Profit Power: Why you should optimize overhead to optimize growth

November 16, 2021 - By Jeffrey Scott

What’s the right amount of overhead you need as you plan for growth?

(Photo: Palto / iStock / Getty Images Plus)

To answer that, let’s look at the three kinds of companies in the landscape industry:

Skinny Company 1, with overhead is too low: Running too lean, burning out leaders and not taking full advantage of this economy,
Fat Company 2, with overhead is too high: Inefficient leaders, confused org charts, under-trained staff and growth that is possibly out of control.
Nimble Company 3, with overhead is just right: Trained leaders are pulling their weight, managing teams of people working in a good culture.

Which company are you, and how do you know?

Having said that, there is a fourth kind of company; one that watches and right-sizes its overhead ratio as it grows from year to year.

Tracking your overhead into next year

In a recent newsletter, I wrote about taking my Leader’s Edge peer group through an exercise of assessing overhead ratio (overhead positions vs field positions.)

I did this again with another peer group full of landscape business owners, and we took it a step further. Let me explain.

When we measured the overhead ratio of this group, the majority of companies were in the 2.5 to 5 range. With some below that range and some above that range.

A score of 3 means that for every overhead position, they had three fully chargeable positions. A score of 5 means they have five fully chargeable positions.

After we calculated each company’s ratio, I went around the room and told each company why I thought they were high, low or just right. Then I asked each company what the growth plans were for the coming year, and how that growth would impact its overhead ratio.

It was an eye-opening discussion and many of the companies tweaked or completely changed 2022 plans on the spot

Your challenge

As you grow, keep one eye on overhead and another eye on field staff positions.

First, you have to decide if your overhead ratio is too high, low or just right.

Then, you have to filter your growth plans through this overhead ratio calculator and decide what needs to happen next year to determine the right-sized growth. (For example: growing more field positions, growing overhead in a key area or limiting overhead growth)

Growing overhead is not bad, and often it is a good thing if you aim for recruiting Grade-A players, streamlining accountabilities and reducing overlap.

To learn more about your overhead ratio and how to plan for growth, join us for our upcoming Financial Master Class.

We will be collecting data and diving further into discussions during this two-day virtual class, held Jan. 5-6.