Financial planning is one of the most important things you can do to keep your business healthy and thriving in a competitive market. But not all plans are created equal.
The most effective plans account for both the expected and unexpected and leave plenty of room to recoup costs associated with business management and operations, delivery of solutions and emergency situations.
There are five categories all annual financial plans should include but that many plans overlook. Attention to each of these five critical areas ensures your business is continually poised for growth, and that it is consistently well prepared to weather any circumstance, event and occurrence that threatens its stability and profitability throughout all twelve months of the calendar year.
What work was sold in the previous year that will result in revenue for the coming year? How much will come from one-time project work, and how much will result from recurring maintenance work? While projected revenue from backlog can’t be truly counted as profit until customers pay, it can and should be planned for and allocated to the parts of your business that rely on it most to keep it operational throughout the year.
Labor is the most controllable cost associated with the landscape contracting company’s operations. There are many factors that impact labor costs, but one of the most critical is how much revenue is absorbed by crews per hour on the job for variables like travel time and site setup and cleanup.
One way to offset and recoup the costs associated with labor is to determine how much revenue the business will receive in the form of sold jobs over the course of the year, how many man-hours will be required to complete that sold work, and how much revenue must be generated per man-hour to recognize a profit.
The goal is to align the expected revenue per man-hour with the number of man-hours you budget in the plan. As a rule, businesses with $1 million in annual revenue should limit labor costs to no more than 20 percent of the overall budget.
Cost of goods sold
It costs money to deliver quality products, services and solutions. Much of that cost is incurred in the form of inventory acquisition, vehicle and equipment maintenance/repair and subcontracted work.
As with labor, cost of goods sold, or COGS, should represent a percentage of overall expected revenue usage in the financial plan. While not quite as easy to control as labor costs, COGS is an equally important consideration when gauging how likely the business is to reach its quarterly and yearly gross profit margin goals.
The reduction of the value of both tangible and intangible assets matters just as much to the bottom line in the landscape contracting firm as events that reflect cash transactions. Both depreciation and amortization affect the overall value of the business, the main factor in lenders’ determination to extend loans and lines of credit to fund its growth.
Paying careful attention to the rate of depreciation of vehicles, equipment and inventory and the rate of amortization of more nebulous assets like patents and copyrights ensures that the gross profit margin is minimally impacted by the value reduction of these assets over time, and that the business can secure financing when it needs it.
Burden includes any costs associated with running the business that cannot be directly related to COGS. Examples of burden include – but are not limited to – select management salaries, facility expenses, certification and licensing costs and other non-billable activities and events necessary to keep the business operational. Clearly identifying and allocating for burden is critical for preserving the business from cash shortfalls that can hinder normal operations and threaten profitability.
While these five often-overlooked components are by no means the only considerations to remember when building a strong, forward-thinking annual financial plan, they lay a solid foundation for a plan that sets up your business for continued growth and success in the coming year and far beyond.
EDITOR’S NOTE: This article was written by Mike Eisenhuth, a former Success Coach with LandOpt, a business that works with independently-owned landscape contractors across the U.S., helping them increase profitability, cash flow and revenue. To learn more, visit www.landopt.com.