With the upcoming year posing continued uncertainty for landscaping businesses, it’s difficult to know how each company will be affected. However, as the business environment continues to evolve, there are steps that every business leader can take to set themselves up for success—and they begin with data.
In a recent Aspire webinar, Kevin Kehoe discussed this very issue and explained how he utilized data to help landscaping companies grow and thrive during his consulting years.
As the saying goes—before you can know where you’re going, you need to know where you’ve been. Let’s take this past year, for example, and review how your investments paid off.
All landscapers make investments in three key areas: Labor, overhead, and equipment. These investments all impact productivity; labor directly performs the work, overhead supports labor, and equipment makes labor more productive. To calculate your return on investment, or leverage rate, simply compare productivity to revenue.
Let’s take a closer look at one of these investments, for example: Labor. If your labor is bringing in an estimated $36.36 worth of revenue but is costing you $16, your leverage rate is 227%. In essence, for every dollar you spend on labor, you’re getting $2.27 in revenue.
The question on everyone’s mind when looking at this example is, “Is that good?” According to Kevin Kehoe, the answer is a resounding “No!”
For a maintenance company, a reasonable goal is $2.50; for a construction company, an appropriate goal is over $4. The key is to maximize your leverage rate to the best of your ability, because ultimately a higher leverage rate means a larger net profit.
Why utilize leverage rates?
Knowing your leverage rate not only helps you understand how you are performing but also enables you to determine if you need to make changes in your business.
During the webinar, Kevin used a model to simulate a landscaping company with a service mix of construction, maintenance, enhancements, irrigation, and arbor. From there, he calculated the leverage rates for each division and their impact on the company.
It’s important to note here that leverage rates will vary by service, with maintenance typically having the lowest leverage rate and construction or enhancements having the highest. One may think that because maintenance has the lowest leverage rate, they should do less maintenance work; however, that’s not the case, because in many instances, maintenance work can lead to enhancements and other jobs.
So, what is the key takeaway from this model?
By drilling down into each leverage rate, you can identify whether your divisions are hitting their goals. Going back to our labor example—where we found were only receiving $2.27 for every dollar spent on labor for the maintenance division—if the goal is to achieve at least $2.50, we have identified that we’re not meeting our goals.
Tips for improvement
There are several ways to improve your labor leverage, including decreasing your overall costs or improving your margins. An increase in prices is a great example.
Year over year, your costs rise. It’s important to make sure your prices reflect your changing costs to ensure you are making a profit. Increasing prices won’t affect your labor costs but will likely increase your overall revenue.
Another way to improve your labor leverage is to reduce your labor hours—in particular, indirect time—without decreasing revenue. Indirect time is a hidden profit killer that wreaks havoc on your bottom line. While it’s impossible to completely eliminate, you can begin by identifying where improvements are needed as well as planning initiatives to reduce lost or wasted time.
By analyzing your data and understanding how leverage rates affect your business, you can better prepare for the year ahead. You can start making positive changes by setting goals for each division. Goals inform your entire team of your expectations and reinforce the need to become more efficient.
Whether you are a multimillion-dollar company or a $100,000 operation, knowing and understanding your numbers and how they affect your business will keep you profitable for years to come.
To view the “Critical KPIs for 2021 Planning” webinar with Kevin Kehoe, click here.
If you enjoyed this blog post, you might also like to read How to Manage Indirect Time in Your Landscaping Business.