This message may be offensive to owners of lawn and landscape companies because it reveals the truth about money, profits, and landscapers’ misunderstandings about money and profits.
I’ve discovered three big lies about landscaper’s profits. I’ll reveal the components of each lie below…and I’ll help you understand the truth about landscaping profits along the way.
Disclaimer: I don’t provide tax advice or legal advice. Nor do I work for the IRS. I’m sharing what I’ve found while working with over 300 lawn and landscape business owners.
I have a really fun job! In 80% of my cases, I help lawn and landscape contractors increase profits and personal income. It’s very rewarding to see profit improvements. But in 20% of my cases, the contractor is already making good money. But they don’t understand why they are having so much financial success. They hire me to help them better understand their costs and their profits. I enjoy my work!
My goal in writing this report is to help you have a better relationship with the money you control as you travel down the road to become The Wealthy Landscaper in your town.
- High Profit Lies
In high-profit cases, the landscaper is often confused about money. He states that his NET PROFIT is 30% percent or more. Profits are often overstated for one or more of the following reasons:
- The owner is NOT paying themselves a salary for doing the job of managing the business, running the crew, or working in the field.
- The owner is NOT paying their spouse (or children) a salary for working in the business.
- The owner purchased equipment with personal money, so the expenses for equipment are not properly recognized in the income statement or balance sheet.
- The owner has NOT paid themselves important benefits like health, disability, or life insurance.
- The owner has NOT contributed to a company sponsored retirement plan.
- The owner works out of their home and has not attributed any expenses to cover the costs of an office, storage facility, or shop.
- The owner has not complied with government mandates for providing employee benefits like social security, Medicare, unemployment, or worker’s compensation insurance.
- Equipment or facilities have been paid for and fully depreciated so there is no depreciation or interest expense being recognized on the income statement.
- This one may surprise you the most. But I’ve sure found this one over and over again. The business owner AND accountant have done a poor job with tax reduction strategy. As a result, they suffer with very high tax bills.
Large profits are highly desirable. But hear me…A net profit that can’t be predicted, explained, or repeated is nothing to brag about. On the other hand…Profits that are predictable and accurately account for the real costs of doing business make a company very valuable.
Predictable profits are the foundation for every Wealthy Landscaper. 😊
- Low Profit Lies
In low profit cases, the landscaper has been creative in hiding income or overstating expenses. Some of these practices are intentional and could be found illegal if discovered in an IRS audit. On the other hand, some are considered best-practices and 100% legal. Many landscapers think they MUST report low profits to avoid paying high taxes. ☹
My goal is NOT to pass judgement on you or your company. In fact, there are times when a good company has NO PROFIT – NADA – ZILCH – THEY ARE IN THE RED. But that’s no place to hang out. Profit is required for sustainable companies. I’m here to help you better understand money and profit.
Here are examples of how landscapers hide income and overstate expenses:
- The owner does not report cash payments. The cash goes in their pocket and never finds it way onto the income statement.
- The owner accepts payments for “trade outs”. This is also known as “exchange of services”. The owner may acquire business equipment or personal services instead of money. Again, the income received never finds it way onto the income statement.
- The owner decides to defer end of the year invoices until the next tax year. In other words, they defer income.
- The business liquidates excessive equipment assets, but the sale of these assets are not recognized on the income statement.
- The owner or owner’s families receive services directly from the company but does not pay the company for the services.
- The owner accelerates payables and recognizes expenses well ahead of the due date.
- The owner pays personal expenses out of their business bank account.
- The owner pays expenses for outside investments out of their landscape business bank account.
- The owner takes an excessive salary for themselves or family members.
- The business pays excessive amounts of rent or lease payments for owner-controlled assets.
- The company is taking full legal advantage of a non-cash expense like depreciation.
- The business has excessive dirty debt from past years, leading to higher than normal expenses.
- The accountant helps the business owner with creative accounting techniques like loans to or from shareholders for tax reduction purposes.
According to a recent report by the National Association of Landscape Professionals (NALP), the average net profit of the member companies in their survey was a measly 2.3% of gross revenue. This means that a company who generates $1,000,000 in revenue reports $23,000 in net profit. That’s pitiful! In fact, 2.3% net profit is an inadequate return for the risk you assume as a business owner.
My goal is to help contractors learn the business skills required to earn net profits at least 5 times the national average. You’ll find yourself earning healthy profits AFTER your salary and benefits package.
Your goal should be to INCREASE PROFITS year after year. As you do this, your company becomes more and more valuable. And, it’s okay to pay income taxes on profits. If your company and tax plan is set up right, you’ll lower your tax liability along the way. Don’t accept low profits as a way of life. Raise prices!
Now, it’s time to address the biggest profit lies in the lawn and landscape industry…
- Job Profit Lies
High profit or low profit, we are talking about what the Income Statement tells you about your company. Think of your Income statement as a summary report of all the jobs you’ve completed over the week, month, quarter, or year. It’s an important report card.
You may be surprised by this statement, but of all the lies landscapers tell about their profits, the most dangerous lie of all is a DAMN LIE about job profits. Here’s why I call this a DAMN LIE.
Job profit lies destroy companies faster than high profit or low profit mistakes covered elsewhere in this report. Regardless if the LIE is an error of omission, an unintended math error, or poor record keeping, job profit lies are DAMN LIES. That is…your company will be DAMNED if you let these LIES live.
