Most businesses would choose a $100,000 job over a $20,000 job without hesitation.
In theory, the value from the $100,000 job should be five times more, but this isn’t always the case. By analyzing our profit-to-labor ratio we’ve discovered that sometimes taking the $20,000 job yields greater profits—six times greater profits in our case.
The process of analyzing your business’s profit-to-labor ratio is simple, yet the results could drastically alter your profits for years to come. You’ll know which jobs are worth your time and which ones to avoid.
The underlying principle when analyzing profit-to-labor ratios is to make the most amount of money in the least amount of time.
To outline this process, we’re going to borrow an acronym from the medical field: ADPIE. This method is used to diagnose and treat patients, but today we’ll use it to help you remember how to determine your profit-to-labor ratio, no matter what landscaping niche you’re in from lawn care and hardscaping to sports field construction and everything in between.
Your landscaping company is unique. You have unique employees, unique equipment, unique experience. All of these factors affect the time it takes you to finish a job.
For this reason, your employees need to record the amount of time they spend on every job. TSheets is a great time-tracking service that your employees can download onto their phones. It integrates well with QuickBooks, Gusto, and other apps, allowing you to know your exact labor costs for every job you work.
Figuring your labor costs for each job is essential to determine what jobs make the highest margins. If you haven’t been doing it in the past, start now to accumulate enough data to see trends.
Once you have data, you can determine your ratios by moving on to the step below: diagnosis.
While the D in ADPIE in the nursing world is diagnosis, a more relevant term you can use here is to determine.
For each job, calculate this ratio: How much you make on a job (profit margin) / How much you pay in labor (total labor costs)
Let’s look at two examples:
Job #1: You made $5,000 and paid $2,300 in labor costs. Your ratio is 2.17
Job #2: You made $2,000 and paid $300 in labor costs. Your ratio is 6.67
Once you have a few months’ worth of data, categorize the jobs. Mulching, weeding, mowing, aerating, and fertilizing are effective categories. If your jobs often involve several of these activities, you could categorize by the size of the job.
However you do it, the goal is to divide up the jobs in order to recognize trends. Average all the jobs in each category to find the average ratio. For example, if you have 47 jobs in the fertilization category, combine all 47 ratios to get an average ratio for fertilization. You’ll be able to say, “Okay, this is how much we make on fertilization jobs.”
The next step is to analyze these ratios and plan which jobs to bid for in the future.
So, you have all your ratios ready to go. Now you must decide what range of ratios you’re willing to work with. To do this, consider the demand in your area. If you find yourself swimming in an overflowing pool of job opportunities, you can afford to be picky. On the other hand, if jobs are scarce, you might need a wider optimum range in order to stay profitable.
Consider our examples from above. Job #1 had a ratio of 2.17. Job #2 had a ratio of 6.67.
If those job ratios were actual averages for their categories, obviously Job Ratio #2 is a better choice. It’s three times more profitable that Job #1. You would want to seek out jobs like Job #2 and avoid opportunities to work Job #1.
When we implemented this process, we found jobs that were six times more profitable than other types. Now, we focus our marketing and bidding efforts on those high-profit jobs. Every landscape company is different, and there is no golden ratio, but every business owner is more than capable of analyzing their own numbers to decide the optimal ratio for their circumstance.
Once you have your plan, the next step is to implement it.
Focus on the categories that yield the best results. At first, you might think you’re limiting yourself, but in reality, you’re adding value to your business. You deserve jobs that actually make you money. You deserve to make the most out of your employees’ time.
After you’ve implemented your plan, take the time to evaluate and modify it if you aren’t getting the results you want.
Your optimum productivity range isn’t set in stone. The best way to know what works for your business is to try it out and evaluate afterwards. As a general rule of thumb, the more skill or equipment required for a job, the higher the profit ratio will be.
Have you found enough high-profit jobs? If not, you might need to expand your range. Maybe in the summer, you can afford to be pickier, but in the winter, you need to take whatever jobs you can find.
Are you effectively narrowing your job possibilities? Are you making more money than before? If not, you might need to narrow your accepted ratio range to exclude more jobs.
Adapt this strategy to fit your company. It’s flexible. It’s relative. That’s what makes it so effective.
Let’s end by emphasizing the quote from Charles Darwin:
“A man who dares to waste one hour of time has not discovered the value of life.”
Again, that is the underlying principle when analyzing profit-to-labor ratios. Time is your most valuable resource.
When your company uses every hour wisely, it will transform into a highly-profitable business complete with efficient employees and satisfied customers. That’s the end goal, isn’t it?
EDITOR’S NOTE: This article was written by Jamie Davidson, lead content developer for Sports Field Solutions, a sports field construction, renovation, and maintenance company based in Dallas, Texas.