Mind your Ps and Ls

In January 2016, I conducted several estimating workshops in Colorado. At one workshop, I asked a landscape contractor how 2015 wrapped up for him. He responded that he didn’t know because his financial information was with his CPA and the CPA hadn’t analyzed it yet and gotten back with him.

It might be too late to fix problems for 2015, but he needed to see his P&L statement moving forward. Essentially, the P&L statement is a snapshot of how well the business is doing at making or losing money at any given point in time. It’s an essential tool for entrepreneurs to use if they are going to understand their businesses. Click here for a downloadable P&L statement.

Formatting the profit and loss statement

Income or revenue.

First, we identify the income for the company and its sources. Larger companies usually break down their revenue into divisions or profit centers. For instance, you might have installation, maintenance, irrigation and snow and ice divisions. If an activity accounts for at least 20 percent of company revenue, I recommend tracking it and its expenses in its own division. If the total income for the company is less than $500,000, I’d recommend having just one division.

Direct costs.

Next, we have direct costs. These are the costs that can be directly attributed to projects or services provided by the company.

• Materials and sales tax: This is the pre-markup cost of job materials (and the related sales tax) used and includes such things as plant materials, fertilizers, hardscape materials, irrigation parts, etc. It does not include fuel.
• Direct field labor: This is the cost of the crew working in the field. It usually does not include project or account managers.
• Labor burden for direct field labor: Labor burden includes FICA, FUTA, SUTA, workers’ compensation insurance, general liability insurance, 401K costs, vacations, holidays and paid time off expenses. It ranges from 20 to 30 percent of direct field labor.
• Field equipment and truck costs: This category usually runs 12 percent of sales +/- 2 percent and includes: fuel, auto and inland marine insurances, repairs and parts, mechanics, depreciation, leases, etc.
• Subcontractors: This is the cost of subcontractors used by the company on projects and services.
• Rental equipment: This is the cost of rental equipment used on projects and services.
• Miscellaneous: This category includes such things as dumpsters, Porta-Potties, etc.

Gross profit margin (GPM).

Sales revenue minus total direct costs gives us the gross profit margin (GPM) for a company or division. This is a very important calculation as it tells us how profitable the company or division is before subtracting general and administrative (G&A) overhead costs.

GPM is also the report card for a division manager when compared to the company’s annual budget and national benchmarks.

Indirect or general and administrative (G&A) overhead costs.

These costs include everything that is not directly attributable to the cost of specific projects or services. It includes such things as rent, advertising, utilities, owner’s and office salaries, etc.

For companies under $5 million in annual sales, G&A overhead costs usually run about 25 percent of sales. It drops as a company grows beyond the $5 million mark.

The owner’s pre-dividend and office salaries account for approximately 50 percent of G&A overhead costs.

Net profit margin.

Once you subtract G&A overhead costs from the gross profit margin, you have calculated the net profit margin (NPM) for the company or division.

This is what I call the pre-tax and pre-dividend/bonus NPM. The NPM is calculated after all bills are paid and owners receive a pre-dividend salary.

Ten percent NPM for a green industry company is good, 15 percent is excellent and more than 20 percent is superb.

Over/under billings.

The final calculation is for over and under billings. If you have work in process that is completed but not yet billed, you are under billed and you would add this amount to the NPM.

If, on the other hand, you have revenue in income that you have not completed (or earned), you are over billed and you should subtract this amount from NPM.