Business Insider: Midyear financial review: Are you really making money?

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Even if you review your numbers monthly and everything looks on track, you could still be off-budget. How is that possible, you ask? It’s because you use skewed numbers.

At Jeffrey Scott Consulting, we benchmark many landscape companies in our annual Financial Master Class. We have seen every financial pitfall there is. Here are five common ways numbers can be misleading, with suggested fixes.

1. Hybrid accounting numbers

Our No. 1 rule: Use accrual-based accounting to manage finances and make decisions. Accrual accounting follows the matching principle, where you record expenses associated with revenue (and vice versa) in the same period. For example, you should record deposits and prepayments as revenue only after you start the work, recognizing revenue when you perform the work. The same with materials you ordered and prepaid for — you should record them as the cost of goods. Many companies think the team uses the accrual method, but when we dig in, we often find it is a hybrid approach of accrual, cash and as-invoiced.

2. Lack of inventory control

Picture this: All of your numbers look great. But the end of the year comes and margins suddenly drop. What happened? You waited until you slowed down to count and reconcile inventory. Then you realize the value of your physical inventory is less than the value on the books. That adjustment hits the cost of goods sold and the gross margin nosedives. Jobs you thought performed well only looked like they did because the foreman or project manager forgot to allocate materials from the inventory. It is avoidable.

3. Underpaid and overperked

Many owners underpay themselves when cash is tight, and this skews their profits. What’s worse, many owners underpay themselves as standard practice, and they think their company makes more money than it is. Conversely, owners may work for Aunt Suzie for free, thus underestimating their profit. It’s the owner’s prerogative to help Aunt Suzie. However, let’s remove these jobs from our management books, so the leadership team can have a clean set of numbers from which to steer the business.

4. Aggregate numbers, lost potential

Some businesses use only aggregate budgets and reports. This makes it difficult to identify opportunities and necessary improvements. Break down your numbers as much as possible and look at them from all angles. Break down revenue and operating costs by branch, division, service, route and sometimes, by job type, crew, etc. You should budget and report overhead by branch and division. When you break out the numbers this way, you can see what needs attention. After I recently went through this exercise with a new coaching client, he discovered a division at his second branch was losing money. Now he can have conversations and make the necessary pivots to improve his year-end performance.

5. Not tracking billable hours

Your revenue and job costs can both be on track and still lose money. This scenario can happen when you are not selling/producing enough billable hours to cover overhead and achieve net profit goals. Unplanned variances in subs and materials can affect gross margins. Therefore, it is helpful to budget and track billable and non-billable hours to avoid disappointment at year-end. Your implementation of these techniques don’t need to be perfect, but it needs to be close, accurate and consistent. Reviewing a clean set of accrual-based numbers monthly and billable hours weekly with your team will help you be more successful.