You don’t need a crystal ball to predict the future – a budget should do the trick, at least for your business.
Consultant Bruce Wilson of Bruce Wilson & Company says it takes three or four years of practice, but setting a budget and doing so effectively can help landscapers measure how they set goals.
“You’ve got to be financially responsible as an owner,” Wilson says. “If you don’t budget, you don’t know if you’re spending more or less than you thought you were. It’s a surprise at the end. And that’s what happens to a lot of (owners).”
But Jim Huston of J.R. Huston Consulting Co. says budgets are few and far between in an industry with thousands of companies nationwide. He cites a Wall Street Journal article that indicated only about 14% of businesses set a budget every year, and in the green industry, Huston thinks it’s closer to 10% or less.
“It’s such a big, monumental task,” Huston says. “People just don’t know where to start. (But) if you don’t have anything to shoot for, you’re going to hit it.”
And Bill Arman of the Harvest Group says that creates an uphill battle for business owners. Sometimes, they run their companies out of passion without stopping to understand their goals. “There are thousands of companies out there that are really pretty skilled at the landscape part of the business,” Arman says, “but they’re not skilled at the business part of the business.”
Arman says the easiest way to dive into budgeting is to take it slow and steady. They start budgeting two months before the fiscal year begins, and at the Harvest Group, they promote what he calls a “mini budget.” This essentially eliminates some of the more complicated facets of budgeting in favor of tracking the essentials.
This means company owners figure out where all of their revenue streams are coming from and then keeping track of gross margins within those revenue streams. A look at past profit and loss statements and backlog of client work also allows contractors the opportunity to forecast profits in those revenue streams and the overhead costs of each segment of the business.
“You can be able to tell pretty quickly which revenue streams are performing and which ones aren’t,” Arman says.
From there, he adds company owners have to do something about the areas of the business that aren’t performing well. If a segment of the business isn’t turning a profit, he or she must decide if it’s an estimating problem, cost problem or an execution problem.
For reference, Arman says it may be a cost or estimating problem if a company is successfully selling over 15-20% of its proposals and still not making money.
He also suggests that if a company owner suspects the quality of work may be what’s holding them back, investing in training or watching the crews out in the field will help.
“A critical element is making sure you have the people to help generate and sustain that (profit). Budget ties into your planning process,” Arman says. “Budgeting is pretty doggone important to run a business, and very few people do it. That’s how we operate: Landscapers are ready, shoot, aim. We react.”
Once a budget’s in place, Arman and Huston both suggested checking it once a month and revising based on more current projections. Huston says this helps owners set clearer goals for sales, plus expenditures on overhead and labor productivity.
“You’re turning on the scoreboard for people to understand if you’re over or under these goals,” Huston says.
Huston says checking back in with a budget helps landscapers identify pricing problems. He’ll often ask his clients, “Do you know how much your two-man landscape crew needs to do daily to be profitable?”
The answer is often silence, so he breaks it down simply with a hypothetical: If the rate is $45 an hour and they’re working 10 hours, landscapers don’t realize they need to bill $450 per day, per client. Without going back and utilizing the budget to evaluate profitability, they may never realize they’re not maximizing the revenue potential.
Plus, checking back in helps landscapers evaluate the structure of their companies. Huston says he’ll often go through each department of a company with business owners to determine where it needs the most work.
“Once people have a budget and go through the process two or three times, it really opens their eyes to their business,” Huston says. “They can basically look at it and all of its components and tell whether or not they’re on track.”
“If you really want to grow your company, you’ve got to get a sense for how you can predict the future. When you budget, you’re basically predicting the future. Then you actually perform according to your prediction. When you don’t, it helps you understand what you were thinking.” Bruce Wilson, consultant, Bruce Wilson & Company
Wilson warns that when contractors are forecasting using the budgets they’ve created, they shouldn’t oversimplify their projections.
Taking this year into account is a prime example: If contractors never tweaked their budgets between the start of 2020 and the end of 2020, they probably struggled. Wilson says the COVID-19 pandemic caused maintenance contracts to be reduced or canceled, and many landscapers never adjusted to account for these types of situations.
Additionally, there are other variable costs to consider in years that aren’t marred by global pandemics, such as material costs or labor. If contractors aren’t careful to account for these changes, their projections will be skewed.
“If you really want to grow your company, you’ve got to get a sense for how you can predict the future,” Wilson says. “When you budget, you’re basically predicting the future. Then you actually perform according to your prediction. When you don’t, it helps you understand what you were thinking.”
Wilson says simply completing the budget isn’t enough – once you’re comfortable creating one, use it to your advantage. One way to do so is to find areas of profitability and push hard to secure more valuable clients within those revenue streams. They should be clients who value quality.
“When you win a job on low price, you’ve obtained a low-price loyal client,” Wilson says. “That client is probably going to go out to bid every year. To me, that’s probably an undesirable contract.”
Arman suggests joining an advisory board or trade association, so that business owners who have little experience have the help they need to get on track.
And when contractors get stuck, they should reach out to an advisory group or the company’s preferred certified public accountant.
“The lesson learned here is you find where your weaknesses are,” Arman says. “Since you’re the owner, you get to do the stuff you want to do.”