Compete by mining your financials

Photo: iStock.com/Worawee Meepian

How can average companies compete against large companies and lowballers? That’s the question.

Here’s the short answer: They can’t. Average companies are just that—they’re average. Middle of the pack. Not special. Neither good nor bad. Just average.

Polls have shown that in America, the majority of people consider themselves above average—a mathematical impossibility.

If you are average, then competition will always be difficult.

Here’s the question I will answer as a CFO: How can a landscape company thrive against large companies and lowballers? Another short answer: Treat your data as if it were gold.

In the landscape industry, we are fortunate to have software programs available that will collect and organize tremendous amounts of data.

Large companies must serve many types of customers and properties—or they could not be large. Even though they have software to help them identify the most profitable type of customers and properties, they are too big to focus on a limited segment of the market.

The lowballers do not understand their true costs, which is why they are lowballers. They cannot afford to buy software, much less contract with the people who can find the gold in their data.

And between those two types of competition, there’s a nice market where above average companies can dominate—if they have a plan to mine the gold in their data.

Here are three reports that I use to find the gold. I encourage landscape companies to plan for 12 percent net profit margins and settle for 10 percent. My research proves it is possible, showing that the average landscape company’s net profit margin is 5 percent, but some companies are above 10 percent. Net profit margin is a percentage calculated by subtracting all expenses, including depreciation and owner’s salary, from revenue and dividing by revenue.

• Division profitability. Divisions may include construction, maintenance, enhancements, irrigation and snow. You can export this report from most software to Excel. It shows revenue and direct job costs for each division. Then you allocate all other costs to each division based on each division’s estimated use of that cost. These costs include indirect job costs (e.g., fuel and repairs), sales and marketing costs and general and administrative costs (e.g., rent, office salaries). After these costs have been allocated, you can calculate the net profit and the net profit margin for each division. Be ready for some difficult discussions. I have seen many instances where one or two divisions show losses.
• Portfolio analysis. Each company has a portfolio of customers or jobs. You will need job cost software to perform this analysis. You can export the job cost report to Excel and then sort the data to make it easier to analyze. I generally sort the data from largest customer or job to smallest. I use Excel’s conditional formatting to highlight customers or jobs where the gross margin is below average. Be sure to consider the proportion of your revenue that comes from small customers. It is difficult to be above average and serve both small and large customers. In performing your portfolio analysis, analyze construction and ongoing contract work separately.
• Cross-selling/upselling analysis. The least expensive and most profitable way to acquire more revenue is by selling additional work to existing customers. For example, if your company does construction and maintenance, then every construction customer should become a maintenance customer. Which company is the best company to maintain the value and appearance of the customer’s investment in a new landscape? Obviously, the company who built it. Would customers want to risk their investment with a lowballer?

Generally, I use data from the last 12 months so seasonality does not create issues.

These reports should generate a discussion of the following questions among the management team or key employees.

• Which division is most profitable? Why?
• Which division is least profitable? Why?
• How much can we improve the profitability of each division? In other words, what is our standard of profitability (gross and net margins) for each division?
• What actions do we need to take now to get the divisions closer to their profitability standards? (Do not try to do too much at once.)
• What characteristics do our most profitable customers or jobs share?
• What characteristics do our least profitable customers or jobs share?
• Considering those common characteristics, what do our ideal customer or job segments look like?
• What upselling or cross-selling opportunities do we have?
• How do we change our sales and marketing efforts based on the answers to the questions above?

There is great power in this combination of reports and spirited discussion among a team. Using the reports and discussions, the team can create a plan to dominate a segment of a market and enjoy a net profit margin well above average.

A CFO’s job is to create and execute a plan for greater profitability. If you do not have someone who can mine the gold in your data, contract with a CFO so you can become or remain a company performing well above average. While owners are smart enough to do most of this work themselves, most owners did not start a landscape business to look for gold by digging in numbers.