Why should you know your critical percentages?

By John Corban

When I work with a new landscaping client, in the first two sessions, I analyse their profit and loss (P&L) and highlight their four main expenses (as a percentage of their sales), and compare these to what the targeted percentages should be. As you may know, I have created a financial model that allows any landscaper or horticulturist to know immediately what expense is too high in relation to sales for a landscaping or horticultural business.

It could be that one or more of the following expenses are too high; materials, site labour, subcontractors, and business running costs. Knowing what their expenses should be allows us to create a clear path ahead to rectify lack of profit. These are your four critical expenses.

Charge out rates and material mark-ups
Knowing the critical numbers also allows a business owner to know what their charge out rates should be in their quoting system, what their material mark-ups should be, and whether their jobs are still being underquoted.

Obviously, this simple analysis of a P&L tells us if all their clients’ job installs have made the gross profit they should have over the last twelve months. The same applies to horticulturists analysing on-site labour and materials figures – it can tell us if their jobs are making enough gross profit, or if changes need to made.

Running costs
I will then look further down the P&L into the running costs section, and show a client if these expenses, as a total, are fine or too high in relation to sales.

I think every business owner should know these key percentages as mentioned above. It allows them to know what area of their business is, or is not, working in terms of profit so they can set out to fix the problem.

The same approach applies to any business I work with – a supplier, a nursery, a pool builder. We create a financial analysis of their P&L by separating income streams, then separating COS expenses and calculating their percentages in relation to sales, and then do the same with running costs.

What about quote conversion rates?
Knowing how much you need to win each month, and what percentage of jobs you have been winning, is important. This information is very useful because it tells you if your sales process is effective enough. It can also tell you if you are too competitive with your quoting – if you are winning too many jobs, then prices should increase. But keep in mind that some businesses with a high profile and following may win a larger number of their quotes because clients want only them to design and build their gardens.

If this is too confusing for you, or talking numbers gives you a headache, ask your bookkeeper to help. If you do know your critical percentages, then I urge you to measure them at least every quarter. I have seen some business owners stop giving attention to their key numbers for a few months and then their project profits started declining.

Remember the saying ‘whatever you give attention to expands’.

If you don’t know your critical percentages, make it an exercise to learn and understand them. It will help build confidence and has a ripple effect on everything else.

John Corban
Business Coach for Landscapers, Horticulturists and Nursery owners
Mob: 0433 27 1980
www.landscaperscoach.com.au