Hear me…everything that happens inside your company is subservient to how you price your jobs. I’ve NEVER met a company with sustainable profits that can ignore the income statement of each and every job performed. Some call this job costing. I like to call it the success key to the birth of a Wealthy Landscaper!
Here’s how some landscapers LIE about individual job profits.
- Ignorance – Some landscapers don’t do individual job costing at all. They never know for sure which jobs are profitable and which are losers. They think the Income Statement tells them enough about their profits. In other cases, they have never taken the time to analyze profits on a job by job basis. The good news is that you can choose to start tracking job costs right away.
- Not Tracking Labor – Labor is the biggest expense in most lawn and landscape companies. Even more important, labor is the biggest RISK in landscaping. Companies that fail to track labor on an account by account basis are unable to manage labor efficiently and adjust prices fairly. Companies who track labor have an advantage in the marketplace. They can raise prices or lower prices to achieve fair profit levels.
- Inaccurate Pricing – The business has established an inaccurate man hour rate. In a recent case, the landscaper told me their man hour rate was $45 per hour. They were job costing individual accounts/jobs to verify they were generating $45/hour. However, after helping them build an accurate budget, they were losing $13 per hour for every account priced at $45 per hour. (They got the man hour rate from a guy driving a nice truck at the gas station.) The company was surviving by OVERESTIMATING the labor hours required to do their jobs. For example, a job that actually took one man hour to complete was priced at 1.5 man hours. The customer was being charged $67.50 instead of $45. The customer did not care if the job took 1 hour or 1.5 hours. They were satisfied with the price and job quality. The owner believed that $45 per hour was the “going rate” and higher prices would not work in his town. WRONG ANSWER!
- Equipment Pricing – Equipment cost are ignored or completely misunderstood. Equipment cost show up in the income statement AND on the balance sheet. Most contractors underestimate their cost of equipment by 50 to 75%. Further, every equipment asset will have to be replaced in the FUTURE. In the FUTURE, equipment will cost MORE THAN TODAY. So, equipment replacement costs must be calculated on a FUTURE basis. Less than 5% of the contractors I have met understand how to properly recover the cost of equipment in their estimating system.
- Overhead Mistakes – If you look at the PROFIT generated by one job, you’re likely going to use this formula: Job Price – Labor – Materials – Subs = Job Profit. When looking at an individual job, you are likely focused on direct costs only and you are ignoring your overhead costs. Most job cost reports are NOT designed to report on overhead cost recovery. That’s the role of the Income Statement.
- Materials Mistakes – Some companies are meticulous about tracking materials costs on jobs. They spend a terrific amount of energy building reports that track materials costs for each job. However, this is the least common mistake made by contractors. Contractors that can’t accurately measure a property, do plan take offs, or use math to add up the costs of materials seldom survive as a contractor. So, if you focus on tracking materials and ignore labor, equipment, subcontractors, and overhead, you’re looking at inadequate information.
- Death by Sales Commission – Companies who pay a sales commission based on gross sales price instead of gross profit are LIEING about profits. If you choose to pay a gross sales commission, you have taken on a business partner who has ZERO RISK and no way to lose. If you choose to pay a sales commission in this business, it must be based on GROSS PROFIT minimums which requires 100% accuracy in job costing reports. If you can’t job cost quickly and accurately, you better not offer to pay sales commissions!
- Sales Volume Must Grow – It is 100% possible for a contractor to show me a job cost report that states EVERY single job is profitable. (AKA DAMN LIE) However, you can look at the income statement and see the company is losing money. Here’s what this means. You simply did not do enough work to recover all of the overhead in the company. You MUST sell more work OR raise prices to overcome this problem.
If you are interested in maximizing your company profits, you can’t accept living with LIES in your job costing system. You must know your numbers. Each and every customer must be a PROFITABLE CUSTOMER. Ignorance, inaccurate job data, and poor estimating systems can’t be tolerated.
Wealthy Landscapers eliminate DAMN LIES in their company. They will wipe you out financially while they destroy your spirit, hurt your back, and use-up your equipment.
Profit Lies Summary
Overstating profits or understating profits as described above can have legit business reasons. I get it.
But you better remember this: A net profit that can’t be predicted, explained, or repeated is nothing to brag about. I encourage you to know your numbers.
Under reporting profits in the spirit of reducing taxes diminishes your company value, incumbers your ability to grow, and is seldom inspiring to those who count on the business.
The fastest way to improve profits is by keeping accurate records of the labor used on a job by job basis every hour of every day of every week of every year. This way, you’ll be able to adjust prices in a fair and accurate manner. Until you do this, you’ll never be in control of your financial future.
Bill Gates, the founder of Microsoft, became one of the richest people in the world by compounding 20% or greater net profits with 20% or greater annual growth for over 20 consecutive years. Could you duplicate his profit performance? What if you met just half of his performance?
I’ll tell you what I think would happen. You and your company would serve your family, your customers, and your community in an extraordinary way. You’d generate enough wealth to reshape your destiny.
You will become The Wealthy Landscaper in your town. 😊
Tony Bass is the founder & CEO at Super Lawn Technologies. He is the co-author of The E-Myth Landscape Contractor: Why Most Landscape Companies Don’t Work and What to Do About It. He has coached over 300 lawn and landscape business owners to improve profits using online and offline training programs. If you own a lawn and landscape business, visit www.superlawntoolkit.com and take the Wealthy Landscaper Productivity Challenge self-assessment. See how your company compares.