Your financial statements are a culmination of the jobs that you complete and the performance of your landscape company. These financial statements contain many line items and metrics, which can make it overwhelming to look at. This is why its important to prioritize sections and specific metrics within the reports. Metrics that drive the performance of your business are called key performance indicators (KPI’s). Now you have the KPI’s, but how do you know how your company is performing. In sports you can measure your individual or team performance by comparing your stats and record to the rest of the league. Getting a hit in Baseball 30% of the time may seem low performing, but when compared to other players it proves to be exceptional. This percent, known as batting average, is one of the oldest and most universal tools to measure a hitter’s success. This percentage of times that a Baseball player gets a hit is key to measuring their performance, similarly to the KPI’s that your financial statements exhibit.
What KPI’s should I focus on when benchmarking my financials? When reviewing your profit & loss statement lets start by configuring each line item by a percentage of revenue. This type of analysis is called vertical analysis. You may see that your cost of sales is at 55%, which is a broad indicator to your efficiencies and performance in your sales team (drives revenue) and job productivity. In order to take action to improve your financials the next time around, its important to benchmark KPI’s that show details into each department or employee. An example of a detailed KPI that you should be benchmarking is your field labor percent to revenue. Your 55% cost of sales may be lower than industry average, but maybe you are still not satisfied with your net profit. After further examination, you are able to see that industry average for field labor is 35% (for that specific service-line), and your field labor percentage is 37%. Through purchasing better equipment, improving upselling strategies, etc., you have a plan to lower your field labor percentage to 33%. If you don’t have accurate financials and industry averages, then you would have no way of determining this opportunity to increase profit.
Be careful when comparing your numbers to those in online forums, online communities, and friends in the industry. You may be able to compare some metrics or KPI’s accurately with your peers in this way, like advertising spend etc. Where this can get potentially incorrect is when some business owners are not familiar with proper green industry chart of accounts principles, or contain varying or inconsistent accounting practices leading to inaccurate financials. For example, some businesses use varying methods when accounting for labor burden and some may be incorporating this within their overhead expenses while other businesses allocate these expenses in the cost of sales. Some businesses may include owners salary within the reports, while others don’t take as much of a salary. It is best to work with an accounting professional to ensure you are benchmarking correctly.
Don’t compare your financials to broad “green industry” numbers, instead base it off of the specific service-lines. If you have a maintenance, landscape install, and irrigation division then you should be comparing to industry average broken down by service-line. For example, you should be basing your irrigation numbers with irrigation industry average, not “green industry” averages. The reason we do this is because some KPI’s vary widely between different service lines. Another common problem I see Is that businesses make the industry average their goal. You want to be better than average, shoot for higher profits!
Before benchmarking your financials to industry average, it is important to ensure that your financial reports and KPI’s are developed correctly. Having incorrect financial reports will prevent you from being able to benchmark. If you are not confident in the accounting and bookkeeping steps needed for this, then contact us for details in how we can help you.