Forget winter hibernation. Now is the time to get working on your business while you’re not swamped in it, and prepare operations for a strong start this spring. Maximize the off-season by raking through your budget and taking stock of people, equipment and backlog. Review 2010 sales and form projections for 2011.
Your budget is a starting point for analysis. “It’s a tool to use for examining your whole company,” says Jim Huston, a green industry consultant and owner of J.R. Huston Enterprises, Englewood, Colo.
Meanwhile, tune into these vital signs: debt ratio, the balance sheet, payables and receivables. Also consider opportunities to grow your business. Decide to add a new profit center to the business, or close down a division that isn’t performing.
Making some of these tough choices now will help get your business in shape for a successful 2011.
Budgeting Matters
Focus on that budget and lock down your projected numbers for 2011. “Conduct a comprehensive review and take a look at every line item,” Huston says. First, review the benchmarks on page B14 and see how your business stacks up. Here are some areas to watch: equipment purchases, labor costs, overhead costs and gross profit margin (GPM).
Equipment: Before you add a new piece of equipment to your fleet, ask yourself this: Can I keep it busy 50 percent of the time? Or, “Can you generate enough revenue from that piece of equipment to make all of the payments?” Huston says. Remember when budgeting, equipment costs also include fuel, depreciation, parts and mechanics’ pay.
Labor: If labor costs are eating up your budget, then sales and marketing efforts should be ramped up to balance the ratio. Start by analyzing how much you are paying yourself (owner’s salary). Huston recommends a fair market value salary of about 12 percent of sales. “Usually, if your overhead is above 25 percent, it’s because your office staff costs are too high,” Huston says.
Overhead: Generally, overhead should not exceed 25 percent of sales. So a company that does $1 million in sales typically has overhead costs of $250,000. Overhead is indirect costs, from office supplies to vehicles, cell phones and downtime with labor burden (see charts for a full list).
GPM: A company’s overall GPM is usually 30 percent or higher – that’s profit after paying job-related costs from materials, crews, labor burden, equipment, etc. If GPM is 30 percent and overhead is 25 percent, net profit is 5 percent. “You should really focus on GPM for each division and if one area is too low, then work on improving it,” Huston says. In other words, one lagging profit center can stall the whole operation.
Personnel Prep
“Fire them up or fire them out,” Huston says. Sounds harsh, but companies need high-performing leaders and employees to grow. Take inventory of personnel: What positions do you need to fill? Where could you trim the fat? What training do you need to provide to sharpen the staff’s skills? Don’t wait until the weather breaks to post your help-wanted ads.
“You need to think about personnel all the time,” Huston says. “You can’t snap your fingers and hire the right person. Recruiting takes time.”
Figure out how many and who you can afford to hire by analyzing the labor costs in your budget. Field labor is an average 30 percent of sales in maintenance and lawn care organizations, and about 20 percent of sales in design/build firms. (Labor burden is about 30 percent, as a percentage of labor.)
In the meantime, identify members of your organization that require minimal supervision. These are your managerial superstars. Then, Huston suggests identifying those who require more than their share of oversight. “Identify those personnel and do something about it,” he says.
Incentive plans will motivate the team to continue working productively, especially during the burnout days of summer. Winter is a fine time to design and launch a program. The ultimate goal of incentives, of course, is to ramp up productivity.
Expansion Opportunities
Huston says many businesses worked through 2009 and 2010 with a wait-and-see mindset, and aggressive companies that are in a position to grow this coming year are prepared to test the market with new services.
Identify client demands, analyze the competitive landscape and determine if there’s a niche your company can capture. The offseason is an ideal time to think acquisition and sales. “It’s a natural break,” Huston says. “A lot of companies are going to wrap up the year, and if they want to acquire a company, doing that in November and December gives them a few months to get assimilated.”
Before taking this step, consider bringing in an outsider to take a good, honest look at your company and its needs. A consultant can guide you through necessary budgeting exercises, prompt uncomfortable discussions that are necessary to engage in before a company can grow (Should you fire this manager? Can you buy a new division? Why is the design/build GPM so low?).
“For a company that has plateaued and can’t get beyond a certain level, it’s a good idea to get an outside perspective and look outward for insight,” Huston says, suggesting that owners turn toward industry association colleagues, professional advisers (CPAs, attorneys, consultants) and other local business owners. “Strategic networking can really help get the creative juices flowing.”
Financial Clean-up Checklist
Review Liquidity Ratios.
- Current ratio: Current Assets ÷ Current Liabilities
- Quick or “acid test” ratio: (Cash + Accounts Receivable) ÷ Current
- Liabilities Working Capital: Total Current Assets - Total Current Liabilities
- Leverage Ratio or Debt/Worth ratio: Total Liabilities ÷ Net Worth
Study your balance sheet. Compare your budget to our benchmarks on page B14 and see where your company stands.
Manage payables. “You want to go into winter with your payables down to zero if possible,” Huston says.
Analyze receivables. Who owes you money – and how much? Don’t let clients use you as a bank. Put a collections process in place and focus this winter on bringing that receivables number to zero.
Calculate backlog. How much work do you have on the docket going into winter and spring 2011? How much more will you need to sell to meet goals?
Control labor costs. Take stock of personnel and ensure that labor costs are in line (average 30% for maintenance and lawn care companies; and 20% for design/build firms).
Watch equipment costs. Before you buy that piece of equipment, be sure you can keep it busy 50% of the time, or at least have work lined up to cover the cost of payments.
The author is a frequent contributor to Lawn & Landscape.
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