For at least a century, two numbers have always defined ‘success’ as a business: gross profit and net profit.
After all – they are a perfect indicator of success – it’s how much money is left over in the business after all the expenses have been paid. And so, for years, businesses have struggled to calculate, and identify, the jobs, or products, that will help them earn the highest profits. You start with your known expenses, add markups for your assumed overhead expenses, and anything left over is profit. The higher the anticipated profit, the better the job. It’s simple, right?
Or is it that simple? Let’s take a look with a real example (Ex. 1)..
Take a look at the two jobs above? Which one would you rather have? And think about for a second before you read on.
If your answer to the previous question was “I need more information.” – you’re right! Gross and Net Profit can help us identify profitable jobs, but they don’t tell the whole story because they don’t deal with reality. Net profit - the guiding light for every business – doesn’t know a damn thing about your business.
Net profit, after all, is just a number. Sales minus expenses, minus overhead. That’s it. Net profit doesn’t know how hard it is to find good staff. Or how much harder it is to keep and fulfill them. Net profit doesn’t know that whole crews sometimes don’t show up, or that the guy you just hired is just about to pour 5 GAL of gas into a diesel engine.
When you’re a landscape contractor, your spend most of your time managing labor. You need every ounce of profit you can get out of that labor because there are 1,000 mistakes around the next turn just waiting to eat that profit for breakfast.
Wouldn’t you like to know a number that will help you grow your business without having to grow your labor? Or wouldn’t you like to know what jobs carry the least risk, for the most reward? Then read on…
The problem with the scenario above is that we don’t know how much labor we need to invest in either job to make the profit. The truth is, I quickly estimated 2 jobs above. Job A was an interlock patio we installed by hand – 3 guys in 3 days. Job B, on the other hand, was the very same size patio, but by adding a skid steer to do the excavation and material placement, we reduced the job to 2 guys for 1 day and 3 guys for another. Material hauling and deliveries were done by subs.
An experienced contract might start to look at those two jobs and realize that 3 days is more than two days and maybe Job B, even though its got less profit, is actually more profit per day… but could one of your salespersons or estimators know that? Could they know it without having to rely on instinct, intuition or just a good hunch? They can, and it’s really simple with just one simple number: Throughput Per Man Hour.
First – what the heck is throughput? Put simply, it’s the revenue leftover from the sale of a job after you pay your vendors, subs, and rental costs. You start with the price of the job, then subtract all the money that flows to vendors outside the business.
In the example above, we would calculate throughput by starting with the selling price of the job, then subtracting all material, rentals, and subcontractor expenses (Ex. 2).
Net profit doesn’t know that whole crews sometimes don’t show up, or that the guy you just hired is just about to pour 5 GAL of gas into a diesel engine.
Once you’ve found the throughput (the money left inside the company), you simply divide that number by the man hours for each job to arrive at each job’s Throughput Per Man Hour (Ex. 3).
For each man hour invested in the job – Job B leaves your company $86 to pay wages, overhead and equipment costs and net profit. Job A only leaves your company with $67.35 per hour to pay those same costs.
By going after jobs that maximize your throughput per man hour, your company will be taking on work that maximizes revenue earned per man hour. And the more revenue each person generates for the company, the easier it is to grow your top line sales without hiring/training/managing/retaining and occasionally psycho-analyzing your staff.
If you picture your business like a funnel, its likely that your access to good labor is the smallest part of that funnel. Customers are there, and you can buy all the equipment and materials that your creditors will let you… but you just can’t snap your fingers and find 5 more good people. It’s just not that simple.
Maximizing throughput also helps surface the least-risky jobs. Jobs with lots of materials, for example, are a lot less risky than jobs with lots of labor. Even jobs with lots of equipment are less risky. Think about the risks involved in cutting a large turf area with 1 person and a tractors vs. 10 people with push mowers. There’s no way the push mower company is going to be able to compete on price, on efficiency, and even if they could, they’d have to manage 10 people showing up to work on time and doing all the right things. I’d much rather try to manage 1 person.
Revenue earned from markups on materials and equipment goes straight to the Throughput number, where revenue earned from labor also goes to throughput, but it increases your man hours, thereby reducing your throughput per hour. By focusing on throughput per hour, your revenue and profits increase, while your risks decrease.
So the next time you hear one of your competitors grumble about their staff, the truck they backed into, and how hard it is to find good people these days…. Just smile and nod. And keep this little secret number between you, me and anyone else who bothered to read this far.
Mark Bradley’s Corner is an occasional advertorial series sponsored by LMN. For more information, visit their website at www.golmn.com.