Planning for Profit

Introduction from Jim Paluch of JP Horizons

There is a single characteristic that all successful business owners have in common, and that’s awareness. These owners open their minds and easily see the things that will improve both their businesses and themselves. Successful owners learn to work on the person inside so that the success outside will come.

In contrast, the owner who believes his people to be the problem, or maybe the economy or the competition, without giving the first thought to improve himself, is working from a position of ignorance. I am not implying that these owners are ignorant. In fact, they generally are very intelligent, just not on how to improve their businesses.

We have all experienced both sides of the line as we have a high degree of awareness on some things and an abundance of ignorance on others. The opportunity is in making sure we are on the right side of the line.

The company owners you read about in this article are working from a position of awareness. They understand the importance of being proactive in creating a profitable company. They may admit that they had not always been aware of ways to work smarter or to be a better owner, but they realized they could learn how. This desire to be better helps the owner to increase the awareness of his employees, and ultimately more success for everyone.

For over 20 years Jim Paluch and the JP Horizons Team have been helping landscape companies Work Smarter and create A Better Way. Learn how they do it at ABetterWayCommunity.com, or email jim@jphorizons.com.

How Contractors are Staying Profitable

 

The majority of landscape contractors have lived through at least one of the following scenarios over the past two years: drastic decrease in design/build business, fairly steady maintenance business but at reduced margins, increased competition, and intense pricing pressure across the board. As a result, many of these same contractors have unfortunately had to deal with the reality of reduced margins.

Today, many contractors are optimistic about what 2011 might have in store. That optimism is partially attributable to the growing number of positive economic signs that began to emerge in late-2010. However, these contractors are really excited because of the lessons they’ve learned—and changes they’ve made—over the past couple of years.

Gross Margins Squeezed

“We definitely had to reduce our gross margin expectations last year because of pricing pressure,” says Tom Morin of Morin’s Landscaping in Hollis, NH. “You can try to offset that by doing more volume, but that hasn’t been very easy because we have more competitors than ever. Fortunately, we have strong relationships with many of our big clients, so the competitive pricing was communicated to us and we were able to make adjustments.” Roughly 60% of Morin’s Landscaping’s revenue is in maintenance.

In Rochester, IN, Tony Sellers of Sellers Services says he’s been pretty successful at holding the line with respect to prices, but gross margin has still taken a hit due to the rising costs of fuel, fertilizer and irrigation pipe. Roughly half of the company’s revenue is in maintenance.

D.J. Vander Slik of Michigan-based DJ’s Landscape Management has faced similar challenges. “We’ve learned a lot and have come a long way these past two years, especially with respect to the services we offer our customers,” he relates. The company is based in Grand Rapids but also has branches in Kalamazoo and Holland. Roughly 75% of revenue comes from design/build, maintenance and tree care work, while the remaining 25% comes from snow removal.

Value Engineering

Vander Slik says he’s gotten serious about a process called value engineering. The premise is that you increase the value of your product or service by either increasing function or reducing cost. When customers began telling him that reducing cost was their biggest concern, Vander Slik began looking for unnecessary functions/costs that could be eliminated.

“We simply asked our customers what they really wanted and valued,” Vander Slik recalls. “We didn’t have to eliminate our core services; it was the little things. This presented a challenge for us because every client values something different. You have to ask them.”

One example of the simple changes that DJ’s Landscape Management made to help clients adhere to their tighter budgets was reduce the frequency of picking up and disposing of litter. “We recognized that doing it every week was wasteful because the bags were only a quarter full,” Vander Slik tells. “So we proposed doing it every third or fourth visit, which made a significant difference in allowing us to bring our price down a bit.”

Equipment Operating Costs

Sellers has decided to put his focus on equipment. “We’re going for uniformity, from the trucks we run to the way our trailers are set up,” he says. The objective is increased productivity, in addition to reduced maintenance costs and overall operating costs.

“Our facility is in a rural area, so we need to have a lot of parts and supplies in stock,” Sellers adds. Reducing the number of equipment brands, models and vendors the company must manage reduces their procurement costs and increases their buying power.

Sellers is also tracking each piece of equipment very closely. “We’re treating each piece of equipment almost like a job now,” Sellers says. He’s watching the hours each machine is used, downtime, and maintenance and fuel costs.

“Paying a $200 repair bill on a $350 trimmer doesn’t really make sense,” Sellers says. “We don’t like to spend our time working on things or hauling them to dealers, so we’re trying to upgrade equipment as much as possible.”

