained this conservative spending so he could increase profit.
Salary increases were conservative across the board, according to the survey. An average 21.5 percent of companies increased salaries for executive management, and 24.8 percent hiked pay for salaried labor.
Ziesler is the extreme in this scenario. The first thing to go in his budget was his own paycheck. “I haven’t been getting one and neither does my partner, Debra,” he says. He’d rather give more to his employees.
TIGHTEN RIGHT. “We have absolutely tightened the belt this year,” Becker says, remarking that he found more slack than he expected. By cutting in the right places, he preserved his profit and plans to grow.
“This economy has forced us to really look at the efficiency,” Becker says. “We cut waste out of sheer necessity, but our feeling now is that we are primed. We are in a position to improve profitability because we have done a lot of work addressing inefficiencies.”
In fact, the type of jobs Estate Gardeners pursues has changed since Becker noticed that the commitment of garden maintenance contracts is a more secure way to boost sales. Essentially, he flip-flopped his approach to ushering clients into new services. Rather than selling maintenance to design/build customers, he sells enhancement projects to existing maintenance clients.
“We never pursued [garden] maintenance as much as we did design/build, and we are thinking that was a mistake,” Becker says. Besides, the sales cycle for design/build projects is longer. And because he refuses to cut prices or offer design services for free as many companies in his area do, Becker needed to find a more predictable way to maintain revenues.
Meanwhile, Becker reduced expenses thanks to natural labor attrition and the elimination of some middle-management positions. He takes good care of equipment, so replacements weren’t necessary this year. His mindful spending approach modeled that of survey respondents, who for the most part were not making significant equipment purchases. Vander Slik shopped around for better phone and business insurance rates this year. “We are aggressive with safety to keep our [workman’s comp] prices down,” he adds.
Also, he increased his automobile deductibles and decided not to upgrade certain technology in the office. Vander Slik saved on phone bills by switching providers. As for health insurance, he got creative with a “self-insurance” program. He opted for a health reimbursement account (HRA) so his company only pays for coverage that employees use.
Payroll is Vander Slik’s greatest expense, so he examined ways to improve efficiency and the costs associated with labor. “We saw our fuel costs jump from 2 percent of sales five years ago to 5 percent of sales in 2007,” he notes. “Obviously, fuel is not something I can say, ‘We won’t buy it this week.’ Instead, we can tighten routes and take a methodical approach.”
During weekly staff meetings, Vander Slik says he “hammers on expenses.” His employees understand how costs add up to less profit for the business. Ultimately, this affects compensation.
Krenshaw recognizes the importance of retaining quality labor in a market where big companies dole out cushy benefits. He could quickly lose one of his good guys to the competition. “If you don’t offer health insurance, you are not going to compete for employees,” he says simply.
Herbi-Systems covers employees’ premiums, which is $150 per month per person. “We’ve got to be good to people who have been here a long time,” Krenshaw says. Some years, he raises the co-pay or deductible. “Other years, we might look at our insurance package and say, ‘We can do more (for employees) without raising the cost too much,’” he says.
But only 23.9 percent of survey respondents provide health care insurance for management; 18.6 include the benefit for salaried labor. There is a disparity in health insurance offering across revenue categories. For example, 3.7 percent of firms in the $100,000 or less group offer health insurance, while 82.7 percent of firms $1 million-plus provide the benefit.
“We are big enough now that we get someone’s attention when we shop (health insurance), but a guy with less than 10 employees is in a tough position – and you’re still in a bad position if you have less than 20 employees,” Krenshaw notes.
There are other ways to cut expenses. Ziesler is taking advantage of the housing market. His company purchased a “green” building with heavy insulation, energy-efficient lighting and top-of-the-line air conditioning. He no longer pays rent and significantly cut utilities expenses.
“I just got my first electric bill and it was less than $400,” Ziesler says. “I jumped. My air conditioning cools 3,000 square feet.” Green is a great investment. But Huston stresses that landscape contractors must revisit the No. 1 overhead cost – labor – and assess their true needs based on actual sales. While owners can trim and clip away dollars here and there, managing labor costs is critical. The first employees to go should be the bureaucrats, he says.
Sometimes, those managers and office personnel are family, which makes the cut session even more painful, he acknowledges. “Maybe it’s your spouse or your brother-in-law,” Huston says. “Giving them the pink slip is a real emotional grinder. But you have to be tough about it and say, ‘The reality is, we don’t have the work to support this staff.’”
Also consider cutting part-time workers or reducing salaries until the market improves. The fact is, you can’t cut your rent or gas bills. But if your people aren’t busy, neither is their assigned equipment. You’re paying their workman’s compensation, salary (or hourly wage), benefits in some cases and a slew of other costs that add up.
“Say you have three crews,” Huston says, assuming that three people comprise one crew. “That’s nine people in the field. Reduce the number of crews and keep efficient employees.”
Krenshaw can make up the loss he bears from increasing health insurance costs by squeezing more productivity from fewer employees.
“If you’ve got a technician that’s 50 percent more efficient than your competitor, for every three technicians he has, you only have two in the field,” Krenshaw explains. “So the way to save on health insurance (and other expenses) is not to have as many technicians. And the way to hire fewer is to be sure they are efficient. Hire quality people, pay them well and keep them.”
STAY STRONG. While contractors must scrutinize labor as a “versatile” overhead expense during tough times, there are certain expenses that successful companies should not cut. Think twice before you nix the marketing budget.
Instead, focus on targeting quality clients. Bill Lillie, co-owner of Sprigs & Twigs Landscapes in Gales Ferry, Conn., has improved the way he targets and qualifies customers. “We’re reaching the right customers with the right product.”
His company has a presence at local home and garden shows, but he doesn’t pursue relationships with every interested person who wants an elaborate landscape. “We are getting better at saying ‘no,’” he says. He immediately learns whether the homeowner has set a budget, and if not, this is a red flag.
Sprigs & Twigs advertises in high-end coastal magazines that reach his target market, and he steers them to the Web site to learn more about services. “Each year, we’ve seen a doubling of the number of serious hits on the site,” Lillie says. “That’s a 24/7 marketing program without us doing anything.”
Sales are up 30 percent this year, and Lillie expects to finish 2007 with more than $400,000 in revenue. “Word of mouth advertising just continues to grow as our reputation continues to grow,” he says. “This is our tenth year in business, so we are relatively young, but it feels like we have hit the tipping point because people are becoming aware of us.”
Reputation is never more important than in a rough economy, Huston says. Landscape contractors must work to maintain a positive image so they can retain customers and show homeowners why they must pay fair prices for services.
“In this economy, your reputation is worth its weight in gold,” he remarks. “Contractors with bad reputations aren’t getting referrals.”
Control quality and be sure that equipment can handle the job. While landscape contractors may be tempted to skimp on repairs or put off equipment purchases for another year, doing so could hinder productivity and project results, Huston notes.
“If they turn over equipment every three to five years, it saves tremendous repair costs and downtime,” Huston says.
He returns to the motto business owners should adopt in challenging times: under-promise and over-deliver. Those willing to work harder will surface from hard times without missing profit or tarnishing their reputation with customers.
“We’ve had to work harder to get the customers we have,” Lillie acknowledges. “But we’ve had a good year. The customers are out there.”
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