While Mike Rorie, president, and Gary Kuykendall, vice president of sales, grew Groundmasters into a legitimate business during their first few years, they were also busy educating themselves on the complexities of running a business.
Now, nearly 20 years later and after receiving a great deal of help from industry consultants and colleagues in the industry, Rorie can talk easily about what percent of Groundmasters’ revenues go toward employee compensation, how much return he is getting from his equipment vs. what he should be getting and other such numbers that play a critical role influencing management decisions.
STARTING STRONG. For Groundmasters, each year’s financial performance is predicated first and foremost on the company’s ability to retain customers.
“Recurring sales are your lifeline in this business,” noted Rorie, adding that a high renewal rate is the sign of a healthy and competitive business that is satisfying its customers. “I think it’s critical that you maintain renewals in the 90 percent range because you have to replace every percent that goes away before you can grow your business at all. I want to stay above 90 percent renewals no matter how big we get, but I feel management and customer service is sliding if you lose more than 10 percent in one year.”
The value of customer renewals is emphasized throughout the company.
“There is no question that everyone in the company knows we have to renew our work,” Rorie added. “If we don’t, then we’re not doing our job. If we lose a job, we should all want to know why. Who did we lose it to? Under what circumstances did that occur?
“The reality is that customer service is the business we’re in,” he continued. “It just so happens that we do this in the form of a horticultural product.”
Having the renewals set up for the next season by the end of the calendar year lets the budgeting process for the coming year start during the winter.
| Budgeting Back |
|
Snow removal services have long been one of the five profit centers for Groundmasters, but recent winter weather has taught the company about the danger of counting on Mother Nature for late-season cash flow. “In 1996, we pushed more than $1 million worth of snow, which is about twice our normal level,” affirmed Mike Rorie, president. “Going into our budgeting for the next year, we knew wouldn’t do that much in snow again, so now we had to make up for about $500,000 just to stay at the same level overall.” As a result, the company has gotten away from budgeting for much snow revenue. “In 1997, we did make up most of those $500,000, but we still ended doing about 2 percent less overall than we did in 1996,” Rorie noted. “Going into 1998, we reduced our snow revenue budget by about half again, but we’re forecasting an overall growth of 10 to 15 percent for the company. And if it happens that we exceed what we’ve budgeted for snow, which could easily happen now, then we’ll grow quite a bit. “Our snow budget used to be for 10 to 15 percent of the company’s total revenues, but now it’s less than 5 percent,” he added. “So it’s all upside if we get the snow and there’s no downside if we don’t. And we know we’re not going to start off the year behind budget because of factors that are out of our control.” – Bob West |
“Our budgeting starts when I meet with our account managers to work on our sales goals for the next year,” Rorie explained of the process that starts in late fall each year. “Sales then reports those numbers back to production so they can figure out how much labor will be required to produce the work. The operations manager also meets with the fleet manager to identify our equipment demands for the next year. All of those figures are then turned in to accounting so they can make sure all of the budgets are acceptable in order to produce the desired gross margin and gross profit.”
In addition to using outside consultants such as Frank Ross to help the managers with this process, Groundmasters managers may often take a retreat over a weekend to discuss budgeting and other strategic planning issues.
Once the season begins, Rorie and his managers are continually examining Groundmasters’ performance against the budgeted numbers. The department managers are responsible for checking weekly performance figures while Rorie checks the numbers on a monthly basis.
“We have a continuous check in place on a 30-day basis to see whether or not the work is being performed at cost,” he remarked. “If we didn’t meet our goal in a month, we need to know why that happened because it’s very difficult to make up ground. The reality is that you should have set your expense budget to meet your needs to do the work booked, so what can you cut if you under perform for one month?
“I can check any of the managers’ weekly reports for a monthly update, but I predominantly rely upon our payroll because labor is what we sell,” Rorie continued. “I know we should have a 23 percent labor cost against total income, and checking that lets me immediately see where those costs are in relation to our variable and fixed costs.”
Jim Bishop, operations manager, pointed out some changes Groundmasters made to improve its internal financial monitors.
“We’ve gotten much better at job costing and knowing out budgets, which means we’ve operated much more profitably over the last two years,” Bishop explained. “Now, we break down every job and every book of business and identify all of the hours necessary for everything from mowing to pruning to fertilizing. That has kept us honest.”
Kuykendall pointed out that this focus on job costing allowed the company to double its profits while growing 17 percent overall from 1997 to 1998.
“We’ve really been watching our expenses and making everyone aware of the critical numbers to watch throughout the company,” Kuykendall added.
All of the job costing information is gathered from the crew foremen, who are responsible for tracking the various fuctions performed on every account they serve. That information then is entered for every crew member and every function for payroll. From payroll, the numbers go to accounts payable for any materials used on the job and to track job costing against the job estimates and gross margins set for the company.
Although Bishop emphasized that job quality is never sacrificed for budgetary reasons, having such a “benchmark,” as he called it, lets Groundmasters managers better adjust the company’s labor levels as work fluctuates.
