The Getting Gross: Make More Gross Margin Workbook
Getting Gross: How to Make More Gross Margin There are lots of areas of the financials that deserve our attention including revenue, equipment, salaries, tools, rent etc. but FEW are more important than GROSS MARGIN. Gross Margin is considered one of key areas for your company s financial success, and is at the same level of importance as REVENUE, CASH FLOW and ACCOUNTS RECEIVABLE. Getting your arms around Gross Margin requires a keen understanding of our Direct Costs including labor and materials and labor. In the landscape industry our labor costs represent the greatest expense line item. While materials will range from 8 to 12 percent of total revenue (maintenance and enhancements), labor will range from 25 to 55 percent of revenue depending on the type of business you have. Remember that without the right amount of Gross Margin contribution toward your overhead and profit you will not be able to pay your overhead expenses and make a fair profit. Generally, the combined Gross Margin of a company will need to be a minimum of 45 percent and preferably 50 percent to make a fair and reasonable NET profit. Labor costs per revenue stream need to be tracked regularly, preferably weekly and monthly as the least frequent interval for review. Remember: GROSS MARGIN is the financial furnace that keeps the company warm! The Getting Gross Takeaways: Harvesters Bill and Ed o o o o Know and understand what is Gross Margin and what is your Gross Margin level Learn the 3 Key Drivers of Gross Margin Know what the Gross Margin destroyers are and how to avoid them Learn and practice methods to increase your levels of Gross Margin While there are no guarantees, if fully implemented, we believe there is an opportunity to increase your Gross Margin by 3 to 5 percent. That translates to 3 to 5 percent more net profit!!! So let s get started. 2
Gross Margin Defined Revenue - Direct Costs (Labor+ Burden+ Materials) = Gross Margin Revenue: This comes from the work and/or services you have sold, self-performed and invoiced Direct Costs: This represents the labor or workforce needed to do the work, plus the burden to accomplish the job, and the materials needed to perform the work. Labor: This is what your payroll typically is for the foreman and below (including burden: payroll taxes, workers comp insurance, health benefits, 401k or IRA costs) Materials: Such as chemicals, fertilizers, mulch, flowers, plants, soil, etc. Remember, the Gross Margin of a company pays for the Overhead (indirect and SGA costs). Whatever is left over after paying for the Overhead is NET PROFIT. Note: We do not count the revenue and the costs associated with sub-contracted work in the Gross Margin calculation. When calculating your Gross Margin, do not include the sub-contracted portion of your business. What is Your Current Gross Margin Level? Exercise: Determine your current overall company Gross Margin What is your current overall GM year to date in dollars? As a percentage? Take total revenue less subcontracted revenue to get to net sales Now, subtract out your cost of labor plus your burden (taxes, workers compensation costs associated with the labor costs) plus your material costs What $ are left over? What do these $ represent as a % of revenue? Is this enough to cover your total overhead costs? To make a fair net profit? Exercise: Determine Gross Margin per Revenue Stream (departments) What is your Gross Margin for just the Maintenance part of your business? % What is the Gross Margin for Enhancements? % Gross Margin for Installations? % Gross Margin for Irrigation? % 3
The 3 Key Drivers of Gross Margin When looking at reasons for achieving low or high Gross Margins they can usually be traced back to three areas: Estimating, Pricing and Efficiency/Execution You will need to determine if the low Gross Margin is a result of one or more of these: The Estimate, Pricing Right or Efficiency/ Execution If it s an estimating issue you need to adjust the procedure to take into account what we have learned. If it s a pricing issue, you need to make the needed adjustment and make money If it s an efficiency/ execution issue, you need to adapt, change and innovate. Estimating for Gross Margin Review the Estimate Is there an estimate? Is it in writing? Is it in the job file? If there was an estimate, see what was estimated originally to get this job done. See what was estimated to perform each function like mowing, edging, weeding, edging, irrigation, etc. Now see how the estimated hours match up with the actual hours needed to perform the tasks. Look at the tasks with the greatest frequencies first like mowing and work down through the least frequent tasks performed. Look at the original estimate and determine: Do the estimated hours match up with the hours being spent on the job? How far over the estimated hours are you? What tasks were under estimated? Are there any obvious omissions or mistakes? Travel time, scope of work change, etc. Are you recording the time spent on this job accurately? Look for simple errors first, then go to the next step and look at the job. Review the Job Bring the estimate and specifications with you if they exist. Go to the job site: track your travel time to get to the site. (You did include travel time, right?) Review the job preferably when the crew is performing the work. What does the job look like quality wise? Are you performing at a satisfactory level and meeting internal expectations and more importantly are you meeting the customers expectations? 4
