The Profit Triangle
1 Sep, 2006 By: Kevin Kehoe LDB SolutionsOne pathway to profits involves managing three key numbers: revenue volume, fixed profits and gross margin. Learning what they are and how to use them can help your company grow.
Revenue volume
There is a definite advantage to becoming a bigger company: pricing leverage. Bigger companies enjoy an advantage because their overhead burden per labor hour is lower. This creates a virtuous cycle when it comes to profitable growth. Because overhead burden per labor hour is lower, the price per labor hour can be lower. This allows for better pricing and therefore faster growth, and increased revenue volume; this is the virtuous cycle.
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What is the strategy for you to grow then? You have to price like the big guys. You can do this by setting up a pricing model for the size you want to be, not the size you are now, and use this to grow into success.
Fixed costs
There is a definite advantage to decreasing fixed cost per labor hour. The only revenue producing labor in your company is the crew. Everyone and everything else are fixed overhead costs. Their only value is to maximize the use and the efficiency of the crew. This means they must be dedicated to defining and streamlining production processes — everything from the morning rodeo to the afternoon clock-out, instead of putting out fires and babysitting crews.
The strategy to accomplish this is to conduct kaizen (continuous and incremental improvement) events to standardize the foreman's work habits. You can accomplish this by immersing yourself back the operations and challenging the way you do everything to reduce time, expenses and waste. You can't win the battle from headquarters; you have to win it on the battlefield.
Gross margin
There is a definite advantage to hiring the right managers. The good ones know how to establish expectations, provide feedback, apply consequences, reward winners and make decisions. These people are the primary drivers of your gross margin. So why would you trust your gross margins to people who are not managers? Know the difference between a technician and a manager. The technician is excellent at doing the work; the manager excellent at driving others to do it. Management is a job for tough-nosed people.
The best strategy is to replace technicians with managers as you grow. You do this by paying more than you are used to paying your technicians. The upside is the more expensive manager can handle 1.5 to 2 times the amount of field production volume than the lesser-paid technician. This actually makes them less expensive in the long run, and the best thing is they know how to manage.
EDITOR'S NOTE: Each month, we'll present a Best Practice you can use to measure your operations. We base these measurements on established industry data, input from practicing landscape contractors and other sources we believe to be credible.
We welcome your thoughts on these measurements, as well as your suggestions for future benchmarks. Send them to Susan Porter at 800/225-4569 x2729 or sporter@questex.com (just mention Best Practices).
Kehoe is owner and manager of Kehoe & Co., a business management consulting firm based in Laguna Niguel, CA. He can be reached via www.kehoe.biz, at kkehoe@earthlink.net or 949/715-3804.
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