Wednesday, July 23, 2008

Business - Some Keys to Profitability I

This is the first in a series on some keys to profitability for landscape and turf management businesses. This first installment focuses on knowing operational costs.

By knowing and evaluating costs associated with operating your business, you can determine those areas that are eating into profits. Key operational indicators are:
  1. The ratio of applied/unapplied labor. In your business, the more labor that can be charged directly to a job, the more potential there is for profit. Labor activities such as cleaning up your shop or yard area, handling and maintaining inventory, maintenance, and trips to get supplies, while necessary (especially maintenance), cannot be recovered directly from a specific job and must be recovered in overhead. Overhead costs are often much harder to determine and may not get charged properly. In addition, the amount of time spent on a specific job in the actual work associated with the job rather than travel, organization, getting started, and ending a work day goes to the efficiency of your work crews. Another point is how efficient is your labor force in getting a job done. Do you have too many or too few employees for a given job? Too many leads to a lot of down time and standing around waiting to do something, too little will over-stress crews and often leads to jobs taking longer than desired thus reducing profits.
  2. Applied materials and material variance. Being able to track all materials that go into a job and charge those to a job is critical. One of the killers to profit is waste - using too much materials (such as mulch), throwing away excessive materials, or having a lot pieces or remnants that cannot be used elsewhere or must be reinventoried would be examples.
  3. Straight time to overtime ratio. Overtime, while sometimes necessary, should be a rare occurrence. If you are paying a lot of overtime, you need to hire additional employees that can be paid straight time. Excessive overtime eats into profits.
  4. Revenue per production employee. This is a measure of just how efficient you business is. If revenue per employee is low, you have too many employees, you have too much inefficiency in your work and jobs, or you have employees that aren't pulling their weight.

Gordon Johnson, Extension Horticulture Agent, UD, Kent County

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