Heading nowhere fast

It was 10 p.m. and I chose to ignore the sign that the road was damaged 56 miles ahead. However, taking this shortcut from central California to Santa Barbara on the coast could possibly save me about 100 miles of travel. With any luck, I should arrive at my hotel around midnight, get a little sleep and be at my client’s office by 8 a.m. that morning.

Being the positive risk-taker that I am, I thought I could navigate the rain-soaked mountain roads heading to the Pacific Ocean. It didn’t dawn on me until too late that I wasn’t passing any oncoming vehicles heading inland from the coast.

The boulder completely blocking the road was the size of a small house. There was no way around it. It was then that I realized I had ignored key warning signs and had made some pretty bad decisions to continue on a path that was destined to fail.

Warning signs.

Bob had a $3-million residential design/build company in Texas. He was growing steadily – 15 to 20 percent per year – but barely breaking even in the process. The previous year, he had lost over $30,000 and knew something had to change, but he didn’t know where to start.

Will had a small landscape maintenance company in Pennsylvania. The previous year he had lost about $30,000 on $300,000-plus in sales. His profit and loss (P&L) statement and his checkbook told him something was wrong. His $30,000 loss should have been a minimum $30,000 net profit – a $60,000 swing. Applying some twisted logic, you could compliment Will. It only took him $300,000 in sales to lose $30,000, while it took Bob $3 million.

Jake had a $5-million commercial landscape installation company near Boston. He told me he had been in business for 29 years, never made more than 2-3 percent net profit, and the more he grew, the more money he lost.

Finding the flaws.

No matter your revenue size, you should be able to attain a 10 to 20 percent net profit margin (NPM). By NPM, I mean that after all the bills are paid and you, the owner, get paid a reasonable salary. Before bonuses, distributions and taxes, you should see 10 to 20 percent NPM on your bottom line. Second, if you’re not earning a reasonable NPM, the problem lies within one of three things (or a combination thereof). Your pricing is inaccurate, your production isn’t up to par and/or your sales volume is inadequate.

Will’s production was fine and he could sell lots of work. However, his pricing was all over the place. He essentially threw numbers at bids. Once he had a simple system for pricing in place with daily revenue goals, he quickly adjusted his bidding. Going forward, he’d probably lose some work and some customers. However, he’d make a profit on the work he completed and billed.

Bob’s problem was also self-inflicted. Similar to Will, growth and production were not the issue. However, he was using unit prices for trees, shrubs, pavers, walls and irrigation systems that were out of date and inaccurately calculated. He also wasn’t including general conditions (drive time, load/unload time, call-backs, crew trucks, etc.) in his pricing. The good news for Bob was that he had a great reputation and little to no competition, and he was in the residential design/build market. His primary competitor was himself. He could adjust (raise) prices and customers would, more than likely, accept the increase.

See the signs.

Jake’s was another story altogether. His estimating system contained a fatal flaw. His company had $800,000 in truck and equipment costs and 80,000 billable field man-hours. He’d include $10 ($800,000 ÷ 80,000) for every man-hour in a bid when pricing jobs. He’d overprice jobs that only required $3-4 of time and expense cost per man-hour and underprice jobs that required more than $10 time and expense cost per man-hour. Guess which jobs Jake’s company won? He’d win the bids that he happened to get right or underprice. Hence, the more work he sold and installed, the more money his company lost.

Unfortunately, Jake was at the end of his landscape career and he simply did not have the wherewithal to correct things and his company went out of business.

If your company isn’t generating a reasonable net profit in the current economy, don’t be a bonehead like me and ignore the signs that you’re going in the wrong direction.

First, recognize that something is wrong. Then do something about it. Will and Bob did so and are well down the road to recovery. Jake, on the other hand, either could not or would not, make the necessary changes. He’s down the road and out of the industry. I learned a lot working with Jake. Unfortunately, I don’t think he learned much from me.

Jim Huston runs J.R. Huston Consulting, a green industry consulting firm.