“It was a difficult process to go identify all of these specific numbers and build this process,” Bishop added. “I really wish we would have done this when we were at $500,000 sales.”
| The Equipment |
|
Contractors who know Mike Rorie, president, Groundmasters, Cincinnati, Ohio, may know him as a true ‘equipment guy.’ Rorie earned himself and Groundmasters a reputation that gets the most out of its equipment fleet. As it turns out, however, Rorie discovered he hasn’t been getting as much from that fleet as he could. “We’re a capital-intensive company,” Rorie pointed out, adding that the company spent approximately $350,000 on capital purchases each of the three previous years. “We expect that number to be reduced for each of the next three years, unless an unexpected amount of good fortune comes our way in terms of growth.” The company’s philosophy has been to reinvest heavily in the organization, but it may have been investing too heavily in capital expenses. “I’ve been told to increase the return on capital that I expect and to expect a good deal more than I have,” Rorie shared. “So I played with the numbers and realized that when you consider what we expect to do in terms of growth and profits that I was doing a poor job managing our growth per capital dollar spent.” Rorie recognizes, however, that his approach toward equipment is unique in the industry. “Most companies don’t want to invest in equipment or capital improvements, and they suffer from under investment,” he said. “We were in the opposite situation with trucks, mowers and other equipment staying in the garage all day instead of going out and earning money. “Now, I realize how important it is to keep your capital utilization as high as possible, so I’ll look for two to three times revenue growth to capital investment over prior years in 1999,” he noted. – Bob West |
Although Rorie isn’t involved in the job estimating process for new contracts, he has established some company-wide policies.
“We don’t charge for labor travel as a part of each job’s costs,” he pointed out. “A lot of our competitors do that, but our attitude is that if a customer is paying us for that time today and some other company comes along that is located closer to that contract, then we’ll lose the job. So including that cost in your service means a lot of customers are going to be short-term customers. Instead, we focus on keeping our travel time minimal and recovering that cost through the onsite time. We won’t cross town to cut grass. ”
WHAT COMES FIRST? There are three general components a green industry contractor can provide to its customers: quality, service and price. Most people would agree that it’s possible for a company to provide any two of these three components at the same time, but not all three. Deciding exactly what it would provide its customers has meant making changes to adapt to a changing market for Groundmasters.
“We used to deliver quality first, then service and then price,” explained Rorie. “Five years ago, we switched to service first, then quality and then price as the market demands changed.
“But in the last three years, we’ve gone to service first, then price and then quality because the market has grown so fickle and people want what they want the second they think of it today,” Rorie continued. “Competition and corporate downsizing drove pricing down, and we began to see more people looking for discounts and resisting price increases.”
As price demands grew, Groundmasters realized that doing quality work wasn’t necessarily enough to keep it on the job.
“So we left our pricing alone knowing full well that our costs were going up,” Rorie explained. “Because we weren’t raising our prices we had to let our quality go down.”
But Rorie is quick to differentiate the idea of letting quality go down from offering poor work.
“The difference between a good job and a great job is a small window of details,” he said. “Everyone has to mow the grass but how well do you set the edges, prep the beds and get rid of clippings?
“At times when we haven’t emphasized quality, we still felt we were delivering the best work in the market,” he said. “We just weren’t as good as we could’ve been. This is just a way of controlling our costs by limiting the amount of time crews spend on a job.
“For example, now that we’re giving more emphasis to quality, I don’t expect productivity to go down,” Rorie continued. “But we may allot 90 minutes for a crew to spend on a job instead of 60 minutes previously to drive quality. That crew should be just as productive as ever, but now it will have more time to produce quality work.
“Now, with the combination of market shifts and our new leadership, we’ll be able to return to a service, quality, price approach because we’ll be able to deliver a very fast product at a very high quality, which will enable us to return to asking for a higher price that we’re able to defend,” Rorie added. “The key for us now will be our ability to be consistent as the service provider because we’ll always be defending our price.”
CONTRACTS. “We structure our contracts to generate money when we’re generating costs, and I recommend everyone do that as opposed to even billing where the cost of the contract is divided up into 12 equal, monthly payments,” Rorie maintained. “We want to be paid for spring clean-up and installation work when we do that work because those are labor intensive and material intensive services. If we use the even billing approach, then we put ourselves behind from the start.”
While many contractors offer customers discounts on their bills if they pre-pay for the entire year’s service ahead of time, Groundmasters rarely grants such requests.
“We’re not big on discounting because we don’t have cash flow problems to deal with,” Rorie pointed out. “But it hasn’t always been this way. I understand the value of discounting when a company has cash flow problems, but the thing to remember is that discounting doesn’t increase revenue vs. costs – it just improves cash flow.”
Instead of discounting, Rorie turns to a revolving line of credit from his bank if he’s faced with cash flow issues. He maintains a line that covers at least one month’s earnings for the company because that’s the minimum amount the company will have as receivables.
“If a company is making money, then it’s not too likely that is has cash flow problems,” he concluded.
The author is Editor of Lawn & Landscape magazine.
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