Profit First for Lawn Care and Landscape Businesses

By Christeen Era and Mike Michalowicz

 Many owners of lawn care and landscape businesses found their companies on the belief that they would make more money working for themselves than they would as employees. Dedicated to the maintenance and beautification of properties, they believe that their hard work and their expertise in 

• Language: English
• Publisher: Green Profit Academy Inc
• Release date: Dec 14, 2021
• ISBN: 9798985076509

Christeen Era

Christeen Era is co-founder of the Green Profit Academy (GPA), a consulting and coaching company that supports lawn care and landscape businesses with courses, webinars, small-group coaching, community-building, and online tools. She is a certified Mastery Profit First Professional, Pumpkin Plan Strategist, Fix This Next Advisor, and QuickBooks Pro Advisor. Inspired by the proven success of the Profit First program and methods, she created and pioneered the use of a specialized, industry-specific toolbox, The Green Profit Toolbox™ for Lawn Care and Landscape Businesses, to help owners manage their expenses and increase their gross profit margins to as high as 65%. Her mantra is "You are your company's best employee. Pay yourself well, and pay yourself first." Christeen is also the CEO of Core Growth Strategies, an accounting support and consulting company that has helped hundreds of small and mid-sized businesses improve their cash flow, post higher profits, and achieve stronger growth. With more than twenty years of experience in accounting and business consulting, Christeen is passionate about helping lawn care and landscaping companies flourish and grow, in good times and in bad. She understands that entrepreneurs start their businesses with the goal of living the life of their dreams, and her mission is to help them do exactly that. Connect with Christeen at [e-mail].

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Introduction:

Managing Your Profit Means Managing Your Cash

The lawn care and landscape industry has the potential to be one of the most profitable service industries in the contracting field, with gross profit margins of 50% to 65% and net profit margins of 30% to 35%.[1]See https://www.lawnandlandscape.com/article/get-to-know-gross-margin/ and https://www.lawnandlandscape.com/article/the-price-is-right/. By simply tracking your net profit margin you can monitor your business’s financial health. This measure can act as an indicator on how effective your company’s current operational practices are and assist you in forecasting your profitability based on your revenue.

Unfortunately, the reality often doesn’t live up to the potential. In recent years, only 23% of lawn care and landscape small businesses reported profit over 31% of their annual revenue. Another 13% reported profit between 21% and 30%. That means that only a little over a third of lawn care and landscape businesses saw their profits exceed 36% of their revenue. [2]See 2021 Edition 8th Annual Green Industry Benchmark Report conducted by HindSite software of 380 landscape companies (page 8).

If the industry has so much potential to be profitable, then why are so many businesses struggling? Recent data, summarized in Figure I.1, shows that 27% of lawn care and landscape businesses made less than 10% profit, and 16% weren’t profitable at all. Over 78% of the industry as a whole makes less than 31% profit.

Figure I.1: Lawn Care and Landscape Small Businesses’ Reported Profit

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What’s going on here? This question is important to the very survival of your company. Businesses that make a profit of 10% are just barely surviving. Anything under that means your company is on life support. Your profit needs to be 10% to 15% for your business to survive and 15% to 20% (or more) to thrive. Please note that these percentages should include the owner’s compensation if the owner is on the payroll. If you don’t take steps to move your profit from the surviving level to the thriving level, your business will fall victim to lack of profit, no matter how long you have been at it.

According to the Small Business Administration, half of all businesses fail within their first five years and only about one-third survive ten years or more.[3]https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf. Page 3: What is the survival rate for new businesses?" And, according to the U.S. Census Bureau, the survival rate percentage has changed very little over time. Only a quarter of small businesses make it past the fifteen-year mark. All of those failed small business have one thing in common: They ran out of money. This can happen quickly when investing in the wrong areas of the business at the wrong time.

You’ve worked hard, learned your trade, and invested an enormous amount of time and money in getting your business up and running. How do you make sure that you are profitable from the beginning and over the long haul? How do you make sure the foundation of your business isn’t built on a landfill? How do you answer the questions that you face daily: Am I offering too many services—or not enough? Do I struggle during lean months because I haven’t budgeted for the lack of revenue? Are my employees truly productive, or do they waste time and money?

