Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.
The 2019 season is almost at its halfway point and the most important part of the year is fast approaching. Certainly, the first five or six months of the year are important. Getting an early start in the spring and having plenty of backlog to burn through the first couple of months of the year are critical to your success.
However, even if spring and summer weather works against you, labor shortages haunt you and the economy frightens you, you still want to finish strong and maximize your bottom line at year’s end.
How it works in the field.
There are a number of things that I have on my MYR checklist. Here are some of them.
1. Calculate your break-even point: First, you want to maximize your sales. To help you do so, you should calculate your company’s break-even point (BEP). You achieve it when you’ve accumulated enough gross profit margin (GPM) dollars to pay your total general and administrative (G&A) overhead costs for the year. To calculate your BEP, you divide your G&A overhead dollars for the year by your average GPM percent. For instance, if your budget is $1 million, your G&A overhead cost is $250,000 and your GPM is 35 percent, it calculates as follows: $250,000 ÷ .35 = $714,286 BEP
Once you reach your BEP, any revenue above your direct costs (job materials, field labor and labor burden, field equipment costs, subcontractors and rental equipment) goes directly to net profit, as long as the job is completed in the current year.
2. Review your profit and loss (P&L) statement: You want to check to see how your actual year-to-date (YTD) results compare to your budgeted amounts for sales and direct costs (materials, field labor, labor burden, equipment, subcontractor and rental equipment costs).
3. Make any necessary pricing adjustments for work to be completed prior to year’s end. You should consider reducing your prices 5 to 10 percent (perhaps more if you have hit your BEP). This could help you maximize your backlog and subsequently your year-end sales figures.
4. Plan out the revenue for the remaining months of the year. I recommend projecting the sales for each of the remaining months of the year by category. Include revenue for winter work, Christmas decorations, etc.
5. Start monitoring your backlog for 2020. This is especially important for commercial installation companies. Many of my commercial installation clients strive to be 50 percent sold for the upcoming year by January 1.
6. Review your 2019 budget and prepare your budget for 2020. I like my clients to simultaneously review their old budget and prepare their new one five to six months before the end of the current year.
7. Review your pricing for 2020. It’s not too early to start planning for price increases at the time you conduct your MYR. Labor costs are the primary driver of price increases. Remember, for every dollar that your labor costs increase, you have to increase the price of your services to your customers about $3. It’s roughly a 3:1 ratio. I also think you should raise your prices every year, even if it’s just 1 to 2 percent. Doing so will help prevent “sticker shock” because your customers will expect the increase.
8. Plan your Christmas decoration advertising campaign (only if you do such decorations).
9. Set goals for the remainder of the year to include:
- Identifying software that you want to review and possibly implement. Start this process in September or October.
- Planning for end-of-year equipment purchases.
- Making plans to attend fall events
10. Set preliminary goals for the winter similar to the ones above.
- Identify new ideas, systems, software, methods and equipment that you want to research.
- Consider events that you are interested in attending and/or peer groups that you might join.
- Consider skills that your team needs to improve or learn.
Too many in the industry fail to take the time to plan properly. I like to meet with my clients twice a year – in the winter and, then again, in the summer – so that we can plan the upcoming year. The mid-year review is an important part of this planning process.
Planning isn’t easy as it is a learned skill. The U.S. Marine Corps adage is so true. “The more you sweat (plan and train) in peacetime, the less you bleed in war.” If you take the time to plan your mid-year review properly, your bottom line and your checkbook will thank you at year’s end.