If you’re a landscaper you have access to a ton of information about how to run a landscaping business from a financial perspective. But if you’re like us then you may feel that a lot of this information is confusing and/or contradictory and/or impossible to actually follow in real life. So in this post we’re going to try to break through all of the noise and highlight the most important operating benchmarks that you, the landscape business owner/operator, should keep in mind when managing your business.
Why Benchmarks
Many other articles attempt to “help” you manage your business by describing expense ratios, or pricing formulas, or dividing cost into intricate categories. We’re not going to do that. Instead we’re going to focus on benchmarks. Why benchmarks? Because they’re simple to remember, they’re the best place to start, they don’t depend on ill-defined categories, and they can provide a quick and easy “sanity check” when you want to better understand the financial health of your business without pouring through reams of financial data.
Simply stated, if your business falls outside the range of these benchmarks, then you’ll really want to understand the reason why, for better or for worse.
“Cash is King”
We start with the most important benchmark of all, the two flavors of revenue. Top-line revenue is the total amount of money your business brings in over a given time period (nominally one year) and, not surprisingly, the basis for all other benchmarks. Bottom-line revenue, or net revenue, on the other hand, is how much money your business generates after all other costs (except tax) have been subtracted.
As we all know, at the end of the day we do this to feed our families. So the most important revenue benchmark of all is net revenue margin, i.e. what percentage of the money that you make do you actually get to keep and take home. For landscapers this figure is typically 5% – 20%, with a consensus at around 8%.
Labor
Let’s face it, landscaping is all about manual labor. That said, it should come as no surprise that labor is the most expensive cost in a landscaping business. Whether you’re a one-man wrecking crew, or you have several teams of workers and an office full of staff, labor is most likely your single largest cost, and therefore an expense you’ll want to try to control.
In the landscaping industry, labor as a percentage of top-line revenue is typically between 25 – 55%, with a consensus average around 35%. For larger businesses, overhead labor (office managers and workers, i.e. those who don’t actually do the leg work) ranges from 11-15% of top-line revenue.
While labor cost is notoriously difficult to reduce (the lowest cost worker is rarely the best worker) you’ll want to make sure your worker cost is in-line with other comparable firms in your geography. You’ll also want to take advantage of very valuable federal tax credits that the government offers for hiring individuals from a certain area or of a certain type (e.g. veterans). These credits are potentially worth thousands of dollars annually and are a traditionally overlooked tax advantage from which all landscapers should take advantage when hiring new employees (but that’s the subject of another post).
Materials
Regardless of your specific flavor of landscaping business, your second largest expense is most likely materials. This is the one cost category that most successful landscapers track and manage very well so we won’t spend much time on it here.
Suffice to say that material as a percentage of top-line revenue is typically between 10% – 20%, with an average of about 15%.
Fuel
Here at FuelCred, the fuel cost category is near and dear to our heart. That said, it also happens to be the most notoriously difficult cost to control, as well as the third largest cost category in a typical landscaping business.
Fuel is the lifeblood of your business, but the cost – outside of traveling long distances to find the cheapest rates – is largely out of your control.
As can be seen in the graphic above, greater than 80% of the cost of fuel is from local/state/federal taxes plus the underlying cost of oil as set by the global oil cartels. It’s no wonder that the cost of fuel as a percentage of top-line revenue ranges from 2-7%, depending on specific geography. Hopefully, for your sake, your business is around the 4% consensus average.
Similar to labor, fuel cost is difficult to directly reduce. The best strategies for managing this cost revolve around carefully tracking fuel cost and, of course, taking advantage of federal/state/local fuel tax credits/refunds. Shameless plug- our app FuelCred can help you do both.
Marketing
Finally, let’s address another often overlooked category which, while it might not be high up on the list of cost categories (many businesses fail to market at all), it’s an important consideration for your financial health. We’ll just simply state that most successful businesses deploy some percentage of their revenue towards smart marketing. Marketing leads to sales which leads to a higher net profit margin. So in this case going above and beyond the benchmark is actually a good thing.
The typical marketing budget as a percentage of top-line revenue is from 1 – 3%. If you’re not hitting this target then you might be doing your business a disservice.
Wrap-up
Whether your business falls in-line or outside of these metrics, you’ll want to take a good hard look and understand the reasons why… and take action accordingly.