Are you doing tasks that are not part of the original scope of work? For example: parking lot sweeping or blowing. Sometimes the client s expectations change that increases the hours needed to accomplish the work. For example, extra trash pick up or fix the sprinklers as part of the contract etc. Again, look at the original estimate and see how the estimate matches up with reality both with tasks being done and how long it takes to complete them. Have the expectations changed from the original estimate? If so, then you need to figure exactly how much time these expectations have cost you. Next, decide how you can go about either offsetting these additional costs by increased efficiencies, or perhaps you need to make a legitimate cost increase proposal to the client. Going for an increase should only be considered if all other means to get the right gross margin have been exhausted and the current margins are at unacceptable levels. Re-estimate the Job Do a new estimate using all of the info gathered on the job and with your observations. Be specific with times to complete the tasks with regular routine work like weekly mowing and the non-routine type of work like hedging 3-4 times per year. See how the new estimate now compares with the original estimate Here are the most common areas that are not in the estimate or not estimated accurately or where we just get it messed up. Travel time and loading and unloading time. Mowing and turf detail either missed some areas or not using the right size equipment. Hand watering pots or color beds. Irrigation system is not fully automated or operational. Large amounts of leaf drop that was unaccounted for. Misunderstanding of what is included in our scope of work or not included. The route sheet says to spend four hours here so that s what the crew will do whether it needs it or not. The supervisor has not adjusted the schedule to what actually is needed to perform the job. Estimating: The Bottom Line Many Gross Margin issues can be traced back to the estimate. In today s competitive market this makes the estimating process a very critical process. It boils down to if the actual labor and material costs to perform the work are in line with the estimated costs Exercise: Pick out 2-3 of your larger jobs that are at a low Gross Margin level 5
Go through the points we have reviewed: Review estimate and job and re-estimate Determine if you have an estimating issue causing lower Gross Margins What part of your estimating process needs to be adjusted? Pricing the for the Right Price Pricing: How did you mark up your direct costs to reach your sales price? Now we all know it s a competitive world out there and yet we need to learn how to price our work competitively while making a fair and reasonable profit. Here are some tips: Estimate the jobs accurately with the costs to perform the work to be as accurate as possible. This is essential. Determine your desired Gross Margin that makes you money and is competitively priced. Now take your total costs (Labor plus burden and materials) and DIVIDE it by the reciprocal of the desired Gross Margin (Stay with us here) Example: Total direct costs = $1,000.00 and desired Gross Margin is 45% Divide $1,000.00 by reciprocal of 45% or 55%; $1,000.00/.55 = $1,818.00 sales price $1,818.00 (sales) - $1,000.00 (direct costs) = $818.00 (gross margin) $818.00 / $1,818.00 = 45% Gross Margin To achieve the following Gross Margins: GM of 55% divide costs by.45 GM of 50% divide costs by.50 GM of 45% divide costs by.55 GM of 40% divide costs by.60 GM of 35% divide costs by.65 Note: The mark up on costs will vary on several factors including the size of the job, the potential for additional sales, type of work etc. In other words all jobs are different and often will require considerable strategic thinking when putting your price together. 6
Exercise: How do arrive at your pricing? Take a look at your mark up process and determine if this will achieve the desired Gross Margin you are trying to achieve. What types of work get lower mark up opportunities? Higher mark-ups, why? When and why do you mark up work at a higher rate? a lower rate? Efficiency Job Execution This area is a constant and will always need some scrutiny. This area basically deals with how well are you matching up with budgeted or estimated times to complete the tasks vs. actual time to complete the job. Obviously, the more you beat the budget the better. Now keep in mind that if you easily beat the hours then you may be over estimating the hours to complete the job and that isn t a good idea. Efficiency and Execution Tips Visit the job site and observe the crew in action Review the bigger time components like mowing, detail, flower care, clean up. Observe the crew when they are working and see how they are performing the tasks, and how long it s taking to perform the tasks. Look at vehicle set up. Where are they parked? Mowing, edging, clean up, etc. Is the right equipment being used and in the right order? Are you executing the job within the estimated times and if not, why? Are we just sending the same amount of folks out there just because that s the way we have always done it? Does the crew leader know what needs to get accomplished and the time budgeted to get the work completed? Special Note: While Gross Margin is critical we need to also deliver our services consistently. We need to deliver at an acceptable and consistent level to meet customer expectations. We can t expect one; Gross Margin without the other; Quality. We need to have both! Exercise: Take a Good Look at Yourself: How efficient are you? What needs to be done to become more efficient? What new technology have you introduced to your organization last year? Last 3 years? 7
