Is Your Company Falling Prey to These Margin Eaters?

In the lawn and landscape industry, profit margins are already tight so the last thing you need in your business are expenses that chip away at that number further.

As your company grows, the types of margin eaters will evolve along with your organization. Check out some of the common culprits and how to address them below.

Early-Stage Margin Erosion

The biggest expense for everyone in the industry is labor, no matter how large or small your company is. Christianna Denelsbeck, CFO of Landscape Workshop, based in Birmingham, Alabama, says this is why it is necessary to have budgeted hours for each job and hold your crews and managers accountable to those hours.

Timothy Sherman, CFO of Yellowstone Landscape, based in Bunnell, Florida, says often it’s easy for new owners to think they are making a high margin starting out if they don’t pay themselves any salary or wage, and don’t have any other employees.

However, as the business grows, owners are pressed to deliver faster, better service for customers, and the most logical way to do that is to hire staff to assist.

“Now you have to pay market wages, and you begin to see the true profitability of your business,” Sherman says. “So the necessary, but margin-eating expense to build a business is the cost of identifying, hiring, training, developing, and employing the team to deliver on your promises to your team, your customers, and your investors (yes – if you bought a mower and started your business, congratulations! You are an investor seeking a return).”

Another large expense is capital expenditures, such as vehicles and equipment. Denelsbeck says while these don’t show up in EBITDA, it’s a real cash item.

“Attempt to consolidate purchases to a single vendor for the equipment category,” she says. “This increases your spending volume and can lead to discounts on pricing. Negotiate rates with your vehicle and equipment providers at least every other year and whenever your volume dramatically increases year over year.”

Sherman adds fixed or semi-fixed costs like facility rent can also eat into margins early on, but are required as incremental costs to grow the business.

Denelsbeck says another major factor of margin erosion can be poor estimating practices. She says it is critical to track your budgeted performance to actual on a frequency basis.

“We should be able to point out what inputs (labor, materials, etc.) drove the project over budget and correct any issues asap otherwise, we will operate at a loss,” she says. “It is also important to frequently update the inputs that go into our estimates (labor wages, material pricing, etc.) and push price increases to the customer as appropriate.”

Margin Eaters As You Grow

As your company scales, the type of margin eaters you’ll encounter will shift as well. One possible problem is when growth causes misalignment in the form of scope creep.

“An owner-operator is highly focused on learning exactly what their customer wants, accounts for the cost to deliver for them, and prices accordingly,” Sherman says. “As you grow, you have to work hard to align your team who typically does want to think like an owner, but often only see part of the picture.”

Sherman notes the sales team is focused on bringing new business, and the natural tendency is to promise more for less to make things happen. Meanwhile, the operations team wants to make the customer happy so they will agree to tasks that were not part of the original contract.

He says a better approach is ‘Yes, but.’ For instance, sales could say “I could lower my price to match your existing contract, but I’d have to carve these items out of our scope. Would that work for you?

For operations, they can respond to client requests by saying something along the lines of, “Of course, we can take care of that for you, but it’s not in the contract we agreed to – can I send you a pricing for that later today?”

“Of course, there are many other angles to take care of our customers in a profitable manner,” Sherman says. “But they all require finding ways to motivate and align your team on what you’ve decided matters.”

Direct costs are another area that can easily cut into your margins.

“I see companies get comfortable with their ‘go-to’ vendor and lose discipline in price checking,” Denelsbeck says. “It is healthy to bid out major cost categories at least every two years, especially if your business is growing. A simple RFP process can bring cost savings and quality improvements to your business.”

Denelsbeck also recommends pre-ordering supplies such as equipment parts or snow and ice materials to save on paying inflated prices. She says rebate programs can also be beneficial.

Sherman says they ensure all materials purchased are job costed to reduce wasteful spending on ‘stock.’ He adds that leveraging scale is not a primary driver of profit margins, as quality is far more important than unit price for the vast majority of purchases. Though he does acknowledge that in areas like insurance, scaling systems, or investing in additional tools like in-cab cameras, scale can help make those investments more palatable.

Frequent job damage or incidents can also impact your profitability. This comes down to properly training crews on how to use equipment.

Denelsbeck says some other costs that cut into margins are technology and people investments. She recommends finding the proper “break-point” in your business for when the financials can support such investments.

Sherman adds that cost of workers’ compensation insurance, health insurance, and retirement savings programs can be expensive as you hit certain threshold requirements or seek to become an employer of choice.

“Ensure you have the right brokerage partner who is willing to ‘go to market’ for you on a regular basis and discuss pricing and structure with multiple carriers,” Denelsbeck says.

Sherman recommends not confusing benefits with company culture.

“An employee who feels underpaid and undervalued won’t perform at their best,” Sherman says. “But the benefits being provided should complement that perception and not just be provided because it makes the owner feel good about themselves.”

Advice for Others

Another way your margins will shrink is by failing to push out price increases as warranted. Denelsbeck advises reviewing customer contracts on at least an annual basis.

Because labor is the necessary expense that will not go away, Sherman recommends first understanding the fully loaded cost of every hour that an employee works at a customer’s job site.

“Eliminate cost from that anywhere that you can to be as competitive as possible,” he says. “Add a margin that you are willing to accept on top of that. You now have a minimum bid rate for every request that comes through your door. If you go below that rate, by definition, you will not have an acceptable margin – so don’t!”