Businesses are driven by people, especially in labor intensive industries like landscaping. Companies that leverage labor optimally are positioning themselves for success. Labor influences business activity heavily, and therefore is also one of the largest expenses. Pay careful attention to productivity and efficiencies related to the labor in your business.
Labor efficiency is a major indicator into the financial health of a landscaping business. You may be able to use it as a gauge to identify the right time to add, decrease or replace staff.
There are two main categories of labor within a landscaping business, and its important to distinguish between the two in your financial reports. There is direct labor, and administrative labor. Each needs to be tracked and reviewed on a regular basis.
These employees are working on the jobs in the field, and for the time they work they are directly generating revenue for the business. Looking back at your past-year’s financials, and knowing how many hours worked, you can determine a total labor rate figure for each hour worked. This is a useful metric to use in future estimates, and ensures that your team is hitting the mark. You should also know your direct labor to revenue percentage, which can vary from 20% to 40% depending on the service-line. Its important to know your number that allows for the profit that you want. It is usually best to view this KPI over a longer period, like 12 months, instead of a shorter period with higher possible variations.
Controlling and leveraging administrative labor is what separates highly profitable companies from the rest. Administrative labor relates to the managers, office staff, and other employees that are not directly tied to generating revenue for each job. Do these employees make up 10%, 12%, 14%, etc. of revenue? Companies that utilize CRM’s, software’s, and other technologies are able to better control administrative labor levels. Just as any other overhead expense, there needs to be a justification of why you a hiring or retaining an administrative employee. If you hired a manager, and they are not adding value to the team or helping the company reach their goals, then maybe it is time to make the necessary adjustments.
For both direct and administrative labor, there could be numerous causes as to why the efficiency is low. These are some possible reasons:
– Revenue is too low, and doesn’t support the wage rates
– Individual wages are too high in specific labor categories
– Overtime is excessive
– Incorrect pricing tactics, that don’t recoup all labor expenses
– Employees are not being productive or utilizing resources optimally
– A labor category is overstaffed
– The employee benefit structure is too generous
– No goals that are tied to KPI’s
– An increase in idle time
It is great to leverage your labor effectively, but there needs to be an awareness that there is a limit. Overleveraging and overworking employees can lead to high turnover, and a less than desirable company culture. A low labor to revenue ratio is an indicator that you may need to add on new team members, especially if you are a growing company.
Monitoring your labor efficiency is not enough, take action based on what your financials are telling you!