Can you accomplish some larger tasks in less time with better equipment? Chemicals? Do you have your people actively engaged in finding ways to get the work completed faster and better? List 3 examples where this has helped with improving your Gross Margin Top Gross Margin Destroyers Let s review of the most common reasons the Gross Margin are too low: Not part of the culture or mind set from top to bottom and bottom to top, lack of ownership and accountability We re too busy to figure out why we are losing money!! Let s go get more!! Having the wrong customer; the customer is always right but you may have the wrong customer Turn over of personnel Increase in costs without a price adjustment Insufficient increases Scope of work change without price adjustment Extra work performed without being billed Inaccurate job costing Basic administration, or lack thereof No system or processes in place Operational execution Estimates are not accurate and we are winging it Wrong sized mowers Wrong sized crews Picking up clippings vs. using mulch mowers 8
Field guys not knowing what the hours or time budgeted to perform tasks: mowing time, trimming time, detail etc. Loading and unloading of tools and equipment in morning and afternoon Long drive times to remote job locations Lack of or not using pre emergent herbicides requiring either weed eating or worse, hand weeding Hand watering areas that can be automated or use self-watering reservoirs Lack of job sequencing being used: Who should do what? And in what order of priority? Over pruning shrubs Performing tasks that are not included in the contract because it was not clear what was included or not Not using technology: chemicals, smart irrigation controllers Added on services to agreement without getting appropriate pricing to accommodate the increase in workload Exercise: Identify Some of the Destroyers and Destroy Them! Which Destroyers are currently destroying your GM? List the top 3 1. 2. 3. What needs to be done to destroy these top 3? 1. 2. 3. Who will lead your task forces to make this happen? What are the next steps? Who, What, When? 9
How will you know these have been destroyed? Now Pick 3 More Destroyers and repeat the above 1. 2. 3. How to Increase Your GROSS MARGIN Here are 19 ways to increase your Gross Margin. Do not try to do all of these at the same time! Go through these and start off by implementing two or three of them. Get really good at these before moving on to two to three more. Pretty soon your Gross Margins will be Getting Gross as in better Gross Margins! 1. Instill the mind set within the culture that we are always looking for ways to improve everything we do including how to increase our Gross Margins 2. Build a mini budget for each revenue stream (department) that is 10% of the total revenue and above that projects labor expenses and tracks actual labor costs 3. Adjust labor needs to seasonal requirements especially with maintenance 4. If it does not affect the quality of work have maintenance people do minor extra work assignments while on the job: be careful here not to have a negative affect on the job or with the customer 5. Allow for budgeted hours for non-routine tasks vs. routine tasks such as planting flowers, or large hedge work, separate and bank these hours 6. Have the right mowing equipment that matches the job size and accessibility 7. Use mulching mowers where ever possible 8. Adjust pricing to meet customers needs if they mandate a non-efficient way of performing; examples: smaller mowers, stops and starts with their operational needs 9. Avoid headcount jobs and focus on performance-based projects 10. On extra work and specialized services the margins should be higher and still be market competitive 10
11. Know your labor costs: hourly average wages for each revenue stream as these may vary 12. Have trucks and or trailers that equipment and tools can be kept secure without having to load and unload each morning and afternoon 13. Route jobs correctly and consider traffic patterns for your routing 14. Responsible use of chemicals to promote plant health, prevent weeds, curtail growth with Plant Growth Regulators 15. Use a gas jockey for vehicles and equipment rather than crews and foremen stopping 16. Sell jobs that are closer to each other: less drive time more production time 17. Consider pure mow crews for larger mow jobs and routes 18. Build incentive programs that link productivity along with delivering consistent quality 19. Visit all jobs regularly, at least quarterly using a quality review process and observe how things are really being done by the crews in the field. You will be amazed at what you will discover! Exercise: Set the goal for Gross Margin improvement Determine what your overall GM is now % Determine what your Gross Margin Goal will be in 1 year from now % Now pick 2-3 areas that will require focus to help reach your goal 1. 2. 3. Now who needs to be involved with getting these into place? What are the next steps? Meet and Plan out your Getting Gross game plan Measure your progress monthly and adjust as needed 11
Getting Gross Summary: We believe with a focus and concentrated effort that there is a 3% to 5% potential improvement with your Gross Margin by following what we have gone over with our Getting Gross program. Getting Gross Tools GROW Card metrics showing GM ranges for different revenue types Targeted Gross Margin goals by size of job and by type of revenue Mini budget template Arriving at hourly average wage with burden 12