By David Gallagher
Historically and generally speaking, there has never been a bad time to be a lawn and landscape contractor. Where most service industries are growing at a meager 1 to 2 percent, the green industry has charged along at about a 10- to 12- percent growth rate. Certainly, it’s difficult to complain about the state of landscaping as a whole.
But working in a healthy industry, where there continues to be a high level of demand, hasn’t necessarily allowed contracting companies to experience optimal success. As providers of a business operating system for landscape contractors, every day we at LandOpt see firsthand that the good times have led to an unusual side effect – most contractors don’t follow formal business practices. The kicker is, they can usually get away with it.
It’s because they’ve gone for so long without formal practices that contractors are resistant to the idea of change, even when doing so will likely result in greater profitability. Ultimately, however, every green industry service professional has a critical question to ask: Am I a contractor who reluctantly became a businessperson, or am I a businessperson who chose contracting as an economic opportunity?
There are plenty of people in the green industry who are content to work hard and hope that things continue to work out, from a business standpoint, year after year. For those who want more assurance that they can successfully grow and sustain their companies, putting together a logical and structured annual plan is a must.
Part of the reason many contractors have never created a focused annual plan is fear of the unknown. While there are many industries that rely on estimates and projections to function, the green industry has generally been averse to forecasting and planning. Many lawn and landscape pros tend to “wing it” rather than take the time to gather hard numbers and look them in the face.
Even companies that recognize they need to begin managing on data rather than emotion may not be prepared for the pain involved with making a real change. Everyone has a tendency to revert back to what’s familiar and comfortable, so staying committed to a long-term plan is easier said than done. But, as difficult as transformation can be, a contractor who remains dedicated to the plan is more likely to experience ongoing success.
The first step in formulating an annual plan is evaluating the current state of the business. Even companies that say they’re “doing great” often don’t have measurable numbers to quantify their claims. Other times there is short-term success that is well defined, but they are not growing consistently over a given period of time. It’s critical to conduct an objective diagnosis to find out what, if anything, is ailing a company before applying any modifications.
Contractors know how to maintain turf or build a landscape feature, but might need help identifying problems with the financial aspect of their businesses. That’s where companies that specialize in implementing and supporting business systems and processes for contractors can impact a contractor’s success.
There are a number of accepted business models for green industry contractors that offer suggested revenue allocations for various aspects of the company, including labor, equipment and facilities.
For example, a contractor may earn enough revenue to support a $100,000 facility, but this particular contractor happens to place too much importance on maintaining a building worth $1 million. Goals for this contractor could be to earn more to justify the existing facility or find a more sensible alternative. Either way, something needs to be done about the disproportionate cost of the facility in relation to the rest of the business.
Another area of evaluation is to look at how business has gone over the last couple of years. This provides a general understanding of the level of success the company is capable of, while also providing the opportunity to identify areas of weakness that can be improved. A previous year can be an excellent indicator of what will occur if the overall energy is kept constant; however, prior years do not establish limits on what a company can become in the future with more focus and effort.
Abraham Lincoln once said, “The best way to predict your future is to create it.” That concept certainly applies to the annual planning process. When forming an annual plan, the goal for the contractor is to create a vision of the future that he wants for his business, and then put pen to paper and draw out the creation of that future in practical terms. Having a dream is a great thing, but driving that dream with metrics and data is the only realistic and responsible way to make it happen.
Making that happen requires a long-term plan, a three- to five-year strategy that will act as a guide and dictate certain areas of growth that must take place on an annual basis. Each year’s plan should be much more detailed and budgetary, beginning with the sales and revenue plan – the revenue portion accounting for existing work under contract, and the sales portion projecting new business.
Far too often contractors have only a vaguely defined hope that revenue will be higher than the previous year, rather than a clear expectation of where new revenue streams might originate. Generally speaking, contractors are not accustomed to proactively driving the sales process. When done properly, however, sales actually can and should be conducted in a predictable manner.
That’s a difficult concept to accept for contractors who primarily rely on current customers for additional business or referrals. The contractors must either establish weekly goals for themselves or the salespeople to tap into the full potential of the market. These goals typically involve conducting a predetermined number of introductory meetings on a weekly basis.
By constantly getting in front of new faces, salespeople can systematically work their way from introductions to proposals and eventually to signed agreements. Sales is the biggest catalyst in growing a company, and owners must have a process that proactively and consistently generates business.
An overall annual plan estimates the net profit by applying forecasted expenses against the income represented in the sales and revenue plan. Examining these numbers in the evaluation phase can sometimes cause a stir. For example, a contractor’s labor may add up to a higher-than-normal percentage of his direct costs; however, this contractor feels that he’s light on labor help and doesn’t want to make any cuts. In the annual planning phase, that same contractor can leave his labor force intact by selling his work at a higher rate, which will balance out that labor percentage.
Price increases are not the best way to make friends with customers, but pricing must adequately cover a contractor’s costs of doing business, also known as burden. The planning process should include a look at the annual cost of owning and maintaining equipment and vehicles, which involves spreading the total cost of ownership of each item over its anticipated life cycle with the company.
Labor burdens for hourly employees include everything from direct wages to benefits to vacation time and even training. Departmental burdens also come into play. Recurring services by the maintenance department and one-time services by the project department, along with their respective management and material costs, should each carry their own budget.
In addition to assisting in plotting out sales goals and other implementations that can facilitate growth, the annual plan can also reveal important facts about current resources. For example, if the ideal average revenue per labor worker is $100,000, but a contractor finds each laborer is actually generating $110,000, it could be a good indicator that he can afford to hire another employee. On the other hand, if the average is just $80,000 per person, the contractor can feel comfortable getting more out of what he already has.
Contractors who have never tackled the annual planning process may find the task intimidating. For those who are willing to make a change, assistance is available from companies like LandOpt – service organizations that form long-term relationships with a contractor to guide planning processes and provide daily coaching, usually over a multiple year time period. Once an annual plan has been developed, a contracting team must take responsibility for managing that plan and making it a reality.
A big part of this involves monitoring actual results and comparing those numbers against what was planned, and then understanding if or why there’s a difference. By constantly monitoring progress, a contractor has the ability to react and make adjustments to ensure the plan becomes a reality.
Preliminary results may fall short of expectations, but it’s also possible to see that business is going better than anticipated, which allows the contractor to bank the additional income for future allocations should business slow or even out over the course of the year.
In other words, working a plan requires the motivation to boost efforts when revenues are dragging and the discipline to not get carried away when things are looking up.
Successfully executing a financial plan routinely leads to growing profit margins, but it can also have nonfinancial advantages, for example, a company owner may be able to reduce the number of hours he has to work each week. Following a plan also minimizes the stress of wondering how and where revenues will come from.
While increased profits are the most immediate benefit from developing and sustaining an annual plan, there actually is a lot more at stake. The green industry continues to evolve, maturing into a more competitive environment. It’s only a matter of time before aggregation of currently duplicated services will begin.
By practicing and perfecting accepted business systems and processes in order to formulate a plan on an annual basis, contractors can empower themselves to defend their turf in the marketplace for decades to come.
EDITOR’S NOTE: Gallagher is the Director of Success for LandOpt, a business operating system that incorporates components of technology, processes, systems, and professional development to help landscape contractors increase their profitability.