Revenue & profits are low, so what’s next? There are many reasons for this, it could be a pricing issue, market factors, etc. In some circumstances, your business just needs to simply produce more with the current available resources. Below are three main signs that you may need to produce more:
- Inflated overhead expense %: Although top-line revenue doesn’t tell you much, it is essential to drive up revenue to recoup necessary expenses within your landscaping company. This is especially true for covering fixed overhead expenses, since these are typically incurred year around through the busy and slow seasons. At certain times you may find that based on the financial data you are behind on your sales targets causing overhead % to revenue rise. You may also be hyper focused on net profit in the short term, lacking awareness of the sales needed to get through the slow months later in the year. Decreased production is one of the most common reasons for an increased overhead expense %!
- Low return on assets: This is defined as net profit divided by total assets. If you’ve attended our past webinars, you’ve probably noticed that we love ratios that include net profit. Including net profit means that there needs to be a focus on efficiencies and productivity in order to hit the goal, instead of focusing solely on top-line revenue. This ratio shows how much profit your business can generate from its assets. If your goal is 20%, and you are showing 5% month after month, then this may be an indicator that assets need to be replaced to improve productivity. It becomes difficult to compete in any market when you are not leveraging the right equipment!
- Labor efficiency & productivity: Businesses are driven by people, especially in labor intensive industries like landscaping. Companies that leverage labor optimally are positioning themselves for success. Determining direct labor expense as a percent to revenue, or as a percent to revenue minus other direct expenses, are two ways to measure the efficiency. For administrative & management labor, measure based off the percent of gross margin available to recoup this cost, or as a percent to revenue. If labor expense percentages are inflated, but other line-item expenses are not, then this could be a great indicator that its mostly a labor efficiency issue!
This analysis starts with having clear financial reports and data available. The financial health of your company changes every day, week, and month. Its crucial to keep track of financial KPI’s like the three listed above, so you can catch issues early.