Sometimes landscape companies can benefit from a good pruning. Here’s a look at how downsizing can drive profit.

Most of us take for granted that growth is good, whether it’s our nation’s GDP or our company’s annual revenue. Just as we believe that increased domestic production indicates a healthy economy, we often use sales volume as a yardstick to measure the success of our companies.

Unfortunately, this model doesn’t always hold up in real life. More revenue doesn’t necessarily mean higher profits, and it’s not uncommon for fast-growing companies to realize a net loss even when sales are booming. While companies can benefit from putting growth before profits for a time, growth can be risky—especially in volatile economic times.

In fact, there are times when the most profitable option can actually be to downsize.

A tale of two landscapers

The recent recession was just such a time. With sales grinding to a halt, many landscaping companies found themselves floundering. This often led to abandoning the growth mindset and cutting labor and other expenses. Downsizing doesn’t always cure financial woes, as many a company can attest. However, when it is undertaken systematically and with a focus on increasing profitability, trimming operations can sometimes turn a business around.

Neil Bales, vice president of sales and marketing at Lawns of Dallas, recalls his experience coping with the recession. “About four years back, we brought in (business consultant) Bill Arman,” Bales says. “He came in and helped us analyze all of our services. We quickly saw that our tree division was bringing down our overall company gross margin. We decided we could either take a good amount of money and resources to bring it up to our competitors’ margins or we could cut it altogether and focus our efforts on landscape maintenance and irrigation, which we excel in. It’s been great since we did that. We believe it’s better to be excellent at a few things then just OK at a lot of things.”

Following this intervention, Lawns of Dallas increased its gross margin by about 4 points and landed back in the black, which allowed the company to realize its best profits in three years even in a down economy.

A poor economy is not the only trigger that can cause a company to consider downsizing. Rob Scott says being overly reliant on one large customer almost led to disaster for his U.S. Lawns franchises operating in the Dallas-Fort Worth metroplex. “Our largest client, which managed 14 apartment communities, didn’t renew in January of 2014 after being acquired by a larger company,” he explains. “They represented a substantial portion of our revenue mix. We had to make many adjustments, including significant layoffs in production, management and administrative staff.”

Rather than scrambling for more business, Scott took an unusual and gutsy approach that paid off big in the end: He evaluated all of his U.S. Lawns’ remaining clients and gave notice of termination to the least profitable ones. This, of course, reduced the company’s revenue even more. However, overall profitability skyrocketed. The company now enjoys more than $100,000 higher profits despite bringing in $80,000 less in monthly revenue.

Planning by the numbers

These success stories didn’t just happen by accident. They were the result of careful and deliberate planning and decisive implementation.

Bill Arman, landscape business consultant and co-founder of The Harvest Group and Harvest Way Academy, explains that to make more money, a company has to consider both revenue and costs. “You can’t undervalue the importance of revenue. But we usually go after the cost side first,” he says. “Subtracting your direct costs (labor + payroll taxes + insurance + materials) from your revenue gives you your gross margin. Your total company needs to make enough gross margin to meet overhead costs (such as indirect salaries with supervision, administration, sales, vehicles, equipment, fuel and so on). That’s your break-even point. We believe minimum gross margin should be at least 45 percent.” Arman says with that kind of gross profit, a company should be able to make at least 10 percent net profit if it is operating efficiently. “There are three things that will goof up margins: poor estimating, improper markup and inefficient execution,” he says. “We usually find it’s all three.”

How to Minimize HR Heartaches while Downsizing

What is the No. 1 profit killer for service businesses? For most, it’s over-hiring labor. Hiring one extra crewmember at $10 per hour may not seem like it would make much difference, but running the numbers shows otherwise: In over 50 weeks he will cost your company $20,000—and that’s before payroll taxes, workers’ compensation and general liability insurance. That’s a lot of money off the bottom line if it’s not absolutely necessary to have that person. Clearly, managing your operation with a leaner staff can add significant dollars to your bottom line.

Unfortunately, HR costs aren’t just numbers in a spreadsheet. They’re people, with families to support. Letting good employees go is often the hardest thing a business owner will ever have to do. Not only does it strike a blow to the employees who are laid off, but it can depress morale for the ones who remain.

While trimming staff is never easy, here are some tips to help minimize the pain for all involved:

Know your company’s limits. “I think any good business person has an emotional attachment and doesn’t just look at numbers, but at some point you have to draw a line in the sand and say this is our limit as far as labor numbers,” says Neil Bales, vice president of sales and marketing at Lawns of Dallas. Religiously tracking your revenue and expenses will help you base your decisions on economic fact rather than guesswork. This will make it easier for you to do what you have to do with a clear conscience.

Be decisive. If you find your company is in trouble, sit down immediately and formulate a plan. Then follow through. Making the hard decisions and implementing them right away may seem heartless, but it is actually kinder to yourself and your employees than forcing them to endure days, weeks or months of uncertainty and dread. And doing the right thing for your company without delay may even allow you to hire them back sooner than you could otherwise.

Communicate.Let your employees know why you’re letting them go. Show them the numbers if you can. It won’t keep them from being upset, but at least it will help them understand you’re not doing it for personal reasons.