To answer all of these questions—and to put your business on track toward higher profitability—you need to understand cash: where it comes from and where it should go. When you manage your cash effectively, you create predictable profit that can help you grow your business. This book provides all the tools you need to manage your cash and devise a strategic growth plan. By the end, you’ll know how to grow a profitable lawn care and landscape company that gives you more time to spend with your family, living the life of your dreams. You’ll see that offering more services is not the solution to cash and profitability problems, and you’ll understand that chasing revenue will not necessarily build up your bank account, because some or all of that revenue may not even cover your costs. With profit as your guide, you will manage your costs, choose the best clients, build up your bank account, and put away money for your retirement. Throughout, our mantra will be PROFIT FIRST.

Let’s begin.

Chapter 1 :

Transform Your Business from a Cash-Eating Monster to a Money-Making Dream

This wasn’t the first time over the last five years that Steve had been able to take a fully unplugged vacation from his business. This trip, however, was special. Steve and his wife, Katrina, were celebrating their twenty-eighth wedding anniversary, and they’d been dreaming of this trip to Hawaii for a long time. They had planned it out from beginning to end: round-trip first-class tickets, a luau, tours of beautiful waterfalls, a helicopter ride, a visit to a coffee plantation, and a fancy celebration dinner.

The trip was profoundly satisfying for Steve for several reasons. First, he had paid for the entire trip from his quarterly profit distribution from his business. Second, he was able to spend time away from his business without a worry in the world. He knew that his team was managing his company without him. His gross profit margin was 60%, and everything was running like clockwork.

It hadn’t always been this way, though. Steve thought back to a Sunday afternoon twenty years earlier. He’d just finished watching a television show about fugitives hiding out in Alaska, and in that moment, all had become clear: Having figured out a solution to his business problems, he now had to tell Katrina that they needed to leave Connecticut immediately and move to Alaska to hide out.

Steve had started his Norwich, Connecticut-based lawn care and landscape business, American Landscape and Lawn Science, in 1992, running the company’s day-to-day operations from his home office. The business was ideal—low pressure and easy to manage. Best of all, he earned enough to support his family.

Over the next four years, he doubled his revenue, added two full-time employees and one summer employee, and lived very comfortably. He was building his dream business. By 2001, Steve had nearly tripled therevenue that he’d already doubled, and he now had twenty field employees: a four-person lawn application department, a four-person landscape crew, and four mowing crews composed of three people each. In addition, he had two managers: a lawn care manager and a landscape manager. He also employed a landscape designer, a bookkeeper, and himself. Unfortunately, by that time, Steve was no longer living his dream. Instead, he was living a nightmare.

Over the years, whenever he’d had an opportunity to take a big account or contract, he’d jumped at the chance. It wasn’t long before he had gone from providing simple lawn care services to doing everything for his customers—lawn care, maintenance, landscaping, pruning, mulching, trimming, snow plowing, and more. Like lingchi, a form of torture once used in China, it was death by a thousand cuts. For Steve, those cuts were the expenses and debt he accumulated in order to serve his full package clients. The managers he hired weren’t qualified to be managers; they were the blind leading the blind. His company was bleeding to death.

This was a very daunting time for Steve. Although his revenue had increased, his pay had not. The challenges of managing his business and serving more than 300 customers kept him awake at night. Nearly broke, he desperately tried to figure out how to keep his business alive and his family housed and clothed. He took on $50,000 in new debt every year for seven years in a row. He even took on debt to pay his own salary—the salary that was no longer enough to support his family. Even worse, $250,000 of this debt was unsecured debt, not leveraged debt tied to equipment such as trucks and mowers. Slowly but surely, carrying around the dread and worry wore him down. Worst of all, he hadn’t shared any of his business worries with Katrina. In fact, he hadn’t told anyone.

In the meantime, he continued to push through the days with the hope that everything would work out. If he just kept grinding, it had to work out—didn’t it?

But it hadn’t worked out. And now he had to figure out a way to tell his wife and two children that they needed to move thousands of miles away and hide in the wilderness because he’d screwed up. Though he felt the shame of failure, he knew he could count on his wife’s kindness. Surely she would understand. He turned the television off, and with all the courage he could muster, he made his approach through the kitchen and down the back hallway to find her. His courage quickly faded, though, and he detoured into the bathroom.

Steve stood in the shower with tears of shame and disgrace streaming down his face. He thought about what he’d been doing over the last seven years. He’d tried his best and thought he was doing the right things. He didn’t come from a family of entrepreneurs, and he didn’t have a business advisor who could teach or guide him, but he knew those were just excuses. He was a college graduate with an economics degree and a business minor. He should have been able to navigate his way through this situation.

