Financial Blind Spots: The Money Misconceptions That Hurt Landscape Companies

It’s hard to make sound decisions when your financials are either structured in a way that buries the relevant information or certain aspects, such as your labor burden, are misinterpreted.

“Don’t assume your data is accurate, reliable, relevant and comprehensive without a thorough investigation,” says John Joestgen, principal of JJ Landscape Consulting. “If you want to improve your company, there needs to be accountability.”

Joestgen says to ensure true accountability, you need solid, reliable metrics. Even then, if you are misreading your numbers, they can easily lead you astray.

Misleading Income Statements

Joestgen notes that profit and loss statements are full of opportunities for misconceptions. Too often, P&Ls are packed with clutter and misdirection, causing the pertinent information to be lost in bigger numbers.

“When I look at a P&L or any report, the goal is to collect relevant info, it be comprehensive and accurate and then in a format that allows the reader to easily see the patterns, trends and metrics so they can quickly and simply interpret the information to make educated decisions,” Joestgen says.   

One example of where the data can get muddled and cause managers to ignore the P&L entirely is if the payroll is recorded based on the check date, resulting in a month with four payrolls and 23 weekdays to earn revenue, and the next month could be a five-payroll month with 20 weekdays to earn revenue.

“I recommend you do a high-level pro-ration adjustment for the beginning and end of each month in 20% increments (Monday through Friday) to put payroll in the right month,” Joestgen says.

He adds that when reviewing your P&L, it’s critical to understand when the percent is more important than the dollar amount and vice versa. Joestgen’s rule of thumb is that when comparing direct costs, the percentage of revenue is more important, and when comparing overhead costs, the dollar amount matters more.

“Direct costs, like labor and materials, are variable costs,” Joestgen says. “Because your actual revenue dollars will likely not match your budget or prior year. Don’t scold the production manager for labor being $10,000 over budget if revenue is up and both budgeted and actual labor was at 25% of revenue.”

Some of Joestgen’s other recommendations for structuring a more useful P&L include separating out subcontractor work and creating separate departments or profit centers.

Joestgen explains that because subcontractors generally have a different markup than labor and materials, they can cause month-to-month swings in P&Ls and ruin the analysis of budget trends when comparing actual versus previous years versus budget.

Creating separate profit centers for your different service lines can also help with teasing out useful information for each department. For instance, Joestgen advises not mixing your enhancements and maintenance work in the same department.

“There are different crews to hold accountable,” Joestgen says. “Enhancement revenue fluctuates more than maintenance. When you merge the often-beneficial OT from enhancements with the generally bad OT from maintenance, the merged number becomes useless as a metric for management.”

Viewing All Overtime as Bad

Another area that can be misinterpreted is overtime. Joestgen encourages owners to not view overtime as inherently negative. He argues there are cases for beneficial overtime.

“Instead of thinking of overtime as 1 ½, think of it as regular time + half-time (or what I call the premium time because it represents just the “premium” that you paid to get that work done that week),” he says.

For example, if 30 employees each work 50 hours at $20 per hour, most companies calculate overtime like this:

• 30 workers × 40 hours × $20/hour = $24,000
• 30 workers × 10 overtime hours × $30/hour = $9,000
• Total: $33,000

“That $9,000 number looks expensive,” Joestgen says.

But when you separate out the premium portion of overtime, the picture changes:

• 30 workers × 50 hours × $20/hour = $30,000
• 30 workers × 10 overtime hours × $10/hour = $3,000
• Total: $33,000

“You paid a $3,000 premium to get an extra 300 hours of work performed that week,” he says.

Joestgen notes that for better clarity in reports and decision making, attach only the regular time portion to the job cost and then track the overtime premium portion separately.

“It may seem like you are perfecting data, but you are just cluttering up your metrics and making it harder to make good management decisions from your reports,” he says.

He also warns against putting the overtime premium time in overhead when it should be a direct cost.

“Some software companies default to putting this in overhead, which hides production cost and makes field performance and metrics look better than reality,” Joestgen says.

Joestgen stresses that good overtime is when your existing crews are able to perform 10% – 25% more work in certain weeks, rather than running over their budgeted hours.

“We are talking about having that laborer installing 50 plants in 50 hours in a week instead of installing 40 plants in 40 hours in a week,” Joestgen says. “You must still meet or beat the budgeted hours. And don’t work 50 hours this week and run out of work next week. After those two conditions, you can determine whether OT benefits or hinders your company.” 

Overtime is most likely to be beneficial for construction and enhancement work as they can use more materials and generate more revenue. Meanwhile, it is harder to have good overtime for maintenance crews as there is no material markup.

“Smart overtime jobs will generate healthy overhead recovery that you wouldn’t have if you declined the job,” Joestgen says.

He does caution against pushing 50-hour weeks for months, as it is likely to result in your team no longer hitting budgeted hours as crews’ bodies adjust to a different pace and productivity drops.

Misunderstanding Financial Concepts

Joestgen says another common area where landscape companies are misled is when certain financial terms and concepts are not fully understood. This can lead to estimating mistakes that will cost your business in the long run.

For instance, markup, multiplier and gross margin should not be used interchangeably.

“That would be a serious error,” Joestgen says. “You would either lose the job for a price that’s too high, or you’d get the job and lose your shirt.”   

While markup adds a percentage to the direct costs, a multiplier multiplies the cost by a set factor. Gross margin looks at profit as a percentage of the total revenue.

“All three describe the relation of direct cost with gross profit and the total price (gross profit is expressed as a dollar amount; gross margin is expressed as a percentage),” Joestgen says. “During the estimating process after the direct costs have been determined, any of the three can be used, each with their own unique method, to determine the sell price.”

For instance, you have an estimate with $100,000 in direct costs and a sale price of $190,000. You can use a markup of 90% of $100,000 = $90,000 to add to the $100,000 = $190,000, or you can use a multiplier of 1.9 to multiply by $100,000 = $190,000, or you can use a gross margin of 47.7% where $100,000 / (100% – 47.4%) = $190,000.

When these concepts are used incorrectly, you can end up with $100,000 + 47.4% = $147,400 instead of $190,000. Resulting in your price being $42,600 too low. Joestgen recommends using whichever job costing is in the software you’re using, but if you create estimates outside of software, multipliers are the easiest to grasp and minimize math errors.

Joestgen says another commonly misunderstood financial concept is your true labor burden. While there is no set practice on what burdens should be considered direct costs versus overhead, he says it is important to calculate the total burdened wage.

“I consider the burdened labor rate to be the actual cost for that laborer that I need to collect per billable hour,” Joestgen says. “The idea is to collect all the costs paid on behalf of a laborer for the year, then divide by the hours that the laborer is doing billable work for the client.”

For instance, if you pay $24 an hour and an employee works 2,080 hours a year, their pay is $49,920. If you add paying for their uniforms, hats, boots, Christmas gifts and safety awards, this could put their total cost up to $51,460.

Then, you need to deduct from the 2,080 hours 20.5 days (180 hours) for holidays, PTO and sick days, putting you down to 1,900 hours. From there, you can determine how many billable hours they work in a day. So, if an employee works seven hours out of an eight-hour workday, $51,460 divided by 1,660 billable hours equals $31 an hour, which is the labor cost you need to collect plus the overhead recovery.

If employees only work six hours out of an eight-hour workday, this would push the cost to $36 per hour. Joestgen explains that the fewer billable hours you actually get, the higher your true cost per billable hour becomes.

“If your price is being negotiated down, knowing this fully burdened wage cost will help understand when to walk away from the deal,” Joestgen says.