What is your Profit Margin?

Discussion in 'Business Operations' started by landscaper22, Nov 9, 2007.

  1. hoyboy

    hoyboy LawnSite Senior Member
    from Chicago
    Messages: 346

    When small companies become big companies, the growth process forces them to start recognizing their true costs and expenses. For example:

    Both small and large companies have facilities expenses, it's just that the small company may be able to "hide" that expense by running out of his garage. There is an expense in doing so, but because it is not out of pocket then the small operator is misguided into thinking his profit margin is higher. As the small operator grows and needs to move into a larger facility, he suddenly is aware of that expense. It was there all along, he is just now beginning to recognize it.

    Bot small and large companies have management expenses too. When a small operator grows and begins to higher management staff, suddenly he has to "recognize" those costs. Again, those costs were there all along, but growth has forced him to recognize them.

    This same thing happens for many types of expenses...insurance, secretarial, equipment usage, repairs and maintenance, etc. Is it any wonder that small companies so often have a fear of growth? You hear it on Lawnsite all the time: "I'm going to stay small so I can stay profitable"... The key for small businesses is to learn to recognize those costs even before the growth happens. Build it into the cost and pricing model early on so that when the growth occurs they are not "shocked" by all the additional expenses they are suddenly incurring. That way, growth is a positive experience and something to be sought...not avoided.

    And for goodness sake, take an accounting class everyone. Spend the off season learning some basic financial skills...it will be the best investment you can do.

    By the way, purchasing equipment does not effect your bottom line...except for the associated depreciation expense and interest expense. Equipment is an asset, not an expense.

    sorry for the long post.
  2. SwihartServices

    SwihartServices LawnSite Member
    Messages: 154

    Thank you!
  3. YardPro

    YardPro LawnSite Gold Member
    Messages: 3,570

    we will do about 1.2M this year.

    the percentages shoud stay the same as you grow. the margins can get a little smaller, but that only comes from doing much larger jobs, that inherintly have smaller margins.

    we do see dips in out net when we first go through an expansion ( adding a crew). but then the numbers get back up.

    here is an example. For us, one residential crew of 2 men will generate $175k/year. when we add another crew, we cannot just add another $175K/year of work, we have to build it. So we have 2 crews doing only $250K the first year, then in a few years they will be back at the regular volume....so our percentages do drop when you grow. These are referred to as the "growing pains".

    FCPWLLC had it 100% correct in his statement about your salary. You HAVE to pay yourself what it would cost you to have someone else do the job. If your business cannot support this, then you are not making money and cannot grow. How can you hire someone to do your job (so you can move up to administrative, etc.) if it cannot support paying for that position.

    the other reason for separating your personal income and business profit is to see whether or not the BUSINESS can support a purchase. If you need to buy a truck and the payment is $600/month, does your business have $600/month left AFTER you get paid for your work? If not then YOU will be buying the truck, and this is a problem. This means your pricing structure is off, and you need to determine how to increase your net.
  4. YardPro

    YardPro LawnSite Gold Member
    Messages: 3,570

    the reason people say they make less as they grow is exactly as stated by hoyboy.

    i also agree with his statement that people should take accounting classes. You can be a great landscaper that understands only a little about business and you will probably fail,

    BUT... you can be a great business person that understands only a little about landscaping and you will probably succeed.

    remember this is a BUSINESS first and foremost.. we are a business that provides a service, we are not a service that is in business.

    I see a lot of guys spending a lot of energy and time discussing and researching what mower to buy, or how to modify their trailer, but they should be spending their time and energies on the business aspect of landscaping... it will benefit them much more
  5. landscaper22

    landscaper22 LawnSite Senior Member
    Messages: 852

    Thanks Yardpro...That really helps! Now I do consider myself to have a good business mind so to speak. This may sound bad, but providing lawn service is not a passion at all. But I have always considered myself a business owner that provides a service, as you stated. My job is to see to it that the service gets completed properly. What ever it takes to do that, I have to do. Do I enjoy working in the hot summer with sweat burning my eyes....NO! I enjoy making money. I enjoy working with computers, talking to customers, being creative, etc...Most importantly, I enjoy working for myself.

    There was a thread that someone started a week or so ago..something about how important is your knowledge lawn care to the success of your business and how important is it to your customers. Well, it's important. Sure! But you can have all the turf management degrees in the world...But if you don' t put your business management first, you could still fail. My point was if you understand 1-I need to make money 2-I need to listen to my customers' needs 3- I need to be dependable 4-Do the best job I can even if I don't always know every detail about the job. If you do those things you will not fail. The knowledge comes with time. If you screw up in the meantime, just make it right. You can't go wrong that way!

