This is a landscape contractor’s top employee compensation concern.
“Each week, the owner is sweating bullets to see if he can make payroll,” explains Ed Laflamme, industry consultant with The Harvest Group. “Landscapers are even known to take cash out by using credit cards since they don’t have lines of credit with their banks, especially when they are smaller, to ensure they make payroll. As they continue to do this, the debt and lack of cash flow can become a huge problem.”
Why? Because wages and compensation make up quite a bit of a landscape contractor’s business—roughly 30 percent of the average company’s gross sales, according to Turf‘s Compensation Survey.
In fact, wages and compensation are a considerable part of a landscape business, no matter if it’s maintenance or design/build-focused. Wages and compensation make up about 28 to 32 percent of revenue in maintenance-focused businesses and 10 to 15 percent of revenue in design/build businesses, Laflamme says. The use of more materials tends to impact the percentage for design/build businesses, he explains.
When it comes to paying wages timely and consistently, “cash flow is king,” says Terry Delany with Davis+Delany, an industry consulting firm specializing in employment issues.
Having enough cash to cover payroll is a must for any landscape business. This is why many small business owners start out working a job while building their businesses simultaneously. While the split focus can make it difficult initially to grow a business, running out of cash to pay employees makes growing a business impossible.
Many issues involving cash flow can impact payroll, including pricing, estimating and billing, Laflamme says.
But landscape contractors have options. When cash flow is tight and a landscape contractor’s ability to meet payroll is compromised, there are things he or she can do to put the business in a better place financially.
Know your numbers
Regularly reviewing profit-and-loss statements can give contractors very clear pictures about revenue, costs and expenses in their businesses during specific times, including determining cash flow available to repay existing debts, finance additional debts or reinvest in their companies. These records provide information about a company’s ability—or lack thereof—to generate profit by increasing revenue, reducing costs or doing a combination of both.
In other words, a profit and loss report highlights where the business is succeeding and where it’s struggling. It can help gauge financial health and give owners insight into whether they are pricing jobs correctly to ensure profit. And profit is what enables contractors to reinvest in the company and grow.
The problem? Contractors aren’t reading their profit and loss reports, Laflamme says.
In fact, USA Today listed “Check your financial statements regularly” as one of the top 10 strategies for small businesses this year—a basic but essential goal. “In the crush of work—or from the fear of finding out bad news—many entrepreneurs hesitate to look too deeply and regularly into their financial reports: profit and loss, cash flow, aging accounts receivable and payable. Every week, perhaps on Monday or Friday, spend at least 30 minutes reviewing your financials,” suggests Rhonda Abrams in USA Today. Abrams wrote the book “Successful Business Plan: Secrets & Strategies.”
“When I work with a business, I can usually uncover their cash flow problems by looking at their profit and loss statements,” Laflamme says. “In one instance, I figured it out within two hours of my visit. This particular contractor wasn’t billing correctly; she wasn’t including her travel time to jobs sites or load and unload time. Once it was corrected, she went from zero profit to $50,000 net profit over the next 12 months.”
In general, a profit and loss report is split into two sections: revenue and expenses. Revenue lists the details of all income from your primary business activities (service sales), any revenue from secondary activities (bank interest) and other financial gains. The expenses section lists all expenditure on primary activities, such as material and labor costs, in addition to any other expenditures.
Total sales is the most important part of the revenue section. Sales should increase since the previous profit and loss report, reflecting a healthy business. Breaking sales down into different services can help you see which services are performing well and which ones need more attention.
In the expenses section of a profit and loss statement, there are two main sets of figures: cost of goods sold (cost of direct labor and any materials used to offer services) and operating expenses (cost of indirect labor and any other costs not directly linked to providing your services). Businesses are always looking to reduce costs. For instance, a supplier that offers better deals on equipment or materials could help bring down cost of goods sold. Operating costs are a little more challenging to reduce. For instance, an owner can’t bring down his or her compensation bill without reducing number of employees, which may not be possible. Checking a profit and loss statement for unexpected spikes in costs versus gradual increases (such as inflation-based increases or annual employee pay raises) is a good idea.
