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Budget building blocks Benchmarking your business
Budget building blocks
Benchmarking your business
by Jimmy Miller for Lawn & Landscape magazine
It can be tough to start understanding your
numbers. Diving into the process of budgeting can be dizzying. Between figuring out what type of budget you even want to create and deciding who you want involved in the process, it’s difficult to get moving in the right direction. And then once you do, taking the necessary steps to ensure the budget is actually correct or that your company uses it is a whole other ballgame. “Paralysis by analysis comes to mind, right?” says Steve Steele, the head of financial service practice for Bruce Wilson & Company. “There are so many ways you can budget. It can be a daunting task.” Not knowing where to start is natural, especially in an industry with lots of people who love spending time out in the field, not behind a computer monitor. But industry consultants believe knowing what a budget’s for is the reason some in the industry don’t take that first step.
~ Jim Huston J.R. Huston Consulting
What’s step one?
The Harvest Group’s Bill Arman recommends company leaders carve out two full business days to get together when it’s time to start budgeting. Invite just division leaders and full-time accountants to the room.
Huston cautions against getting too many cooks in the kitchen. “I’m not going to get a lot of the other people involved initially; it gets a little too convoluted,” he says. “Once I get the budget all put together, I’d bring (all leaders) in and sort of affirm the labor hours I put in there…and get them to understand how we put these budgets together and get them to buy into it.” Steele says this process should begin in October or November if the company’s fiscal year is a calendar year; if not, the process should start a few months prior to the beginning of the fiscal year. Plus, Steele says knowing the status of your major clients before starting to budget is important, too, so budgeting without those bids settled can make it a fruitless exercise.
The conversation with staffers is not all about numbers: Budgeting allows everyone involved to see growth or attrition trends, plus Arman says it can be a great teambuilding and accountability exercise. This also helps your team determine if they have the right people in the right spots across the company. “You could put all sorts of great budgets together,” Arman says, “but if you don’t have the right people, forget about it.”
The right fit
Huston recommends identifying the type of budget your team needs to succeed. For example, companies could create a simple cash-flow budget that focuses on what’s going into and out of the business. You could also craft an accounting budget that’s more IRS-friendly, or as Steele suggests, you could start with a simple sales budget. Huston says budgeting newbies should create a forecasting budget. He says this budget allows companies to better understand their key benchmarks they need to hit in order to succeed that following year. To get started on this, Huston recommends gathering the prior year’s profit & loss statement, insurance documents and the state employment tax rates, among other items. When it’s all said and done, this type of budget should help leaders determine their projected expenses and revenues for the year, plus how they’ll need to price their work to reach those desired metrics.
Huston illustrates the point with a hypothetical: Suppose your company budgets $1 million in revenue for landscape installation work, and your typical job runs $20,000. That means you’d need to complete 50 jobs in the year to reach $1 million, the target revenue. Huston says keeping up with the forecasting budget would show company management how they’d need to pace those jobs to ensure they reach 50 jobs sold before year’s end. “The successful entrepreneur sort of has to be paranoid,” Huston says.
2022 Benchmarking Your Business Report | Lawn & Landscape Magazine
Compared to 2020, how did your location’s 2021 total gross revenue increase in each of the following categories?
16%
Landscape construction/ design/build (residential and/or Commercial)
12%
Lawn care/chemical application (residential and/or commercial)
12%
Landscape maintenance (residential and/or commercial)
8%
Snow and ice management
9%
Irrigation installation/ maintenance
6%
Tree care
As of November 1, 2021, pay per hour, on average, for each of the following positions:
mechanic
$25/hr . . . . . $19/hr
irrigation technician
$23/hr . . . . . $17/hr
construction worker
$22/hr . . . . . $16/hr
spray technician
$21/hr . . . . . $16/hr
mower operator
$18/hr . . . . $15/hr
Breaking it down
Of course, if the hypothetical management in that scenario hadn’t looked at each individual segment of the business, then they might’ve missed how many jobs they need sold in just the installation division.
Approximately what was your location’s average gross profit margin for each of the following services it provided in 2021?
