Lawn Care Accounting Strategies
It was suggested to me to compose an article that would consider finances for the smaller operator with an emphasis on profitability. As I began to think about it, I asked myself what specific axioms could I impart on the small operator with just a few employees and less than a quarter of a million dollars in annual revenue? What is the financial Holy Grail for this size operator? As I thought about it I realized that successful financial acumen really has nothing to do with size but with organization and discipline. Smaller operators practice it using smaller numbers on a smaller scale and larger operators practice it using larger numbers on a larger scale. But sound financial management knows no size.
If I had to break successful financial management into the most important five Lawn Care Accounting Strategies they would be:
Pricing for Profit – In the service business, pricing is all about gross margin. Gross margin is the percentage of the total sales price left once the direct (variable) costs are subtracted. This can be broken out for both materials and for labor or a hybrid for both. Depending on which aspect of land care you are in your gross margins will differ. Lawn Care, for example should be about 50% or higher whereas build and design could be at 30 -40%. No matter which area you are involved in, that gross margin is what is used to cover the fixed overhead. Once the fixed overhead is covered (breakeven), any incremental revenue will show a net profit equaled to the gross margin. The takeaway here is to make sure you keep your gross margins high. Don’t be a low baller.
Efficient Use of Labor – Is there anything more powerful than pricing when it comes to profitability? The answer is yes. And the efficient use of labor is probably the most important factor in determining profitability. For example. Let’s say we have a lawn technician that we target to bill $100.00 per hour. Let’s assume that:
Example 1: His drive time is a half hour for every hr. Then his real return is $50.00 per hour.
Example 2: His drive time is 15 minutes for every hour. Then his real return is $75.00 per hour.
The two examples above give us two very different results using the same pricing. The take away here is efficiency, or reduction of windshield time is paramount when attempting to maximize profit.
Controlling Material Costs – In land care, materials can be a significant expense no matter which area of the business you specialize. Materials must be figured into your pricing and used at the rate that you specified in that pricing calculation. Over usage, purchasing materials at higher prices than figured into the pricing calculation as well as theft and other shrinkage will lead to a dollar for dollar reduction of profit by the amount of the miscalculation or other overage. This is what makes ordering and using materials at the prescribed amount at the proper cost one of the top 5 financial controls that need to be adhered to in order to ensure maximum profitability. The take away here is that proper ordering and physical control of inventory is very important when trying to maximize profit.
Managing Marketing Dollars – Cost effective marketing is one of the most difficult and ever changing areas that we as land care operators need to manage. Many business people go about making these decisions completely backwards. What I mean by that is they target a percentage of their revenue for marketing, spend it and never track it. Many folks in the industry say to spend 6 to 8% of revenue on marketing. The problem with this type of thinking is it has no relation to the success of the campaign. The proper way to determine marketing expenditures is to determine how much a business is willing to pay for a new customer of a particular type. This is done by considering the life of a customer and the profit that can be made over that life. Let’s assume that we are willing to pay $100 for a new customer. We need to find a marketing method that will deliver this cost per sale (easier said than done) and determine the number of new customers we want. The take away here is that the marketing expenditure should have nothing to do with a percentage of revenue but rather the return on investment of the expenditure.
Accounts Receivable Management – Accounts Receivable Management is an extremely important area of financial management. A business that doesn’t have control of its accounts receivable will almost always have poor cash flow, having trouble meeting its expenses in a timely fashion. Accounts receivable management starts with laying out a formal procedure for their collection. This procedure starts with an accounts receivable aging report. There should be a “Current”, “Thirty”, “Sixty”, and “Over Ninety Day” column. At each point along the way a collection effort should be made (i.e. at 30 days perhaps a phone call to the customer, at 60 days perhaps a letter and at 90 days perhaps a stronger effort). In any event the land care firm should not allow a very large percentage of their receivables to go over the sixty-day column. History shows that the older a receivable is, the more difficult it is to collect. The take away here is to have an effective collection process and to be firm when deciding to put a customer on credit hold.
The profitable land care company understands and implements sound pricing policies, uses labor efficiently, is constantly working on cost controls and manages accounts receivable and customer credit in a prudent manner. These are practices that profitable companies of all sizes adhere to in order to succeed. There are many small operators who are very profitable who want to stay small who understand these practices and there many are many small operators who don’t understand them who are unprofitable. However, the larger more profitable companies used and understood these lawn care accounting strategies when they were small – that’s how they got large!