A few key figures can help owners get a better gauge on a landscape company’s profitability.
- Revenue – cost of goods sold = gross profit. This is a key figure for setting prices and budgeting sales targets.
- (Gross profit divided by revenue) x 100 = gross profit margin. This figure shows what proportion of gross profit a company keeps from each dollar of revenue generated. For instance, 10 percent of gross profit margin means a company keeps a gross profit of 10 cents for every $1 of revenue generated.
- Gross profit – operating expenses = operating profit. This figure reflects the profit generated from a company’s core operations and does not include EBITA (earnings before interest, taxes and amortization).
- Operating profit – (taxes + interest) = net profit. This is the bottom line – total amount earned or lost after paying all expenses.
Make payroll changes
There are three ways companies pay employees: weekly, biweekly and monthly.
If a business currently pays employees weekly, switching to biweekly pay can save them some time, money and hassle.
First, paying less frequently reduces processing time, which includes factoring regular and overtime wages, salaries and any additional compensation, if applicable, as well as payroll taxes and voluntary deductions. Depending on the size of the payroll, this can add up. Paying employees biweekly versus weekly reduces time spent processing. It can also save money for those companies who use a payroll service provider, since they charge for additional processing. Reducing the number of times a month employees get paid also simplifies the paper trail, reducing the overall amount of paperwork.
Delany switched from paying his employees weekly to biweekly at GroundSERV. “It doesn’t sound like much, but when you have a number of employees, it cuts down on office overhead,” he says.
Improve accounts receivables
Landscape contractors answering Turf‘s Compensation Survey listed slow accounts receivable as the No. 2 headache they deal with in paying employees. And in Turf‘s Green Industry Guide survey conducted in February 2015, 32 percent of contractors listed getting paid on time as a business issue that keeps them up at night.
One of the quickest ways to access cash, of course, is to expedite the collection of receivables or late payments.
Caron Beesley, a Small Business Association contributor, suggests the following “soft-approach” strategies to start with for collecting or pursuing client debt.
- Rebill overdue bills immediately. As soon as the first bill is past due, rebill promptly as a gentle reminder. Alternatively, send a monthly statement with the amount owed (with interest) clearly labeled as past due.
- Connect with accounts payable. Check whether the invoice was received and if you can help in any way. Maintain a steady and friendly relationship. Obtain a verbal agreement confirming when the payment will be made. Follow-up over email confirming the conversation and maintain a paper trail.
- It’s OK not to apologize. Stick to your guns and don’t apologize for chasing payment. Also, don’t consider bargaining, despite the empathy you feel for a client who is struggling financially or otherwise.
- Incentivize. For customers on extended payment terms, offer an incentive (percent discount) for payments sent immediately.
Once invoices run past due more than 60 days, consider offering a payment plan or working with an attorney to issue a demand payment letter or file with a small claims court.
Sometimes, walking away from bad clients or client contracts is the best thing an owner can do for his or her business. Delany learned this with one GroundSERV client.
“As we were waiting for checks from this client, we’d have to borrow money to make payroll,” he explains. “After looking at our numbers, we found we were paying 7 percent to borrow money but we were only making 5 percent on the job. We realized it didn’t make sense. So we let that client go.
“If you don’t know your numbers, you can see how you might not know it’s a losing game you’re playing,” Delany continues. “By figuring out we were actually paying 2 percent to do that work, we realized we couldn’t afford it. If you don’t job cost or don’t understand cash flow, you’ll fall into cash flow problems like this and you won’t be able to pay your people.”
Sure, letting go of customers is tough, but “you want winner clients,” Delany insists. “You don’t want to spend your hard-earned money and time on loser clients. If you are losing money and spending 90 percent of your time on these clients that are on the low-profit end of the spectrum, that could be costing you dearly.” (To purchase a copy of Delany’s book “Know Trust Love: How to Attract and Keep Only the Best Customers,” go to www.davisdelany.com.)
The bottom line: know your numbers. “The owners who review their financials regularly are the ones who don’t have cash flow problems and have nice profit margins,” Delany says. “And profit margins are what get reinvested to fuel growth.”