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Secrets for successful labor hour management

February 18, 2022 -  By
Photo: ©istock.com/Dimedrol68

Photo: ©istock.com/Dimedrol68

The Herring Group 2021 Landscape Industry Peer Benchmark Report revealed some interesting profit data. Twenty-four percent of landscape companies had an operating profit margin greater than 10 percent.

The average operating profit margin for this group was 14 percent. The remaining companies had an average operating profit margin of four percent. That’s a big difference and a big opportunity.

The operating profit margin is revenue minus all operating expenses, including depreciation and reasonable owners’ compensation, divided by revenue. Operating profit excludes non-operating items, like income from the forgiveness of Paycheck Protection Program (PPP) loans.

With such a big opportunity for most companies to improve their profitability, let’s discuss steps to take now to make the green season more profitable.

Steps to profitability

Did you know that many landscape companies with snow operations are not profitable in their landscape operations? We see that situation frequently with our clients. It’s unacceptable.

For companies with snow operations, here is a quick test: Run a monthly trended income statement in your accounting software for the period from Nov. 1, 2020, through Oct. 31, 2021. You should have 12 columns of numbers, one column for each month. Add up the operating income for the snow season — generally November through February or March.

Then, add up the operating income for the green season — March or April through October. Is the total operating income positive for the green season?

How do the operating profit margins for the snow season and the green season compare? For this analysis to be correct, depreciation and any bonus expense must be recorded every month. You will also need to exclude non-operating items like PPP loan forgiveness income.

One of the three primary reasons for low profitability in the green season is poor labor hour management.

In this industry, if people cannot manage labor hours well, they cannot win with profit. In other words, the companies with the best labor hour management have the highest operating profit margins.

Secrets to good labor hour management

For perspective, in 2021, 60 percent of our clients had actual labor hours fewer than budgeted labor hours — they had great labor hour management practices.

What are the secrets to successful labor hour management?

  • Empowering crew leaders.
  • Empowering account managers or production managers.
  • Clearly communicating the budget hour expectation.
  • Managing hours daily.
  • Managing the totality of hours — all paid crew hours. Crews incur hours for preparation, travel, on-site work and shop work. Some companies only manage the on-site hours.
  • Refusing to accept excuses for poor labor efficiency.
  • Creating simple incentive plans for account managers or production managers based on labor efficiency — actual hours divided by budgeted hours.

Empowering team members

How do you empower your team members? Consider this example. Recently, we had extended discussions with account managers from two different companies. We showed them reports of actual labor hours exceeding budgeted hours. We showed them the income statement for the green season that showed an operating loss.

Each group of account managers had no idea that their company was losing money in the green season.

They were mad. Why? Because the work was too difficult, and they created too much value for their customers not to generate a profit. What a great response! The account managers at one of those companies made changes the very next week — implementing some of the secrets above. They created significant change in less than 30 days. The proof was in the numbers.

Empowerment requires reliable data presented in a way that’s easy to understand. In this case, the data should reflect all paid crew hours and show actual and budgeted hours.

It’s February. Now is the time for your management team to develop a labor hour management plan so the company can achieve a higher operating profit margin in 2022 and beyond.

Greg Herring

About the Author:

Greg Herring has served as a CFO of both public and private companies. Herring is the CEO of The Herring Group, an operational and strategic finance consultancy. He has significant experience in the landscape industry, where he serves business owners challenged by growth by installing financial dashboards and systems that provide more margin for their businesses and their lives. Reach him at greg.herring@herring-group.com.

1 Comment on "Secrets for successful labor hour management"

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  1. Great article look forward to more..