January 1, 2013
BY MARK BRADLEY
Your mantra for next year
Could there actually be a way to earn a higher profit by selling more work at a lower cost than you’re selling today? There is, and from Day One of 2013 make sure the idea of ‘super-profit’ is burned in the front of everyone’s mind all year long.
What is super-profit? It’s earning much larger profit margins on your work than anything the industry finds ‘normally’ competitive. Our industry operates at somewhere between two and 10 per cent profit. Companies that make super-profit find ways to earn profit margins of 30, 40, even 50 per cent net profit. On all jobs? Unfortunately not, but you can earn super-profit on a portion of your work. Super-profit is how your company will make the leap from average five to 10 per cent profit margins to between 10 and 25 per cent — doubling (or more!) the average industry profit.
Super-profit is not about selling work at prices above the norm. Super-profit is generated through efficiency and productivity. Super-profit happens by making the most of every hour, eliminating waste, and generating more total revenue per man-hour.
I recommend you sit down with your foremen early this spring and brainstorm a list of problems, issues, or lack of resources that cause wasted time. Better yet, let your foremen develop the list while you help steer the conversation. Start by identifying the problem/waste, then ask them to make their best guess at how many man-hours per week (not crew-hours, but man-hours) are spent on each waste. I wouldn’t be surprised if you and your staff come up with 50 examples in less than 15 minutes.
Here are some examples to get you started: warranty work, re-work, fuelling, work done incorrectly, moving and re-moving materials around a site, equipment breakdowns due to lack of care, working without the proper tools and equipment, waiting for materials or information that should have been better organized, employees showing up late, getting lost, lack of trained labour, and so on. The list gets long in a hurry.
Now go through that same list, but this time, add the following: the average number of weeks in your working year; your average charge-out (billing) rate per man-hour.
Then multiply the man-hours per week by the working weeks per year to get the total hours per year lost to each waste. Multiply that total by the charge-out rate you normally bill your customers and that’s how much revenue may be lost this year to each of these wastes (see chart below).
Clearly, the real cost of moving a piece of equipment isn’t the fuel, or the wage you pay the driver to load and move it. If an employee spends one hour inspecting a truck and trailer and driving to the site with the equipment, one hour loading down, strapping, and inspecting the loaded equipment, one hour driving to the next site and unloading the equipment and one hour getting back to the shop and disconnecting the trailer, you’ve lost four hours of billable opportunity. If your typical charge-out rate was $50 per hour, you’ve really lost $200 of potential revenue.
Think about it this way. If you hadn’t had to move that equipment, your employee could have been doing billable work: installing pavers, planting shrubs, building a deck—anything that helped complete a job four hours sooner. And if you had finished that job sooner, you would have had four hours extra capacity to do another job before the end of the year.
When you add up all the extra capacity created by eliminating waste and staying focused on billable work, it’s not hard to see how each crew can complete an additional $50,000 to $100,000 billable work in a season!
And this is exactly where the idea of super-profit comes in. When you can take wasted/non-billable hours and turn them into billable, production hours, you hit super-profit. Your costs on this extra work are minimal and the profit is through the roof. Assume the crew in the example managed to identify and eliminate $50,000 worth of waste and inefficiency. (Note: Many companies find it easy to identify $25,000 worth of waste before they leave the yard in the morning!) The net profit margin on that extra $50,000 is your super-profit. Let’s break it down.
Normal profit: We’ll assume you charge a fair profit on all your work, so you if you complete an extra $50,000 in work, it’s safe to assume you also earned an extra 10 per cent in net profit.
Labour costs: Would you have any extra labour costs to do that extra $50,000 in work? Yes, you’d have labour costs, but they’re not additional costs. You are paying wages for the waste time anyway. All we’re doing is exchanging non-billable (waste) hours for billable (productive) hours. What would normally be labour costs on this extra work (field labour costs are typically 20 to 35 per cent of sales) is now net profit.
Equipment costs: Your leases and insurance do not increase because your sales went up. Fuel and maintenance costs may increase slightly. Equipment costs are typically 10 to 15 per cent of sales, and since they increase only slightly with the extra work, you’ve likely found another 10 per cent net profit.
Materials costs: If you’re installing materials, these costs will increase with additional work. No extra profit to be found here.
Overhead costs: Your overhead costs don’t increase either. Rent, utilities, memberships, your accountant’s fees, your office manager’s salary — none of these costs need to increase because your crew improved productivity. Overhead costs typically range from 15 to 35 per cent of a company’s sales, meaning the average company generates an extra 25 per cent net profit here as well.
If you really look at that extra $50,000 in work the crew generated, the net profit margin on that extra work is incredibly high. Because labour, equipment, and overhead costs don’t significantly increase, you can expect to return net profit margins of 50 per cent or more on this extra $50,000 of sales. Now you’ve got a very profitable company with some bonus capital available around to reward those employees who made it happen. While most of your sales will be in the ‘normal’ 10 per cent profit range, the extra sales generated through increased productivity can help your company more than double its total profit in a very small window of time.
Worried about finding the extra work to sell? Super-profit helps here too. When your crews are productive and efficient, you reduce the time it takes to complete work, and therefore lower your job costs. With lower labour costs (and lower overhead as a percentage of sales), your costs (and prices) can come down without sacrificing net profit.
At the end of the day, staff and owners want the same thing. We may have a passion for the industry, for creating outdoor environments, but I think we can all agree that we’d like to earn more for the hard work we invest in creating and maintaining these outdoor living spaces. How can we earn more? Introduce the concept of waste, productivity, and super-profit to your company and make it your daily mantra for 2013 and beyond.
Mark Bradley is president of The Beach Gardener and the Landscape Management Network (LMN), in Ontario. LMN provides education, tools, and systems built to improve landscape industry businesses.