Lay employees off in groups. “It’s much easier to let multiple people go at once than one at a time,” recommends business consultant Tim Berry. “It doesn’t hurt them as much. They understand it’s not an attack on their self-esteem or performance but that it’s a business imperative. No matter how much you tell them it’s not them it’s the business, when it’s one person it’s really tough. The personal cost on both sides is surprisingly less with multiple layoffs.”

Hire temps. When business picks up or you find yourself in growth mode again, don’t be too quick to hire permanent employees. Instead, hire temporary help as needed. It may cost a little more per hour, but you will avoid many HR headaches and heartaches. Many landscape contractors take advantage of the U.S. Department of Labor’s H-2B program, which permits employers to temporarily hire nonimmigrants to fill seasonal, peak-load or intermittent nonagricultural employment needs.

To pinpoint areas where a company may be missing the mark on margin, Arman advocates analyzing the revenue stream to isolate problem areas.

Like so many things in business, proper revenue analysis depends on accurate record keeping and the willingness to crunch the numbers. “My best advice would be know your numbers, know your numbers, know your numbers,” says Bales. “Before we started analyzing our operations, I was doing a lot of guess work, which never allowed us to be our best on paper or in the field. Once we got together with Arman, I started to really see and learn the importance of knowing our gross margin and managing to a targeted goal every year. There will always be challenges in business – both inside of our control and outside of our control – but if you know your numbers well, it’s much easier to adjust your needs and game plans accordingly.”

For Bales, it all comes down to planning. “I created an Excel spreadsheet several years ago that lays out revenue and direct costs per month,” he says. “We have all of our revenue streams broken down in this short one-page budget that accurately tells us what our gross margin will be every month. From there, I can determine what our net profit will be easily off of our fixed monthly overhead.”

Pruning customers for a more fruitful harvest

In addition to accurate tracking and planning, being selective about the customers it attracts and retains can help a company go lean profitably and successfully. Business planning consultant Tim Berry, founder of Palo Alto Software and author of “The Plan-As-You-Go Business Plan,” compares it to pruning a tree. “Many service businesses have a portion of customers who are harder to deal with,” he says. “It’s not uncommon for 10 to 20 percent of a company’s customers to be late to pay, quick to complain and routinely ask for a little more than standard service. It’s hard to cut them because they’re customers and we’re entrepreneurs. You have to take a step back and think of it as pruning. You don’t tell them you don’t want them as customers; instead, you raise prices for those customers. Either they pay more and you don’t mind the extra hassle or they drop out and are no longer customers.”

As Scott proved, this can be a profitable move. By implementing a client review process and eliminating clients who demanded a disproportionate amount of handholding, Scott’s company was able to drastically reduce execution costs and raise profitability.

If you reduce the number of clients you service, it’s important to maximize the value of each customer. One way to do this is to sell more to them. It is far easier to upsell an existing customer on additional services than to land a new one. Increasing the value of existing customers also decreases overhead per dollar of revenue, since you’re already servicing their properties. Some contractors worry they will annoy their customers by offering more services. However, good customers will generally appreciate knowing how you can improve their experiences. Examine your current customers’ needs to find out what else you could be offering that would help them realize their goals while raising your profitability.

Keep in mind the importance of quality works both ways. If you would like to retain the best clients, it’s a good idea to provide the best service possible. “Focusing 100 percent of our energy on client retention for the ones we wanted to keep allows us to provide greater resources and quality to existing customers,” says Scott. For his company, this led to increased customer loyalty and much lower customer turnover. Providing stellar customer service, including not just good lawn and landscape care but excellent communication and customer appreciation efforts as well, can also reduce marketing costs through word-of-mouth.

Looking out for profitability

Profitable downsizing often means cutting divisions or payroll. However, that doesn’t eliminate the need for these functions. Many companies find outsourcing to be an effective solution. Hiring out internal services like payroll or mechanical repair can save a company substantially on the bottom line by allowing it to focus on its core competencies.

Referring non-core services to related, non-competing companies is also an excellent strategy. “We formed a strong relationship with another company who only provides tree services, and we outsource 95 percent of that business to them now,” says Bales. He says it’s a win-win-win arrangement. Both companies benefit from being able to focus on their most profitable services, and the customers love the efficient, quality service.

One more way to benefit from beyond the confines of your own company when downsizing for profitability is to find a mentor who can help you through the process. Whether it’s a business consultant, coach or a non-competing fellow business owner, most successful business people say they benefit tremendously from the outside perspective a mentor brings.

Leaning into growth mode

Downsizing or closing unprofitable divisions doesn’t have to curtail a landscape company’s growth. On the contrary, for those business owners who are interested in growing their companies, creating a leaner business model first by focusing on profitability can create a more robust and resilient company—and ultimately set the stage for unprecedented success.

Anne Michelsen is a freelance writer based in the Midwest. She has been writing about landscape-related topics for four years. To comment on this story, email nwisniewski@mooserivermedia.com. To chat with other landscapers about this topic, visit www.LawnSite.com.