<b>Benchmarking Your Business:</b> Financial FAQs

Contractors are good at green – growing it and mowing it – but sometimes aren’t good at tracking it. Lawn & Landscape sat down with Jim Huston, a green industry consultant and owner of J.R. Huston Enterprises, to get answers to common questions contractors ask when it comes to making money, and hanging on to it.

Am I making money?
First, figure out your individual job cost to make sure you’re not losing money on every project. You’ll essentially reverse the estimating process and find out the actual cost and profit margin of each job. Do this by taking your price less the cost of materials, labor, labor burden, subcontractors and equipment.

Next, look at your bottom line. As a rule of thumb, most seasonal businesses break even toward the end of summer and really begin making money the last few months in business (in fall). The problem is, that’s when the crews are burnt out and productivity tends to lag if you’re not careful. Keep in mind, a seasonal business can begin spring $70,000 in the hole because of overhead costs during wintertime that aren’t offset by income. The key is to focus on a strong finish to the year. Sit down with your budget before the end of the season and focus on weak points so you don’t lose money during this critical time.

What’s my break-even point?
Find out your break-even point by dividing annual overhead costs by your gross profit margin for each division of the company. For example, if your sales budget is $1 million and overhead is $250,000, your gross profit margin is 35 percent. When you divide $250,000 by 0.35, the result is $714,000. That means that after reaching $714,000 in sales, you should have earned enough to cover your overhead costs for the year. Usually, companies achieve this at the end of summer, in September (plus or minus a month). The beauty is, after hitting the break-even point, everything else you earn from a job (less direct costs) goes right to the bottom line.
 

How can I get clients to pay me on time?
You’re not alone. This is a sore spot for many owners – they have hundreds of thousands of receivables out, and they’re wondering, ‘When am I going to get this money?’ You can do your best to prevent overdue receivables by getting bills out on time. The longer you wait to invoice, the harder it is to get your money.

Companies can encourage clients to prepay for services by offering a discount. If you have the sales volume, you might consider accepting credit card payments. While you’ll take a hit by paying a fee, you can secure the cash, and this might be a priority for your business now. Most of all, be diligent about following up with clients: make phone calls, e-mail reminders and find ways for them to pay you without thinking about it (electronic withdrawal, prepay, etc.). Reward customers who pay on time, and spread the word that you appreciate timely payment by offering coupons and other thank yous (gift cards, etc.) to loyal, timely-paying customers.

Finally, really evaluate your customer base and recognize that it’s not worth doing business with customers that use you as the bank. When a slow-paying client wants a bid, maybe you should consider passing on that “opportunity” to not get paid.

More contractors are using collection agencies (GreenFlag Profit Recovery www.transworldsystems.com is very popular) and finding them to be an effective tool to encourage slow (or no) payers to pay up. While not as popular as collection agencies, factors are also an option. A factor buys your receivables at the time an invoice is created. Factors usually charge 2 to 3 percent of the amount of the invoice. But the advantage is no waiting – you receive payment immediately.

How are landscape businesses doing in other areas of the country?
For the most part, companies are reporting flat growth – the doldrums. Everyone is treading water and for the most part has a wait-and-see attitude. It’s rare that I see companies that are growing and expanding, and I have traveled to 33 states since Jan. 1. (And, as of publication, I’m still on the road.) People are doing what they can to break even and keep the doors open, and we’re all looking toward the November elections to gauge how the political landscape might change in 2011. The economy is lackluster – it’s anemic. There is little confidence in the direction of the country right now, and small businesses are critical to our recovery. For now, they’re hanging tight.

The author is a frequent contributor to Lawn & Landscape.