Mike Andes (founder of Augusta Lawn Care) analyzes Kingdom Landscaping's P&L and prescribes a turnaround. Key facts: ~11 months' revenue of $150,000, net income of -$9,000 (~-6% margin), and payroll of $101,000 (≈67–68% of revenue) with $88,000 listed as contract labor. Andes concludes the business lacks cash and is not in a growth phase, so the only viable fixes are cutting expenses (especially labor inefficiencies) and/or raising prices; he gives an example that keeping wages at $100,000 while growing revenue to $300,000 would reduce labor percentage to ~33%.
Questions this video answers
$150,000 (about 11 months)
Negative $9,000 (≈ -6% profit margin)
$101,000
$88,000
Approximately 67–68% of revenue
Chapters
My name is usually Mike Andes, founder of Augusta Lawn Care. We have over 150 locations around the world. But today my name is Dr. Diagnosis, because today we're looking at a real profit and loss statement. Financial statement from Kingdom Landscaping, which was a recent turnaround that we did on the Mike Andy show, literally made $0, not a single dollar. We actually need to get rid of customers. It just felt like everything was over. The alternative is that we keep losing money and the business goes out of business. But today, we're actually gonna look at the numbers, break down what I looked for in the first few minutes of looking at these financials. A lot of times people ask me when I go in the turnaround, how did you know what to say to the owner to fix the business? Well, usually you can look at the numbers and they will tell you exactly what is wrong in the business and how you can fix it. So doctor Diagnosis is going to diagnose the problem and then prescribe what should be done to fix the numbers. So let's look at the numbers. First and foremost, I'm going to look at two things. Income. How much are we making in terms of revenue? This is last year, for about 11 months of the year, they made $150,000 in revenue. Now, if we flip over the page here, or we go to the very bottom line, the very bottom line is the net income. And we can see here that they made negative $9,000 in profit, which means we are running about a negative 6 or so percent profit margin. Never a good thing when you have a negative profit margin. So immediately, I know that this business is bleeding cash. And now, is that always a bad thing? Not necessarily. If two things are true. One, we are growing very quickly and all that cash is being pumped into growth. And number two, if we have plenty of cash in the bank to sustain these losses, it was very normal, especially in your first year or two or three, to have a negative profit, bottom line. But if you're not growing and you don't have a lot of cash in the bank that is on your balance sheet, we're gonna have a real big problem. And in this case, Kingdom Landscaping did not have a lot of cash in the bank, so you can't sustain these losses for very long. So what am I going to look at next? Because if we're going to assume that we need to fix this business and that it's not growing crazy, crazy fast, it's not like it's growing 500% and tripling year over year, and they don't have a lot of cash. We can't be losing this kind of money every single month. So what are we going to do to fix it? Well, the first thing I'm going to do is I'm going to look at the major expenses in the business. Because there's only three ways to to be able to fix a failing business. One, if you're going to grow the business, we are going to increase the number of customers. The second way to be able to grow the business is increase the dollars per customer that we are getting. So this would be upselling existing customers. Instead of them only collecting $1,000 per year, you collect 2,000 or $3,000 by selling them more services or raising your prices. The third way to be able to fix a business that's unprofitable is going to be reduce expenses. So this can be making the business more efficient. This can be cutting out unnecessary admin costs, software costs, fuel costs, just massive inefficiencies in the business. This is how I fix a failing, or in this case, unprofitable business. So the first thing I'm going to look for is, well, do we want to grow the business? We can't grow the business because we don't have enough cash. In this case, Kingdom Landscaping needed cash. They did not have the money to keep sustaining these losses. So we actually are basically relegated to only one of these options that it is we need to cut expenses and make the business more efficient. So then I'm looking for inefficiencies. The number one thing I'm going to look for in a home service business is labor, because we sell labor. And most of the time if you have inefficient labor, you will not have an efficient business and you will lose money. So what do I do? I go down here to payroll. And what I'm looking for is the fact that we spent 101,000 thousand dollars on payroll. Here's the problem with that number is that is making up about 67, 68% of all of our revenue. If you look at $151,000 compared to 101,000, literally 68% or so of the revenue is being spent on wages. News alert. If you're spending 68% of your revenue on just direct wages to your frontline team members, you will never make money in this industry. Alright? In my opinion, this number has to be below 50%. Say, well, does that mean I got to cut everyone's pay? No, it means they need to be more efficient, which hopefully means if we make them more efficient. We can take the business to $300,000 in annual revenue and yet still only pay about $100,000 in wages, which would then drive that number from 68% all the way to 33% if we were able to get 300,000 in revenue with still only $100,000 in actual wages. So this is an important number. You cannot be spending more than 50% of your revenue on direct cost of labor. The other thing that I see that's a little bit fishy here is the fact that when I look at the labor, he's doing it all under contract labor. So 88,000 of the 101,000 is contract labor. Which tells me one of two things. Either A, he is doing a bunch of subcontracting and he's doing a 1099 to his employees, or number two, that he's paying people under the table and not paying taxes, workers compensation, et cetera, on those wages. So that would be something I would address with the owner separately. But overall, from a business perspective, the major problem in this business I can guarantee is that we are too inefficient. Now the only other thing that can solve this problem is by raising prices. And this goes to number two. If we're able to somehow double the prices to our customers, guess what that's going to do? Increase our revenue and yet our wages will stay the same. And so the only two ways to fix this business will be a, increase the efficiency of the crew, making sure that they're on pay for performance, making sure they're not stopping a thousand times throughout the day at gas stations or smoke breaks and long lunches, et cetera, that's the number one way to do it. Number two is gonna be raising prices to be able to increase our revenue without increasing our wages. By doing that, I'd be able to effectively drop this percentage and hopefully get it under 50%. Alright, there's only two ways to fix this business, in my opinion. I knew this before going to the business. But if you'd like to actually watch the entire turnaround where I take this business, this exact one, and I turn the whole thing around, click this video here and I hope you enjoy it.
