6 Signs Your Million-Dollar Company Isn't Healthy

Key vital signs to monitor when your little landscaping company isn't so little anymore.

Kevin Kehoe is managing partner at Aspire LLC, a business management software system. He has 27 years of Green Industry consulting experience.
Kevin Kehoe is managing partner at Aspire LLC, a business management software system. He has 27 years of Green Industry consulting experience.

Your company cracked the million-dollar threshold a few years ago and continues to grow. Congratulations, you are in rare air; 90% of landscape contractors never reach the million-dollar mark.

Now the challenge is to continue to build on what you’ve established. Unfortunately, what got you to that magical threshold may not keep you there. In the following discussion, veteran Green Industry consultant Kevin Kehoe identifies six indications that trouble may be brewing—and suggests how to make adjustments before problems take their toll.

1. Culture Lacks Discipline

This first indicator is qualitative. A disorganized shop, dirty trucks and misplaced equipment are all signs of a lack of discipline and an inefficient operation. A few lost minutes here or there and a disappearing rake or two may not have meant much in the early years. Later on, however, with more crews on the road, efficient use of time and taking care of equipment become critical elements to profitable growth.

No, Kehoe says you don’t have to be able to “eat off the shop floor” or have impeccably clean vehicles to be successful. But a certain amount of discipline is required to sustain growth. Not to forget, he adds, that a neat shop, along with clean trucks and uniforms, convey a professional image.

2. Not Being Careful with Cash

When sales reach $1 million, accounting functions and handling of the company’s money often extend beyond the capabilities of a family member. At that point, busy owners are usually forced to hire a non-family member to “take care of the books.”

Most people are honest. To protect your business and cash from the few who are not, Kehoe advises bringing in an outside accountant every quarter to check bank accounts. Make sure, too, that your in-house financial person takes a two-week vacation every year. If there are anomalies in where cash is going, it will likely appear during that two-week stretch.

3. Too Much Customer Concentration

Having all of your customer eggs in one basket is always a dangerous proposition. According to Kehoe, though, even having 20% of your customers generating 80% of your sales revenue can be problematic. Customers go away for any number of reasons, many of which are out of your control, such as a customer that simply stops spending, a company is sold, or a property manager leaves.

Losing large customers puts a huge dent in sales, but that’s only part of the 80/20 challenge, Kehoe emphasizes. Large customers can become demanding over time. They know how much you depend on their business and can gradually grind away at your profit. Kehoe is more comfortable with a ratio that has 20% of your customers representing no more than 65-70% of your sales, but 70% is definitely the upper limit.

4. Net Profit Doesn't Include Owner's Salary

Net profit is certainly a key indicator of how healthy your company is. But is your net profit truly accurate? Kehoe says it isn’t if you do what some company owners do: fail to calculate their salary as part of overhead. Instead, they may wait until the end of the year and take a payout, or just simply forget that the time they spend working in the company is part of its operating costs.

The rule of thumb, Kehoe relates, is for an owner of a $1 million company to receive a base pay of 6% of revenue. A $2 million company owner should expect 5%. A $3 million company owner should expect 4%. Since all pricing is a function of overhead, owners who fail to include their base salary into the overhead are underpricing their work. Not good.

5. Not Measuring Each Service Separately

Suppose your company offers four distinct services, e.g., maintenance, snow, enhancements and irrigation. The mistake some owners make is having a P&L statement that doesn’t break out labor and material for each class or service. Failing to break out each one individually allows a poorly performing service to essentially operate under the radar. As Kehoe remarks, there’s always one service, if not more than one, that isn’t performing up to expectation.

Owners need to identify and understand the impact of an underperforming service. Doing so will allow them to avoid pouring money into something that isn’t delivering a decent ROI. The “heads up” will also provide an opportunity to fix something before it’s completely broken.

6. Equipment Turnover

You want your equipment to deliver a decent ROI as well, Kehoe points out. To determine if your equipment is producing, take a close look at its turnover ratio, which is your company’s annual revenue divided by its net equipment assets (based on straight-line depreciation of five or seven years).

Kehoe suggests that the ratio should be 10 or higher. A ratio of 6 or 7 would be sinking too low, and an indication that you’re not using your equipment as effectively as it could be used. Maybe you simply have too much equipment or perhaps renting a new loader and backhoe would be more cost effective than buying one. Poor routing could be a problem, too, with crews logging too much windshield time and, hence, equipment is spending too much downtime on the trailer.

Kehoe emphasizes that tracking turnover ratio is something that should be done every year. Keeping equipment well beyond its expected lifetime may improve the ratio, but would likely have a negative impact on productivity and add to repair costs.

It's a Transition Period

Kehoe refers to reaching the $1 million sales mark as a period of transition for many owners. At this level, most no longer have the ability or time to manage their operation alone. Instead, they have to depend on other people for support in key areas. Having a culture that promotes discipline and efficient practices, along with systems that monitor their company’s operation and performance, will ease the transition and help promote profitable growth.