Vital signs

There are vital signs that your business is healthy, thriving – making smart money and not producing a “beep-beep-beep” warning that demands an emergency intervention. Those vital signs in a business are called benchmarks. And there are certain numbers you better keep tabs on if you want to stay out of the financial ER.

“There are benchmarks that indicate the health of a company – and there are numbers that are nice to know but are not critical,” says Jim Huston, green industry management consultant and founder of J.R. Huston Consulting.

Those vital signs mean everything to your operation. Ensuring that operations are ticking along in a productive, profitable way requires knowing which numbers to watch – and when to focus on specific budgeting activities.

It’s not that easy. And let’s face it, a profit and loss statement (P&L) is as appealing as getting served a pile of kale for dinner instead of that juicy steak you expected. (Where’s the beef?) But if you blow off the good-for-you stuff, the just desserts of running a successful operation won’t be there. We’re talking profit, growth, employee retention, personal satisfaction, a retirement nest egg. “When you don’t pay attention to those vital signs, the organization lacks focus, so there goes your efficiency and your tools for measuring productivity and profitability,” Huston says.

Basically, Huston’s saying you need to be a control freak about your organization, and that means monitoring those vital signs on a regular basis.

So, what are those numbers, anyway?

First, Huston emphasizes his benchmarking mantra: “Price it right, produce it right and produce enough of it.” Key vital signs are your backlog and operating efficiency – whether you can produce work efficiently according to budget. And, speaking of budgets, there are two types you’ll need to analyze. The first is your job budget: That’s the cost required to complete a maintenance or installation job, depending on your line of work. “In that budget, you’ve got money for materials, labor, labor hours, equipment, maybe some subcontractors,” Huston says, relating that the No. 1 risk factor in a job factor is labor. “If you can bring a job in on budget for labor hours, you’re probably going to do pretty well.”

Labor is the primary vital sign in a job budget. For example, a job that is estimated to require a three-person crew 10 days to complete will take 30 hours per day, for a total 300 hours. If those labor hours are off budget, and the job drags on two more days, your labor costs increase because of decreased productivity. “People can blow your budget,” Huston says. Proper estimating and minding productivity are key, so those job budgets are met, especially from a labor perspective.

The second budget is your overall business budget. We designed a calendar to help you understand when budgeting activities should take place, and what numbers to watch when (see “At a glance: your budget year” on pg. B56). As you work through the budgeting year, keep in mind these constant vital signs, and remember that budgeting is a short- and long-term process.

“As you’re going through the year, you’re asking, ‘Am I meeting my sales goal?’ That is the big picture,” Huston says, returning to the price, produce and production mantra. “Then, you want to see what backlog you have to go with that sales number – what is in the pipeline? Then, look at your job cost reports so you can see if you are coming in on budget for labor hours.”

Here are three vital budget signs to watch on a monthly (or more regular) basis:

Backlog: This is the “produce enough of it” portion of Huston’s success equation (partnered with price it right and produce it right). What work is in the pipeline? “This will give you a picture of what the future looks like,” he says. As a benchmark, residential and commercial installation companies should aim for a two-month backlog. “They want to be sold out for about 60 days, which is optimal because if you tell a new client, ‘You’ll have to wait three months for us to get on that job,’ most clients will look elsewhere to get the work done.” That timeframe is less of an issue for commercial maintenance clients that tend to plan further in advance, he says.

From a long-term perspective, commercial and residential installation contractors should focus on selling a good 50 percent of their year by Jan. 1. Maintenance companies should lock up their work for the entire year by end of March, before the season begins in most regions.

Job cost reports: Are individual jobs coming in on budget? (How are those labor hours doing?) Returning to that 300-hour installation job example, Huston recommends breaking larger jobs down into phases so labor hours can be closely managed. For instance, say a large job includes installing a patio, trees, landscape beds and a pergola. Count each of those items as a “phase” and ensure that each phase comes in on budget.

Remember, labor hours are the major risk with job budgets. Managing labor hours requires proper estimation, and you must closely monitor productivity. (How are you holding crewmembers accountable for completing daily tasks? Does everyone understand expectations? Are they being incentivized for hitting budget – read more in “Rates of pay” on page 60).

To see the full Benchmarking Industry Overview table, click the image above.

