Shifting gears from working in technology to running a landscape firm opened Tim Gardiner’s eyes to how operating without a budget could cost him.
Gardiner is a process guy. “I look at things through a different lens and we track numbers very closely here,” says the president of Meridian Landscaping and Design in Sterling, Virginia.
Gardiner was a silent partner in the company and then, after fully vesting, came to work as its president. That was three years ago and one of his first charges was to create a formal budget.
“Ultimately, we weren’t making a lot of money at the end of the day, and our margins weren’t what they needed to be,” he says of shoring up the numbers.
A budget provides a picture of where the company stands and where it’s going. It’s a road map. “It helps with managing our cash flow because we are looking at our expenses on a monthly basis,” Gardiner says.
Gardiner recognized at his company what most small businesses confront in every industry. The biggest budgeting problem is no budget at all. “They just don’t know how,” says Jim Huston, president of J.R. Huston Consulting. “They have been running their operations in the field and the next thing they know, they’ve got a company.”
The good news is, budgeting can be simple, Huston says. He repeats this mantra: Price it right. Produce it right. Produce enough of it.
The pricing aspect is all about estimating and attaching a fair market value price tag to services. Production relates to efficiencies and operations: how you carry out the work in terms of man-hours, materials, equipment and other resources used. Producing enough is driving volume – filling the pipeline with work. To budget successfully and realize the rewards of high revenues and profit margins, Huston advises keeping an eye on the following four areas of your budget.
- Labor burden – to estimate and price accurately
- General overhead recovery – to estimate and price accurately
- Sales goals per division – the volume required to hit revenue and profitability goals
- Field labor hours per division – to monitor volume and track performance
Starting from scratch.
Gardiner essentially built the budget for Meridian from nothing. He considered all of the indirect “below the line” expenses like insurance and general and administrative expenses.
The bottom line is a company’s net earnings (or net profits). Then he figured the direct expenses that are “top line” like operating expenses and materials. The top line is a company’s gross sales or revenues. “I don’t want to build the next year’s cost model just because we spent X amount this year,” he says.
That’s the danger of plugging in the previous year’s expenses into a budget. Gardiner involves key managers and asks them to spend time considering how they can reduce expenses.
“If you take your finger off the pulse of indirect labor expenses, those can get out of line.” Roscoe Klausing, president, Klausing Group
“We look for ways to save even a few percent per year and I give everyone time to noodle that,” he says. “Then we come back together and discuss how we can save above and below the line.”
For example, Meridian used to pay for company cell phones for employees. Now, workers get a stipend to use their personal devices. That change saved the business a couple thousand dollars, and everyone is happy.
“Employees like it better because we are helping subsidize their own phones, and we save money by moving some of that expense back to employees – but they look at it as an incentive,” Gardiner says.
Another savings came through implementing an electronic time sheet system. Rather than manually logging man-hours, the system includes data for man-hours budgeted for each job vs. actual hours spent. “If I have a fixed contract for a commercial building, my crew manager knows every week whether we are on budget for that property and how many hours are being spent there,” Gardiner says.
These reductions to indirect costs plus increasing sales have boosted revenues by 75 percent during the past two years and increased profit margins from a slim few percent to the higher end of the industry benchmark.
The first time creating a budget is the hardest, Gardiner says to owners.
“But the more detail you get around it, the more detail you have of the overall cost structure of your business – and the less time it will take to budget each year,” he says.
Rebuilding with a budget.
Eddie Sullivan bought Village Lawns in Montgomery, Alabama, in 2015 after spending 27 years in the healthcare industry. For the last decade, he had been talking to the former owner of Village Lawns, who also ran a power equipment dealership.
The former owner felt ready to sell when he recognized his landscape division was potentially competing against his commercial customers who purchased power equipment from the company.
So, Sullivan bought the landscape portion of Village Lawns, and quickly recognized the need for a budget. He had built spreadsheets for multi-million dollar corporations, and scaled down those best practices to build a budget from the bottom up.
“If you are just starting out, begin by figuring out the dollar per man-hour you want to make,” he says. “What is your dollar per ‘clock hour’ you want to make? Then, go from there.”
Sullivan shoots to keep labor at or below 30 percent of his costs, and he currently employs seven full-time and three part-time employees. And he is still dealing with some expenses of acquiring the business. “I’m paying for old equipment while paying for new equipment,” he says. More business has meant replacing worn-out machines and acquiring new ones to manage the work.
“We have more business than the company has seen in four years,” Sullivan says. As of early September, the company exceeded its 2015 revenue of $290,000. He predicts $425,000 in revenue next year. In its heyday, the former business owner drove revenues of $1 million.
Tracking expenses and managing the budget will be the key to growth, Sullivan knows. And then, he’ll be in his comfort zone. “I thrive on processes so everything flows seamlessly,” he says.
Last year, Donald Smego of The Grounds Masters, Knoxville, Tennessee, spent $8,000 on advertising that included gift items for clients – calendars, shopping bags and, a real zinger, $50 flashlights. (He cringes at the thought today.) For a smaller business, this expense was well beyond what he’d normally dedicate for promotions, so he covered the cost with his owner’s salary (see story on page 4).
