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Path to 12% profit — equipment

October 12, 2020 -  By

This is the last of four columns on key performance indicator (KPI) return on investment. I will say it again: The industry’s average net profit is less than 6 percent. It should be closer to 12 percent. This low net profit is driven by three KPIs — labor, overhead and equipment. These three KPI’s represent 96 percent of your annual expenses and investments. And, they are the ones to watch because you invest in them for one simple reason — to generate more revenue efficiently. Maximizing revenue per dollar of cost is the goal. The higher the KPI ratio, the higher your net profit. In this column, I address the final KPI — equipment.

Equipment KPI chart (Graph: Kevin Kehoe)

Graph: Kevin Kehoe

First, the calculation: Equipment KPI = revenue divided by equipment cost.

In this example, the equipment KPI is $2.40. This means that one dollar of equipment (vehicles and capital equipment more than $1,000 in purchase price) yields an annual return of $2.40. If this seems low, it is. The benchmark is $3.25. The benchmark measures the 95 percent percentile in industry return on investment and productivity. By applying that benchmark to $3 million of revenue, equipment cost should be $923,077, not $1,250,000. Since equipment has a lifespan of longer than one year, we apply a five-year average life, and this yields an annual profit impact of $65,385 or a 2.18 percent increase in net profit. This is significant.

Second, the reality: Most companies are overinvested in equipment. Maybe it’s because we like our toys or maybe because we like to keep them and fix them or maybe because they seem cheap enough and everyone is crying for more. These are all very real reasons, but the fact remains that excess equipment ties up cash and robs the bottom line. The KPI ratio does differ by region, so I’m using an average. The benchmark KPI is lower where snow equipment skews it. But, that doesn’t change the profit impact — just the actual benchmark.

How do you increase this KPI? What’s required are technologies like asset trackers and shop control software. These can provide the essential information that drives utilization, repair and asset disposition. Understanding these submetrics is essential to improving KPI performance and altering the behaviors that drive overinvestment in equipment. Lacking detailed data on machine utilization and repair history, there is little hope of improving the equipment KPI. But knowing this data allows for incremental:

  • Reduction in hours and vehicle miles through rerouting;
  • Reduction in repair costs through earlier disposition and identification of operator and brand failure;
  • Reduction in parts inventory though platform/brand
    standardization;
  • Reduction in investment through extended life of some equipment;
  • Reduction in shop and yard staff; and
  • Increase in some service subcontracting in lieu of purchase/
    ownership.

Every industry experiences the same evolution. The winners make labor more productive with equipment, and then they make the equipment more productive with technology. The result is lower investment, reducing cost, and higher revenue creation, increasing net profit. There’s a reason the average landscape industry net profit is lower than 6 percent, and it’s not because we don’t spend enough on labor, overhead and equipment. It’s because we’re underspending on technologies like field activity tracking and a system of record software we need to analyze and improve our decision-making.

About the Author:

Kevin Kehoe, a longtime landscape industry consultant, is managing partner at Aspire Software.

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