Steve thought of his mother, who’d passed away three years earlier. She would never let him quit anything he started, no matter how badly he wanted to or how horrible he was at that activity or sport. He’d grown up in a blue-collar, middle-class neighborhood surrounded by working class people who never quit, who didn’t fail because they didn’t see failing as an option.

Remembering his mother renewed Steve’s strength and resolve. He told himself that he would do whatever he needed to do to save his business, and he would never think about dumping his failures on his wife and kids again. Now he just needed to come up with a plan.

Steve’s story is not unusual. Many lawn care and landscape business owners have struggled just as Steve did. They had started out with the best of intentions to make their businesses great. They dreamed of owning their own companies, and they did everything they could to realize that dream. But somehow they found themselves in over their heads, and one day they realized that their businesses had become beasts that they couldn’t manage. The businesses had taken over their lives, the money demands were beyond their control, and they were bleeding cash that they didn’t have.

Maybe Steve’s story is not that different from your own story. You may be wondering how you got where you are now and trying to figure out when and how you lost control. You may be regretting some of your decisions and wishing you were better at managing the numbers.

You are not alone, and this book is here to help.

Pursuing the Dream

Ask yourself these questions:

Is your business where you hoped or expected it to be?

Are you personally where you want to be?

Do you understand all the ins and outs of your business?

Is your business growing and moving forward as you want it to?

To successfully navigate the opportunities and challenges of your business, first and foremost you need to develop a basic understanding of your financials. This understanding allows you to be proactive in terms of generating the cash and the profit that your business needs. Profit is the seed that can grow your business to the levels you aim for and dream of. The odds of achieving effective and efficient growth without profit are comparable to those of a fish surviving out of water.

To survive, thrive, and grow, you need a solid plan of action. What should this action plan look like? That is a tough question for the busy owner-operator, entrepreneur, and boss, who has to juggle countless details and may not have prioritized business planning. Half the battle is admitting that you may not have paid enough attention to profit and cash management in the past. The other half is making the commitment to understanding and managing key aspects of your business that you may have neglected. Now is the time to make the commitment to managing your cash and creating more profit!

As a lawn care and landscape professional, you know a lot about the science of nature and how to grow plants and trees. For example, you know that you need to take specific steps to grow a certain species of plant or tree in a certain environment. You can look at an action plan or business model in the same way. There is more to managing your business and growing your company than blanket marketing and random efforts to offer profitable services. Putting reliable cash-management systems in place is the key to producing the profit that will allow you to grow your company.

As you are probably aware, your profit depends, to a certain extent, on your revenue. To grow your business, you need to generate not just enough revenue, but also the right revenue. The right revenue is centered around your most profitable services and customers. It is the revenue you generate seamlessly as a result of systematizing your business to deliver a particular service or set of services from start to finish. With these services, you and your team know exactly what’s expected, how it’s done, and whom these services best serve. Even your customers know the needs and expectations that surround these services. You become known as the expert in the industry in your area, and your ideal customers line up at your door to purchase these services from you. For example, you might choose to focus on high-end weekly lawn care services for highly profitable customers rather than landscape design and install services, which bring in much less profit.

To ensure profitability, you need a business model that will withstand anything. You don’t want an ornamental business that can get taken down or blown over by an economic recession, a pandemic, or a local tragedy that has an economic impact. Instead, you want to be like a mighty white oak. As you probably know, the white oak has strong, deep roots called taproots, which continue to grow as the tree matures. This root system anchors the tree into the ground, providing enough strength to support every growing branch. As a result, a white oak can grow as tall as eighty feet, and it is hearty enough to withstand almost any force of nature. The locals know it as that tree, and it becomes a staple in the landscape. It’s remembered for generations because it’s strong, dependable, and reliable. You want your lawn care and landscape business to be a white oak that thrives for many years and becomes a force of nature in the area you serve. The key to your success is your consistent management of cash and your emphasis on profit rather than unchecked or unconsidered growth.

Nurturing Profitable Growth: The Basics

We’ve been talking a lot about profit, but do you know what profit looks like in your business? Consider these questions:

What will it take to generate 50% to 65% gross profit margins in your business?

What steps can you take to achieve 18% to 20% net profit in your business?

Can you identify all the factors that are decreasing your gross profit margin or net profit margin?

What must you do to get your business to a higher level of profitability?

If you can’t answer any of these questions, rest assured that you’ll be able to answer all of them by the time you finish this book.