Sellers says the company’s rule of thumb is to upgrade handheld equipment at least every two years. Riding mowers are in the three- to five-year replacement range. “We have good relationships with our dealers and ask them to always contact us before going ahead with a repair,” Sellers says.

Materials

Sellers Services has also worked hard to maintain good relationships with its materials vendors. “I’ve learned that vendor relationships are just as important as customer relationships,” Sellers says. “We don’t like to price-shop; we like to remain loyal. When I have a bid where the customer says I’m way out of line, my vendors are sometimes able to help me out.”

Morin is taking a similar approach. “We’re paying much closer attention to our inventory now,” he says. “We’re also slowing down to negotiate better, especially on nursery stock. We’ve had a good credit and payment history over the years, so we are often able to negotiate good pricing.”

Internal Controls

Strategies like the ones just described have helped contractors preserve as much gross margin as possible. Still, seeing 5-10% or more melt away has been common. To prevent net profits from taking an even greater hit, additional strategies to control overhead costs have been implemented.

“We work from a pretty solid budget, so we’ve been able to pinpoint areas of discretionary spending that could be cut or completely eliminated,” Morin says. There’s been a hiring freeze with respect to administrative personnel. The company is also holding back on computer and technology-related purchases. “But we’ve still seen our net profits dip 4% or so,” Morin points out.

Sellers Services has endured a similar reduction in net profit. But unlike Morin, he’s chosen to stop the bleeding by ramping up his investments in technology. “Internal efficiencies are going to be the key to growing our net profit,” Sellers says. “That’s why I’ve invested in Include Software’s Asset program. It’s helping us drastically cut back on the double- and triple-entering of information. From bidding to billing, information flows smoothly through the system.”

Back up in Michigan, Vander Slik has been taking a hard look at discretionary purchases, especially office equipment. He’s also re-evaluated the company’s approach to team building and social outings.

“In the past we’d always done more elaborate functions like catered dinners and hockey game outings,” Vander Slik tells. “This past year we scaled it down and had a potluck right at our facility. It went over really well. To be honest I didn’t think it would be a hit, but it was—and I am glad to admit that I was wrong. I’ve learned that events like this don’t have to be big and flashy to be effective. Now we’re looking to do one or two of these potlucks a month. And I’ll tell you, doing two a month won’t cost us as much as one big outing had cost in the past. This has been a great change and a positive means of team building for our company.”

Teaching Your Employees About Profit

Most highly profitable contractors will attest that the biggest change you can make in your company is teaching employees about profit and how their performance can affect it. “Three or four years ago when the industry was really growing, topics like company profit were the elephant in the room,” Vander Slik says. “Now we’re having weekly meetings on where our numbers are.”

The concept of open-book management puzzled Vander Slik at first, but now he’s learned that when employees see the company’s goals, they want to help the company reach them.

The same type of culture shift is happening at Morin’s Landscaping. “The Working Smarter Training Challenge has helped create a huge awareness and understanding of our need to be efficient,” Morin says. “Employees are focused on costs like never before.”

At the crew level, there is a strong emphasis on man-hour goals. “We have a scoreboard in our dispatch room that account managers continually update,” Morin explains. The scoreboard shows budgeted vs. actual man-hours for each job. Everyone can see how everyone else is doing, creating an added incentive in the way of peer pressure.

At DJ’s Landscape Management, every department has its own production goals which tie into the company’s main goals of revenue and profit. “It’s important for all employees to understand that each area of the company plays an important role in our success,” Vander Slik says. “How does an individual crew help? By not having to go back to a property to fix something that was missed, or by not going over its budgeted hours, or by properly operating equipment that helps prevent unnecessary wear and tear and breakdowns.”

Incentives take it one step further, but can also create a level of complexity that can backfire on you. These contractors offer one word of advice: Keep it simple.

“In the past we’ve given out bonuses to everyone in the company,” Sellers says. “I’d usually take 10% of our net profit and distribute it according to attendance. Now I want to come up with something that rewards people for their productivity. The challenge is coming up with a plan that isn’t so complicated.”

“Right now we have quarterly incentives that help drive both top-line and bottom-line performance,” Vander Slik says. “We work off of historical data to create realistic projections. It’s working, because we beat our projections by 10% last summer.”

Although the challenges of fierce competition still persist, all three of these contractors agree that business conditions are improving.

Regardless, the internal changes they’ve implemented and profit awareness they’ve created are what will continue to lift their companies to new heights.

Learn how you can transform your company into a lean, productive and passionate organization that can continue to be competitive for years to come by visiting GreenIndustryPros.com/WorkingSmarter, or call 920-563-1614.

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