Grow with Grunder: Understand costs, gross margins to drive profitability

July 14, 2021 -  By

I always like to remind my team at Grunder Landscaping Co. that good managers make good decisions when they have good information. While our industry doesn’t have the amount of data that companies in Silicon Valley do, how we handle our data and what we use it for is just as important.

Money (Photo: Marat Musabirov/iStock / Getty Images Plus/Getty Images)

(Photo: Marat Musabirov/iStock / Getty Images Plus/Getty Images)

There are a few vital metrics landscaping companies should work hard to track accurately and use effectively, and, this month, I want to talk specifically about costs. Everyone reading this article understands that bidding a job for $10,000 but spending $20,000 to finish it is bad, but having your pricing high or your costs too low can be a slow drip. It could indicate you’re not paying team members enough, you’re cutting corners on quality or you’re pricing yourself out of your market.

Knowing exact costs allows companies to bid, sell and perform work effectively and efficiently. One of the most impactful metrics we review and benchmark with our ACE Peer Group members is gross profit margin.

To calculate this margin as a percent, take your total revenue, subtract the cost of goods sold and divide the result by your total revenue. Include only labor, materials, rentals and subcontractors in your cost of goods sold. Our goal is for our clients to see about 50 percent in gross profit margin, depending on the type of work they do. Specifically, you should see gross profit margin rates around:

  • 50-55 percent for construction work.
  • 45-50 percent for maintenance work.

Gross margin essentially measures how your production costs relate to the revenue they generate. If your gross margin falls outside of these norms, there are ways to get it in line.

If your gross margin is above industry benchmarks

Great! Just ensure you’re delivering quality work and a great client experience first and that your high margin isn’t because you’re cutting corners.

Next, evaluate compensation. Are your team members paid at or above industry and market standards? The labor market is tight this year. If you can afford to give raises, you may have an easier time recruiting and retaining team members.

If your gross margin is below industry benchmarks

Start by trying to find efficiencies with labor expenses. Don’t lower wages, but do make sure you’re minimizing indirect time. Your morning rollout and truck routes are good areas to focus on. Educate your team so they understand the importance of meeting or beating the hours on every job. If your gross margin doesn’t improve with these changes, consider raising prices.

When you dig into the numbers, if one area of your business isn’t performing as well as others, it may be time to shift your strategy. We have a client in the Washington, D.C., area who pivoted to focus more on maintenance once he realized that was the work his team was best at and could be profitable on. His company has grown tremendously since then.

Understanding your costs can help you make decisions on personnel, equipment, pricing, materials and much more. It gives you the confidence to know that you’re making the right decisions and adjusting the course of your business as needed. Costs are an essential piece of data for any manager and may be key to solving challenges your company faces today or tomorrow. If you don’t have a clear idea of your costs, start by calculating your gross profit margin this month.

This article is tagged with and posted in From the Magazine, July 2021
Marty Grunder

About the Author:

Marty Grunder is president and CEO of Grunder Landscaping Co. and The Grow Group, based in Dayton, Ohio.

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