P&L statement: This gives a holistic view of your company. Reviewing the P&L is like that general checkup to keep tabs on how you’re faring financially. You’re looking at the bottom line, your profitability – and you’re keeping an eye on that break-even point that you should hit by early fall. Check our calendar for more details, and make sure you hit target profit margins on every service (those are in the charts on page 63).

“I want to see that net profit at the end of that P&L statement grow in June, July, August and September – and by mid- to late-September, you want to have accumulated gross profit to pay for all of your overhead for the year,” Huston says.

Now that you have your vital signs snapshot, here are three more “second-tier numbers” Huston recommends watching.

1) Payables and receivables: Which accounts are pushing the 90-day plus limit? (And since when are you the bank?) Put a collections plan in action for managing accounts receivables so you can maintain a healthy cash flow. Clients who don’t pay on time sap your energy as a company because you’re producing the work for them, but not getting the cash infusion from the job to put back into the business to produce more. Make sense? So, figure out who’s dragging you down and stage an action plan to collect on past-due accounts so you can put that cash owed to you to work in your business.

2) Budgeted labor vs. actual labor: “Make sure your labor costs are in line,” Huston says. The discrepancy between the labor hours you budgeted for the job and how long your crewmembers actually spent doing the work will make or break the profitability of a project.

3) Overhead expenses: Overhead should run about 25 percent of sales, Huston says. “If your overhead is 30 percent of sales, that’s a big, red flag. It’s either because your sales are not what they ought to be, or an overhead cost is getting out of line. Maybe you have too many people in the office doing sales. Or, you’re paying too much for your building.” Check our chart on page 63 to see how your overhead numbers line up.
 

At a Glance

Your budget year

You’re running your numbers and keeping an eye on the financial vital signs – but what budgeting steps should you be focused on, and when? As the calendar pages turn, your business goes from dormant to rushing contracts to producing to closing out the year (and building sales for the next). There are specific benchmarks to consider as you progress.

Here’s a calendar cheat sheet to help you stay on target this year.

January-March: The backlog months
Building up backlog is the focus for the first few months of the year. No matter your business – maintenance, lawn care, installation or all of the above – the early calendar months are all about selling and securing contracts.

Specifically, if you’re an installation firm selling to mostly residential clients, Huston recommends selling 50 percent of your year by Jan. 1. Maintenance firms can shoot for that and aim to close up their year by the end of March. The same goes for other recurring-revenue businesses such as lawn care.

April-June: Produce it right
“Now, it’s full bore,” Huston says of this high-production time. “You should have all of your crews in place and trained, and now it’s all about productivity. It’s all about being efficient.” For installation companies, that means accomplishing jobs on budget for labor hours. For maintenance firms, the focus is on productivity and meeting certain revenue benchmarks each day. For instance, a three-person crew working a 10-hour day needs to bill about $300 dollars per person, that’s $900 per day.

July-August: Beat burn-out and build your budget
There tends to be a natural break from the summer madness toward the end of August, and this is a good time to ask the question: How are we doing? This is when you make any changes that could help you refocus. Are you on track to meet your budget for the year? “Look at your data and see if there are any numbers out of whack that need adjusting,” Huston says.

Now is also the time to begin planning the next year’s budget. “By planning a budget six months in advance, that takes some pressure off going into winter – you are ahead of the game,” Huston says. “It gives an owner a sense of accomplishment.” And, you’ll need that because the last few months are all about finishing strong.

September-October: It’s break-even time
Finally, you reach the point where your business has accumulated enough gross profit to pay for the year’s overhead expenses. For a business that budgets $1 million for the year and has $250,000 in overhead expenses (that’s the 25 percent benchmark), you’ll want profits to meet and then exceed $250,000 by early- to mid-September. “Once you hit that break-even point, anything you make above direct costs goes right to the bottom line,” Huston says.

November-December: Finish strong
You’re worn out, but don’t slow down. Now that you’ve hit the break-even point, you can really make profit gains if you continue to sell. At the same time, you’ll be selling for the next year and focusing in on that preliminary budget you created back in July and August.

“It’s like the end of a football game – you get down to that 2-minute warning and it’s not time to take off your equipment, it’s time to buckle down and finish strong because you can win or lose the game in that last two minutes if you are not careful,” Huston says. His advice: Develop end-of-the-year intensity.