Owning and operating a green industry business involves more time, effort, and risk than other passive investments like real estate or the stock market. As a reward, green industry businesses should have higher returns when compared to these passive investment options. This return can be measured through the financial key performance indicator (KPI) Return on Equity. Lets start by defining Equity! Equity represents the owner’s stake in the company, or the amount of money that the owner has put into the company or owns.
When evaluating the return on equity, the calculation is Net Income divided by Equity. Return on Equity measures the earnings generated by a company based on each dollar of equity investment contributed by owners. Not only do we consider the amount of money invested by the owner, but also one of the largest impacts on Equity comes from Retained Earnings. Retained Earnings represents the cumulative profits that the business has earned over time and decided to keep rather than distribute to its owners.
Generally, a 50% return on equity is a sufficient goal, but we see many companies that exceed that as well. An interesting discovery from 2023 data shows that out of the hundreds of green industry companies we currently work with, those that provide at least 75% of a specific service-line reached higher Return on Equity numbers than those that provided more of a mix of services.
Companies that were predominantly maintenance or lawn care saw 1.70 times more of a return on the funds they invested into their company. Companies that were predominantly install-based saw 2.75 times more of a return on the funds they invested into their company!
Not only did specialized companies achieve a higher return on equity, but they also utilized their fixed assets (equipment, vehicles, etc.) to generate higher profits and more revenue. Companies that were predominantly in one service-line saw 33% higher return on fixed assets, and up to 10% more revenue was generated.
As a long term play, adding on additional service-lines does have its benefits. One main example of how it could be beneficial is the ability to utilize your current customer list and community that you’ve already built trust with, and those that may have already utilized your services. This will lead to a decreased marketing cost, since funds were already spent to acquire that customer in the initial service offered to them.
Although we do believe specializing your services will improve your return, this doesn’t mean we don’t see highly profitable companies that offer a variety of services. I do feel this data is skewed by companies that are experimenting in additional service lines, or are not ready to add on an additional service-line. There will be lower efficiency, especially in the first few months when the team is learning to operate productivity in a new service. This delay in productivity can be drastically improved by adding on employees who are already specialized in that new line of work. This is why we recommend to add on new service lines as the company grows, and as the company can afford to hire key people for the new service.
Overall, its important to monitor KPI’s like Return on Equity because you should be reaping the rewards of owning a green industry business! Net income and overall profitability is a huge driver of the return you will get on your business, but be sure to balance that with investments into the company and the funds retained in the business.
Learn more about our accounting and tax services for the green industry here!