On top of that, equipment repairs and maintenance totaled $12,000. “We are in better shape with our equipment now because it’s heavy duty and can last, but we are going to start cycling it out in the next year or two,” Smego says.
Smego says his No. 1 goal for the 2017 budget is to just follow it. As business owners know, that’s easier said than done. It requires discipline, and keeping costs in line requires scrutiny and due diligence. Smego laments that the marketing expense was a series of confusing transactions with various account managers calling for him to place ads. “It became so difficult to keep up with and I was spread too thin,” he says.
The equipment repairs stemmed from transmission repairs, radiators and starters along with routine maintenance. His advice: Rotate vehicles. And, he adds, “Look for wasteful spending in the shop.” What parts do you really need to keep in inventory?
Beau Hartman of Hartman Lawn Care in Zanesville, Ohio, has started keeping a close eye on inventory after he realized he had $20,000 wrapped up in mulch, fertilizer, seed and other bagged products. “Now, we are not ordering materials that we have not sold,” he says.
As for that $20,000 in inventory lying around, that could have been cash in the bank. Now, Hartman will pre-order products for seasonal contracts so he has materials on hand, but avoid carrying extra inventory for projected sales. “It’s a balance,” he says.
‘Upside down’ months.
An accurate budget can help a company manage its cash flow, as Roscoe Klausing knows. The president of Klausing Group based in Lexington, Kentucky, says his business shifted 15 years ago to doing more contract commercial maintenance work. “Previously, we provided maintenance services, and at the end of the month we billed for everything we did,” he says.
A decision to sell “budget build contracts” helped grow the business – but after a lesson learned regarding cash flow. Say an account was billed $120,000 per year, or $10,000 every month. During winter, there’s naturally less service provided.
“So come August, September and October, in Kentucky you get upside down on those contracts where you might deliver 10 percent more in services than you have actually billed for, and that can create a significant cash flow crunch,” Klausing says. “You could be celebrating net profits that are really false.”
One way to remedy this issue is to do a work-in-progress adjustment at the end of those slower months, Klausing says.
“So, if you were to bill $10,000 in January but you did no work, then at the end of the month you would make an adjustment that reduces revenue by $10,000,” he says. “That creates an asset on your balance sheet called ‘prepaid services.’ That way, when you look at the income statement, you are not thinking, ‘Oh, great! We made $10,000.”
“Employees like it better because we are helping subsidize their own phones, and we save money by moving some of that expense back to employees – but they look at it as an incentive.” Tim Gardiner, president, Meridian Landscaping and Design
Another approach is to spot trends and do nothing to the balance sheet – but understand that you’ll need to preserve that cash to help fund expenses an account will incur later in the year. “If you know you will break even or lose money in some months, you can budget for that,” Klausing says.
There are a couple of key areas Klausing watches on his budget that can make a real impact on performance. Those are equipment expenses, including routine preventive maintenance. “If you do not have good operators on your equipment then your repairs costs can get out of control,” he says.
The other area is gross profit margins by division. “If you take your finger off the pulse of indirect labor expenses, those can get out of line,” he says.
Klausing Group begins building its annual budget in September and completes it by Dec. 1. Klausing oversaw the budget process completely until two years ago when a staff accountant and financial analyst took on the duty full-time. At that point, Klausing Group was pulling about $3.25 million in revenue.
As for regularly reviewing the document, every month the previous month’s budget is “closed” and actual information is inputted into the rolling budget. “That is essentially a pro forma budget that says, ‘Here is what I have done year-to-date, and here is what is projected for the rest of the year,’” he says.
On a quarterly basis, the rolling budget is reviewed. “We look for trends and update the budget officially, then resubmit it to the staff,” Klausing says.
Eye on breaking even.
Regularly reviewing your budget is a best practice that all business owners should adopt, Huston says.
That doesn’t mean you’re pouring over every line item on a daily basis. However, you should track sales in the pipeline and bids to review pricing on a daily basis, Huston says. “You want to be sure you have plenty of work for crews today and that there is plenty of work in the pipelines that tells you you’ll hit that sales goal for the year,” he says.
Twice a year, carefully review the entire budget and make necessary adjustments.
Regular budget review will help you understand if and when you’ll reach that golden break-even point when you actually start making a profit. For many landscape firms, this break-even point doesn’t happen until late summer or fall.
“That’s why the end-of-the-year push is so critical,” Huston says, noting that the last few months of the year might be the most important ones.
For example, if a company’s sales goal is $1 million and it makes $1.1 million at a 10 percent profit, the gross profit of that extra $100,000 in sales should be $30,000. “Since you already paid your overhead expenses, all of that $30,000 should go to your bottom line, and now your net profit goes from a total $100,000 to $130,000.”
On the other hand, a company that finishes the year below its break-even point at $900,000 rather than $1 million will sacrifice $30,000 in net profit, so its gross profit margins will be 7 percent rather than 10 percent.
The numbers are simple but powerful, Huston says. And every little expense does count, which is why creating and managing a budget is so important. “The key is to think like a business person and benchmark your business so you know where you stand,” Huston says.