Are you running the business based on your bank balance and intuition, or do you know your actual job-costed financial data?
“Owners usually know how many crews they have, how busy the schedule looks, whether the phone is ringing, but they usually can’t answer what 20% of customers generate 80% of their profit or what their fully burdened field labor cost per hour is, and whether enhancements are actually earning higher margins than maintenance,” says Devon Nicoletti, managing director with PHG Advisory.
Nicoletti says this typically comes down to a lack of timely job costing.
“If the P&L is arriving 30 to 45 days late, the owner is managing yesterday’s business,” she says.
Nicoletti will cover common cash flow blind spots and actionable insights during her session, “Profit Carnage: The Financial Truths Killing Your Business” on Monday, Nov. 9 at 10 a.m. at ELEVATE.
“This session really translates the CFO-level thinking into language and examples specific to landscape operations,” Nicoletti says. “So, when it comes to seasonal cash flow, equipment financing, crew-level job costing, HOA municipal payment terms, they’re going to leave with a handful of numbers to start tracking Monday morning and not a finance degree’s worth of theory.”
Common Way Businesses Bleed Cash
You may picture Hollywood-style fraud when you imagine your company profits being siphoned away, but it occurs in far more common practices, including fuel misuse, time theft, unproductive travel time, unauthorized usage of company equipment on side jobs and purchasing fraud with vendors.
“When one person orders materials, receives them, approves the invoice, and reconciles the account, you just create an opportunity for loss,” Nicoletti says. “The rule of thumb there is really separate authorization, custody and reconciliation.”
Nicoletti says while traditional employee theft isn’t terribly common, the problem is by the time you notice it, 12 months have already passed.
“There are some little red flags that you could see when you start looking at your KPIs and your benchmarks and using those metrics as a percentage of revenue that really show a clearer picture that maybe an owner wouldn’t know what that benchmark should be,” Nicoletti says.
Nicoletti notes that other small practices can also add up, such as offering a 15% relationship discount, paying vendors 20 days early and not tracking job costs by crews.
“It quietly eats at margins, so none of it really shows up as like one big red flag,” Nicoletti says. “It shows up as, ‘Why am I busier than ever, but not making money?’”
Causes of Margin Compression
Margins can also be compressed by factors such as labor inflation, profession slippage and a lack of pricing discipline.
Nicoletti says that as labor rates have gone up, many owners have been afraid to raise prices in response. Meanwhile, profession slippage occurs where crews complete fewer properties per day because of routing, rework, callbacks, and supervision issues.
Owners also need to keep an eye on their pricing during contract renewals.
“Owners are renewing contracts with 2% to 3% increases while their true cost structure rose 8% to 12%,” Nicoletti says. “The mistake is really blaming overhead. For most landscaping companies, gross margin erosion is the real story. If field labor productivity falls by 10%, EBITDA can be cut in half, even if the overhead stays flat.”
Improving Your Financial Discipline
Two major takeaways Nicoletti will explore in her session are that profit and cash are not the same thing, and that growth can kill landscape companies if collections lag.
“Your bank balance today ignores your payroll, it ignores your taxes, your AP, your upcoming equipment payments, your gross sales booked, so booked work, that’s not actual cash collected,” Nicoletti says. “The average contract value you could have a large account with poor margin, and that could hurt your profitability. And then just your net income on the tax return. So tax accounting is often very different from actual operational reality.”
She recommends companies do a 13-week rolling cash flow forecast. They should also review aging customers, crew productivity, route density and callbacks, overtime reports and their enhancements backlog.
Meanwhile, on a monthly basis, owners should be looking at their P&L, budget versus the prior year, cash flow statement and job costing by division. Quarterly, owners should conduct customer profitability analysis and review pricing for upcoming renewals.
Nicoletti says one common mistake owners make is believing their only choice is to hire a full-time CFO or nothing. She argues a fractional CFO paired with disciplined reporting can provide the highest ROI.
Anyone who attends Nicoletti’s session will be able to scan a QR code for a free financial health assessment.
“We usually charge $2,000 for this assessment, but they’ll be able to do that for free with me,” Nicoletti says. “It’s kind of like a car mechanic. I pop the hood on their financials. I go through, I build them a huge strategy slide deck showing them the good, the bad, the ugly in their financials, and whether they do business with us or not, I give that to them for the love of the game.”
Ready to gain a better understanding of your financials? Register for ELEVATE, and we’ll see you in Tampa, Florida!