As you start to think more deeply and consistently about profit, keep this key point in mind: If you want to build a business that is sustainable over the long term, you need to ensure that your company generates enough revenue and enough profit to support the overhead of your day-to-day operations, including fixed and variable costs, in addition to a minimum gross profit margin of 50% to 65%. Your fixed costs likely include rent, utilities, office supplies, professional fees, advertising, office staff and management wages, and so on. Your variable costs include the costs that fluctuate with the number of jobs you do or the number of customers you service; these costs typically include field labor, materials and supplies, fuel, and so on. When you are analyzing your costs and overhead, don’t forget to include your pay as the owner! Your business should be paying you, its most important employee. You shouldn’t be working for peanuts, either.

An important part of developing a sound business plan is understanding your break-even point, which is the point at which you generate just enough revenue to cover all of your expenses. To determine your break-even point, add up all your fixed and variable costs in a typical month and multiply that number by 12. Suppose it costs you $50,000 per month to run your company. You must therefore bring in $50,000 per month, or $600,000 per year, simply to break even. Profit kicks in after you’ve brought in your break-even revenue. All profit is created at a percentage rate above your total sales after your operational expenses are paid. This percentage rate is your gross margin, and it is a key performance indicator (KPI) for your business. In Chapter 2, you will have the opportunity to calculate the break-even point for your company and dig into your gross margin. Chapter 11 looks at other KPIs in more detail.

Break-Even Analysis and Gross Margin:

P. F. Landscape & Lawn Company

Let’s look at a specific company, P. F. Landscape & Lawn Company, to more fully understand the meaning and importance of break-even analysis and gross margin. The break-even point for P. F. Landscape & Lawn’s lawn care department is $75,000 per month, which includes all costs, including owner’s compensation. Its units of service are 20,000 square feet per hour on lawn application services. (An important note: In the lawn care industry, it’s common to use the square foot as a unit of measure on jobs, with a mark-up on each square foot. However, price per square foot is not equally measurable on all jobs. In addition, using a job as a unit of measure is unreliable; one job can be large and another small, so not all jobs are equal. So, instead of using the square-foot method or a job as a unit sold, for lawn care I recommend using an hour as a reliable unit of measure when it comes to your cost and selling price. Doing so gives you a consistent and reliable measurement of how many square feet can be serviced in an hour.)

P. F. Landscape & Lawn has determined that its current selling price is $220 per 20K square foot lawn application, and it makes $125 in gross profit per unit on lawn application services. Revenue minus expenses equals gross profit, and thus expenses are $220 – $125 = $95 per unit. The company therefore needs to sell 600 units per month to break even: $75,000 ÷ ($220 – $95), based on the following formula:

Number of units required to break even=total expenses÷(price -expenses per unit)

Once the company sells 600 units, it starts making a net profit at a rate of $125 per unit. The unit price of $220 puts the company close to a 57% gross profit margin, based on the following formula:

Gross profit margin=Net profit per unit ÷price per unit

$125 ÷ $220 = .5682 = approximately 57%

If P. F. Landscape & Lawn raises its selling price to $265 per unit, then it makes $170 per unit gross profit. In that case, it needs to sell only 442 units per month to break even: . Once it sells 441 units, it starts making a net profit at a rate of $170 per unit. This unit price yields close to a 64% gross profit margin

What Is Profit?

We’ve been using the term profit, but what exactly does it mean? When I have asked business owners this question over the years, they have given many different answers, including:

Profit is what my accountant says I have to pay taxes on.

Profit is something I try to make in my business, but it isn’t consistent.

Profit is what we try to bonus our team on if we have great production throughout the year, but we never seem to quite make our target.

Profit is what I have managed to set aside in my savings account over the years in my business savings, but I have to use it to pay my expenses when things get tight.

Profit is what is happening in the first one-third of the day in my business every day.

Profit is the number at the bottom of my P&L (profit and loss statement), but I’m not sure where the ‘real money’ is at the end of the year because it isn’t in my bank account.

All of these responses miss the key aspect of profit. Technically, profit is the financial benefit realized after deducting all your costs (including taxes) from the revenue generated by your business activities. At a more strategic level, profit is what you should be recognizing and taking first—before your business claims all the cash for expenses. It’s what you, as your company’s most hardworking and dedicated team member, should be planning and allocating for. Profit is the prize that will be there at the end of the day, the end of the quarter, or the end of the year when you are ready to claim your reward for running a successful business. In short, profit is the primary goal of any business, and it has two uses: (1) to benefit the owner and (2) to be reinvested in the company with the goal of producing even more profit in the future. There is a natural order to things in the universe, and in