When you visit the doctor, they let you know both the specifics of any significant findings and the overall health of your body. In your landscape company high net profit margin is a significant finding/KPI, but how does a business owner get a full picture into the financial health of the company? Below are 4 major considerations in assessing the financial health of your business:
Seasonality & time of year
We are approaching the end of winter, which is the slow season for many of the seasonal green industry businesses we work with. Some are struggling to get by and counting the days, while others are using it as an opportunity to plan for the upcoming spring rush. Implementing a service mix to help improve profits during the slow season is great, but what else can be done with your existing structure to help? First, lets examine the effect fixed costs have on your business and the impact it can have during the slow season. You may think that you are making a high net profit during the spring and summer months, but is it enough once you spread it across the entire year? If your goal is to make 15% net profit, and you are making 15% profit during the busiest months, then it may not be enough!
Paying yourself a wage
For S-corporations there are legal and tax reasons that a business owner needs to pay themselves a reasonable salary, but lets take a deeper dive into this. You may have come across business owners at events, online forums, and other gatherings that boast about the high profits of their business. The issue becomes when these same business owners do not understand the importance of paying themselves a salary for the work they perform, plus making the net profit on the business. Its important to understand that the profits of the business and owner’s salary are separate and distinct. The profit is the return that you earn on your business, and the reward that you as the business owner get for the risk of owning a business. The salary is for what you do in the business as the business owner. If you are not paying yourself a market based wage for the work you are performing in your business, then your financials are misleading. You are not only distorting the financials, but may actually be operating at a loss. Don’t pay yourself a low salary to falsely show higher profits, instead understand where you are, and make a plan to improve from there!
Cash flow
The term cash flow has become one of the catchy phrases in the world of business, but how does it pertain specifically to your landscape business? Over 80% of small businesses fail due to cash flow problems. Having a positive profit margin may not be enough! The profit & loss statement has some insightful KPI’s, but in order to get a full picture of your business you need to understand the metrics outside the profit & loss statement that effect cash flow. Some items that can effect your cash levels include loan payments, asset purchases, accounts receivable, etc. This is why one of our major service offerings is developing a cash flow forecast for our clients. As a business scales, it becomes increasing more important that there is focus and attention to cash flow.
Division or location profitability
Company-wide financial reports are useful, but for a business with multiple divisions or locations its essential to generate separate financial reports for each. For small businesses, the work entailed in separating financials by service-line may be counter-productive, but as you grow it will become necessary. Each division and location should be seen as it’s own business. If one division is poorly performing, and the other division has high profits, then a company wide report will not show this. When planning for a profitable year, its important to first know how each part of your business is performing. Not knowing a division is actually losing you money, then planning to grow it, will only make the problem worse!
Remember, high profits are great, but consider these points when evaluating the financial health of your business. Have a successful and profitable 2022!