    Now I do have a B.S. in business administration, with a concentration in Finance. I have had accounting classes. Did I learn much? Not really. The basics, yes, but now remember my last accounting class was about 11-12 years ago. I was young, and to me going to college directly out of high school was a waste. I was suffering from burn out, and at that age, friends and social life are too important. But I do understand business management...I don't have accounting down too well, but that's because I'm not an accountant, and have no desire to be. I understand how to make money. I worked in a management position for 4 years prior to starting my LCO. I know how to keep track of numbers and how to make sense out of them.
    But every day, even while I am riding my Z around, I am constantly thinking of new things I can do to grow my business. Now when I first started this business 5 years ago, No one helped me at all with information. You learn fast though. You tend to learn form your own mistakes more than anything else. I think the info I have picked up from this thread has been a huge help. I hope some of these new guy and girls to the business take this thread to heart. Again, I may not have asked exactly the correct question to start this thread, but it led to some great thoughts. I still don't think I was totally wrong in stating that my profit margin is at 59%. Is that actually a true profit margin? I don't know. But I do know that only 41% of my gross has been spent on business related expenses as of the end of October. That includes everything except my salary. And since I am a sole proprietor, the remaining 59% of my gross would be considered my taxable income. My goal this year was to spend only what I had to in the business and see how much I could actually make my business. Not too bad.....Anyway sorry for going on and on....but thanks again...and good night!
  6. txgrassguy

    txgrassguy LawnSite Gold Member
    Messages: 3,083

    I am only at 10% this year despite record numbers and growth.
    Of course my $250K divorce bill might have an impact on these numbers:(
  7. theturfboss

    theturfboss LawnSite Member
    from Indiana
    Messages: 47

    These are the kind of discussions that will make us all better. If only we spent more time running our business and learning true business practices... Here is how I define profit:

    If I were to purchase the business, keep everything in place (workers, managers, rent, etc.), and not doing the work myself, how much is left over to put in my pocket at the end of the year as the owner. Anyone doing work for the business is a cost, which is expensed out, even the owner.

    I think the smaller LCO's tend to have a some what jaded view on how much money they or their company is making. Most guys who run out of their garage do not count a few expenses that the rest of us have dedicated line items for. It is easy to make money when you only consider the cost of the work. From reading post on this site for a while, it seems like the biggest misconceptions are...

    1. LCOs that operate from their house or garage do not have a rent expense, or do not charge the company the going rate.
    2. Many use their personal vehicle for company work. Splitting expenses between personal and company do not give a true reflection of cost.
    3. Insurance is a big one. Whether it be auto, liability, workers comp, insurance on your facility, etc. Many do not carry the right commercial policy, again hiding the true cost.
    4. Payroll is also big. Paying cash, not paying taxes, not using workers comp, etc. are illegal. Many pay workers as subcontractors when they should be paid as an employee, which is more expensive.
    5. How many people purchase equipment personally? The company pays them back im sure. Do they charge the going rate on interest loans?

    These seem to be few of the big expenses that small LCOs or single man operation do not count toward the bottom line. Its been said before, but comparing apples to apples in very important. Just my 2 cents.
  8. GreenT

    GreenT LawnSite Fanatic
    Messages: 42,962

    This is, without a doubt, one of the most intelligent threads on this site in a while. Thank you all that have posted.

    Agreed. another peculiar thing I see all the time on this site is this belief that getting rid of customers is something to be celebrated. My opinion is that as long as an account is profitable and current, it is my responsibility to take care of it and not loose it.

    I don't subscribe to the view of customers as PITAs, in fact I hate that word. All it means is an uneducated customer. Yes, some can be difficult but, we are also are a service business and like it or not the key word is SERVICE. Some LCOs run their operations like some small kingdoms where they have the privilege to "fire" customers.

    I have over 30 years of management experience with some of the largest corps in the US and know for a fact that a business is not viable long term unless it's growing. In our case that equals to customers AND profits. I have never seen any business succeed by decreasing their number of accounts and increasing their gross. By that rational, ideally you would end up with one account paying you 1 mil a year.

    Sorry, it don't work that way.

    You don't even have to take a class. There are some inexpensive books on basic accounting that are written so anyone can understand. There is also the internet, public libraries, etc. All it takes is the desire to better yourself and move forward as an educated business owner.

    Anyway, so that everybody is on the same page, the definition of profit on any given accounting period is:

    TOTAL Income minus TOTAL Expenditures = Net Income (profit)

    Again, thanks to all that have posted. Very enjoyable reading.
  9. wski4fun

    wski4fun LawnSite Senior Member
    Messages: 323

    How does one run a true business by taking home everything that is left over after expenses? How do you buy new equipment? If it comes out of your personal savings then you have stated your actual earnings wrong. The companies profit has to be after you take your cut otherwise how do you figure your own finances let alone the business'. I think the bigger a company gets the more you have to fine tune the money management. Being solo or having a helper, maybe you are so close to the money coming in and out that you do not need to track it very closely. Just remember that ten dollars here ten dollars there adds up. There are two ways of making more money. One is to make more, the other is to save more.
  10. wski4fun

    wski4fun LawnSite Senior Member
    Messages: 323

    Large companies get rid of customers all the time. If you can get rid of one bad customer that takes up more time then a new good customer then in essence you have created a higher rate of return. A company can only have so many problem customers otherwise you spend to much time on a few and start losing the good ones. Large companies know that they won't get everyone so they go after what they think will make them the most money. Some companies spend more on advertising and forget about customer service because the company will hopefully make more by name branding. Other companies spend a ton on customer service and hope to grow by reputation. Both companies know that by doing a certain style they will lose out on some customers. If they had to cater to every individual customer inevitably some take up more resources then they are worth and become "pita". I have found more profit in the small lawns where people are not to concerned when or how it gets done. I do a decent job, charge a fair price and my customers are thrilled with the work I do. I have no headache. I could charge more for the premium lawns but then I am stuck catering to a customer with other challenges which are not worth it for me to deal with. Many maintenance operations are the exact opposite and would view my customers as "pitas" Sorry, a little off topic. Sitting around and bored waiting for the leaves to fall.

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