When I owned a landscape company, I made the grave mistake of not paying attention to macroeconomic trends and financial markets. In 2007, amidst the housing market boom, I failed to comprehend the significance behind these indicators. Had I been more vigilant, monitoring trailing building permits as depicted in Exhibit 1, I would have recognized the decline in permit issuance, a leading indicator of housing starts and ultimately the demand for new landscape projects. Instead, I made the misguided decision to acquire trucks, skid-steers and other equipment, anticipating another record-breaking year of construction. This proved to be a significant misstep.
Since this humbling experience, I have dedicated myself to never repeating the same blunder. I developed a comprehensive dashboard featuring key economic indicators presented in a trailing twelve-month format, effectively eliminating seasonality while helping users comprehend the narrative behind the numbers. These resources are available for free when you join boostingyourfinancialiq.com.
I strongly advise closely monitoring essential economic indicators such as the consumer price index (Exhibit 2), which tracks inflation trends, alongside other leading indicators like building permits, new home sales, vacancy rates and national construction spend, among others. By diligently observing and interpreting these indicators, you can make informed decisions, strategically positioning yourself for continued success in the dynamic landscape industry.
Here are steps you can take to remain ahead of the curve.
1. Regularly review and update your rates.
During the busy season, client meetings, bids and managing your team can become overwhelming, but it’s essential to maximize your earning potential within our region’s short 26-week growing period. With so much on your plate, it can be difficult to find time to focus on the numbers.
You may find yourself thinking you’ll address it during the winter when things slow down, but this can create problems. Consider a scenario where you have 100 field employees who, on average, work 2,000 hours per year, totaling 200,000 labor hours. Throughout the season, you may give out raises, experience increased insurance costs and face higher employment taxes. As a result, your hourly rate increases by an average of $2. If you continue bidding projects without adjusting your hourly rate and labor burden, you could end up losing at least $400,000 over the year (a $2 per hour increase multiplied by 200,000 labor hours). That’s a significant loss.
I recommend conducting cost analyses at least once a month, especially in times of inflation. If you don’t have the resources internally, it’s worth hiring an external expert. Additionally, ensure you have current labor rates for different timeframes (six months, 12 months and 18 months ahead) to use when bidding projects in the future. Adjusting your pricing to account for anticipated cost increases is crucial. It’s also wise to learn from successful contractors who are modifying their contracts to address inflation.
2. Negotiate favorable contracts to safeguard your profitability
I recently spoke with several accomplished contractors who have implemented effective strategies to safeguard their businesses against high inflation. Myles Coughran, the owner of Colorado Design Build, has reduced the time bids remain valid from 60 to 30 days. This strategy encourages potential clients to engage with his company promptly while protecting his business from being locked into a volatile cost environment.
Greg Bobich, co-founder of Watermark Landscape and Design, is including escalation clauses in some larger projects to account for potential material cost increases and states in all new contracts that the proposal remains valid for 30 days from issuance. Judd Bryarly, CEO of Timberline One, emphasized the importance of incorporating escalation clauses into proposals and contracts to mitigate the impact of fluctuating material prices.
By following these examples, you can protect yourself contractually against rising prices.
Engage in monthly strategy review (FSR) meetings.
To stay well-informed about your business, I recommend establishing a dashboard to track key performance indicators such as cash flow, throughput, backlog, gross margin and net margin, among others. Think of this dashboard as the instrument panel a pilot uses while flying a plane. It would be absurd for a pilot to climb onto the wing mid-flight to check the landing gear, but many business owners rely on sheer determination and heroics instead of combining data with intuition. In addition, it is essential for you and your management team to regularly review the income statement, balance sheet and statement of cash flows, both on a monthly and trailing twelve-month basis, to eliminate seasonality and identify genuine trends.
To keep your strategy on track, it is imperative to clearly define your strategic problem— the obstacle preventing your company from achieving its purpose and vision. This might be a need to reduce costs because profit margins are decreasing while intense market competition prevents price increases. Once you have a well-defined strategic problem, you can establish focused strategic initiatives that will help your company overcome the identified challenge.
With your financial dashboard, financial reports and strategic initiatives clearly outlined, you are ready to hold monthly FSR meetings, which involve reviewing financial performance and adjusting the strategy accordingly. The most successful companies consistently build, measure, learn and take action to improve performance.
Boost your financial literacy skills
Financial literacy is a crucial skill for individuals at all levels within an organization. I am not referring to being a numbers-oriented person in the back office, but I am emphasizing the ability to interpret key financial statements, comprehend the story behind the numbers and take precise actions to drive greater value.
In the landscaping industry, if you are unaware of the financial drivers that impact your business, your hard work may be in vain. Take profitability as an example. While it is a common approach for business leaders to reduce overhead costs to increase profits, it can actually harm the long-term sustainability of your business if not executed correctly.
Exhibit 3 shows that the most effective value driver in the landscaping industry is increasing prices. But if the perceived value does not exceed the price, customers will not make a purchase. Therefore, it is essential to have a well-developed strategy in place that enables delivery of an exceptional customer experience, high-quality products or services and establishment of a strong brand. On the other hand, failing to adjust your pricing for inflation, as previously mentioned, can have a detrimental effect on profitability. This highlights the critical importance of financial intelligence in running a successful business. |
Read more in this issue of Colorado Green Now:
Meet a new member
Colorado Materials celebrates 25 years