Landscape construction/design/build * >>>>>>>>>>>32% Landscape lighting >>>>>>>>>>31%
Irrigation installation/maintenance >>>>>>>>>29%
Lawn care/chemical applications * >>>>>>>>>29% Landscape construction/design/build # >>>>>>>>28% Landscape maintenance * >>>>>>>>28% Tree care >>>>>>>27% Lawn care/chemical application # >>>>>>>27% Landscape maintenance # >>>>>26%
* residential # commercial
As of November 1, 2021, average annual salary for each of the following positions:
Chief operating officer (COO) ..................................... 90,000 Chief financial officer (CFO)........................................ 78,000 Owner/president ....................................................... 75,000 Landscape designer.................................................... 60,000 Account manager ....................................................... 60,000 Salesperson ............................................................... 60,000 Supervisor.................................................................. 53,500 Office manager .......................................................... 49,500 Crew foreman/leader ................................................ 45,000
Less than $300,000 - More than By revenue: $300,000 $999,999 $1 million Chief operating officer (COO) 31,500 53,500 90,000 Chief financial officer (CFO) 50,000 56,800 80,000 Owner/president 45,000 74,900 100,000 Landscape designer 38,000 40,000 63,500 Account manager 24,800 39,500 60,000 Salesperson 45,000 36,500 65,000 Supervisor 35,500 42,000 55,000 Office manager 14,000 35,000 55,000 Crew foreman/leader 36,000 42,000 51,000
Arman says breaking down revenue by division at the company and budgeting from there is essential — the number one mistake he sees landscapers make with their budgets is that they lump all revenue into one. He says this doesn’t show you the full picture of what’s going on.
In fact, Arman recently worked with a client who hadn’t broken down his revenue by each individual segment yet at the time they met. On the surface, the company had been performing quite well, pulling in a healthy revenue figure. But when he finally broke it down piece by piece, Arman says the contractor found a concerning figure. “He’s discovered that if he didn’t have snow performing at a high level, the rest of his business would not be doing well,” Arman says. “So now we’ve got to focus on making sure he can have profitable business if it doesn’t snow. If it doesn’t snow, he’s in bad shape.” Steele says putting each component of the business under the microscope allows business leaders to make datadriven decisions on facets of the business, such as pricing or adding efficiencies like improved route density. “At the end of the day, most owners would say their net profit is their ultimate goal,” Steele says. “Money doesn’t drive everybody’s goals, but it’s certainly one of the big drivers in why you’re in business. If you know what your target is, that gives you an idea of what the rest of your budget needs to look like.”
The key figure
The ultimate number that helps you determine if you’re hitting your target? Gross margin. Arman says gross margin is the centerpiece of every good budget.
He suggests aiming for a 45% gross profit margin or higher, though most companies operate around 30%. This is calculated by taking net sales and subtracting out costs like direct payroll, payroll taxes, workers compensation, materials used or even subcontractors or equipment rentals. Then, you take that figure and divide it by the amount of net sales.
Huston says this number helps contractors decide when it’s time to increase sales or, if available labor is tight, when it’s time to raise prices. He says gross margins of over 40% are good on residential installation or maintenance work, while commercially, he sees an average of 25% or so gross margin. “When you do your job costing, if your margins are only coming in at 20%, something’s wrong,” he says. “That margin isn’t high enough.” Letting an accounting program just spit out a budget based on historical data is ignoring critical external factors like fuel costs or fluctuating interest rates. Steele also says wages are largely rising nationwide, so budgeting should take that into account, too. It helps you figure out who to raise prices on and by how much. “Budgeting takes into account a whole lot more than just saying, ‘Here’s the number I want to make next year,’” Steele says. “It really is strategic.” Huston says costs like labor cost in the field and office costs like rent or marketing should be nailed down to an exact figure, while material, equipment and contractor costs are more case-by-case per clients. Using historical data to estimate these while also factoring in potential market changes is vital.
Cleaning up mistakes
Steele says there are a few critical areas where he sees contractors make the most mistakes. Sometimes, they fail to plan for people they’ll hire throughout the year and they don’t take that salary or hourly wage into account. They also sometimes forget about salary increases throughout the year and don’t factor those into the budget. Additionally, not taking each individual segment of the company into account is a common mistake. He often sees people put sales budgets together and suggest that they’ll just put a blanket 5% increase on pricing across the board.
But the biggest mistake, Steele says, is that contractors will often have a big meeting on the budget and then it goes into a binder, never to be reviewed again.
“I’m a firm believer that once that budget is established, it needs to consistently be reevaluated,” he says. “Always ask why – why am I at where I’m at? If you are consistently looking at the smaller pieces of the budget – you’re looking at weekly sales goals, you’re looking at weekly production hour goals – you have a much better chance of making the small changes that you need to in real time that have impact.”
Reprinted with permission from the March 2022 issue of Lawn & Landscape. Visit www.lawnandlandscape.com for more information.