The business financial cycle is very important for entrepreneurs to understand. It’s like grabbing the fire hose faucet handle that gives you control over the flow of water. You gain the ability to turn it on, turn it off, increase or decrease it. Unfortunately, too many entrepreneurs find themselves all wet and at the wrong end of the hose.
This cycle is comprised primarily of budget preparation at the beginning of the fiscal year (usually the calendar year) and the mid-year review (MYR) in the middle of the fiscal year. Mastering the business financial cycle not only provides an entrepreneur and his or her team with the benchmarks, KPIs and needed information to run the business. It also provides them with confidence and peace of mind knowing that they are in control of their destiny.
How it works in the field
My last article discussed some of the major items that an entrepreneur and his or her team should analyze during the MYR. Here are a few more:
Are you on track to achieve or exceed the budgeted revenue amounts for all of your divisions? If not, what’s your team’s plan to get back on track? Knowing your backlog is critical for you and your managers. I like to monitor it and every legitimate lead that I receive on an MS Excel worksheet called the Bid Board. It tells me the status of all leads, my won/loss ratio and what’s in the pipeline.
2. Break-even Point (BEP)
Your BEP goes hand-in-hand with your backlog for each division. For instance, if your sales are too low, once you reach your BEP, you could lower your gross profit margin on bids to make them more competitive (see last month’s article for how to calculate your BEP).
3. Benchmarks and KPIs:
Here are some key performance indicators (KPIs) to review.a. Crew/technician daily revenue goals:
Review how much revenue each crew and/or technician is producing per nine crew-hour day. Here are some examples. Yours will probably vary from mine.
- i. 3-Person install crew: Such a crew usually bills roughly $600 per person per man-day ($1,800 per crew-day) for labor. Costs for materials and specialty equipment are on top of this.
- ii. 2-Person maintenance crew: The daily revenue goal for this crew can vary dramatically depending on geographical location, commercial or residential, etc. This crew would usually bill about $800 per day.
- iii. Irrigation technician: Excluding materials, an irrigation technician usually bills between $700 to $800 per day or approximately $85 per man-hour ($85 x 9 MHrs = $765 per day).
- iv. Lawn care technician: With materials, a lawn care (fertilization, weed control, mosquito / tick control, etc.) technician should produce a minimum of $1,000 per day and preferably $1,200 to $1,500 per day.
- v. 2-Person fine gardening crew: $1,000 per day isn’t uncommon for such a crew. $55 per man-hour (+/-), billed on a times and materials (T&M) basis is in the ballpark.
- vi. Misc.: My clients and I set up daily revenue goals for each type of work. This makes such work objectively measurable (timeable and quantifiable). It’s the manager’s job to see that these daily revenue goals are achieved.
Division GPMs, as well as revenue goals, provide a report card of sorts for division managers. You should measure GPMs both in dollars and percentages. My GPM benchmarks have truck and equipment costs (usually 10-12% of sales) above the line or in direct costs. The below figures reflect GPMs in a normal economy:
- i. Landscape installation, residential: 35% to 40%
- ii. Landscape installation, commercial: 25% +/- 5%
- 1. Mid to high twenties for negotiated work.
- 2. Mid to low twenties for low-bid-take-all work.
- iii. Landscape maintenance, all: 35% to 40%
- iv. Irrigation service work (with materials): 50% +/- 5%
- v. Lawn care work: 55% +/- 5%
- vi. Fine gardening work: 45% +/- 5%
- vii. General tree work: 45% +/- 5%
This is a learned process. It takes time to master it, but the rewards in profitability, confidence and peace of mind can be well worth it. For part 1 of this article, visit, bit.ly/myrpt1.jhuston@GIEMEDIA.com