Revealing the PERFECT Profit Margin! (this equation will change your business)

Today I'm going to be sharing with you exactly how much profit your lawn care, landscaping or home improvement business should be making based upon your revenue. I get this question all the time. That is, how much money should I be taking home? What's considered profit? Today we're going to break it down. I'm going to give you a formula so you can run in your business whether you are above average or below average when it comes to your profitability. Now, the reason most people don't talk about this is because there are so many variables. But the biggest one I want to talk about today is growth. Because how fast you are growing, your business is going be a big dictation of what your actual take home profit is. Because growth sucks cash. If you're growing a business, it takes capital expenditures in the form of buying trucks and equipment and hiring and advertising and just overall waste because you do things that are wrong as the business is growing. And therefore you're going to have to reduce your profit percentage expectation. And so when you go into Facebook groups and forums and people are like, well, I made so much money on this size of business, that's fine, but they're leaving out one of the biggest variables and that is how fast are you growing? So I'm going to show you the formula. I'm going to walk you through exactly how you can use this formula to determine how profitable your business should be. And so revenue is your total gross revenue for the year. So annual revenue multiplied by your profit percentage. This can either be historical or be the percentage that you're trying to achieve minus your growth percentage year over year. So maybe you go from $200,000 to $300,000 in annual revenue. That would be a 50% year over year growth. Therefore, you need to subt out 50% of profit because that's what the cost of that growth is going to be. I know these numbers are round and this is by no means a perfect science, but I think it's a good benchmark for something that most of the time people just gloss over, don't talk about or they feel bad about because they're listening to some person that put a comment that said they made $200,000 in profit on a 400,000 annual year revenue business, which is fine and good, but there's a very good chance that business is not growing. It's in its 5th, 6th, 10th year of business. And I also want to clarify what exactly profit is. I'm going to go over this in just a little more detail and break down what this number should be for your business. So hold on just for a second. But I want you to realize when I talk about profit, I'm looking at the business as an organism separate from you as the owner, which means you get a salary. And when I look at a business's profit and loss statement, I want the owner's salary to be above the bottom line. Because if you're working in the business at all, if you're there for more than 10 minutes, A, you've got to be taking some sort of a salary, especially if you're an S corp. Legally, you have to be taking a W2 as an employee from that business. So even if you aren't an S corp and you're a sole proprietor or you're a single member llc, I still want you to think of yourself as an employee and think of profit as the money left over in the bank account after you've been paid your salary. And so what I want you to think about is, okay, well, what profit percentage should I be getting? What is standard for my industry? And I'm going to break this down. And again, this is not a professional science, but I want someone to have hard numbers that you can actually use. So how I look at this is 10% profit is going to typically be going to be for commercial work and this is for landscape maintenance. This is for a lot of big, big commercial projects and very, very stiff competition. You're up against Brightview and very big companies. And a 10% margin is actually not that bad in the industry. And again, I'm talking about bottom, after the owner's been paid money in the bank, profit percentage of 10%. So on a $2 million business, after the owners have been paid, $200,000 would be in the bank account as profit. Now, again, these are rough numbers, but 20% is what I would use for simple services. These are gonna be things like residential mowing, installing a mulch. This is going to be trimming bushes, property clips, and mostly residential services. This is where Augusta Lawn Care really focuses on, is this 20% marker. And we do that because we mostly focus on simple services. We focus on mowing, trimming, bush cleanup and fall cleanups and all the rest of that. Now, a lot of times the reason people are allured to this next one is because the highest percentage is actually not in either of these things. It's going to be in custom work. This is going to be custom, it's going to be design, build, and it's going to typically be hardscaping land very Complicated forms of landscaping or even construction style work. So design build type of work. Now you have to ask yourself the question, and that is, well, why wouldn't we always go to custom design build work? In my opinion, it's the least scalable. That's why it has the highest profit percentage. It's very difficult to have a design build company or an excavation company that is has multiple locations and has hundreds of employees because very, very hard to find that labor, as well as the fact that growing each of these different types of businesses is going to require something very special. Now I have some notes here. I wrote all of this down. So let me refer to this. In order to scale up or grow a commercial business, you're going to need one thing. You're going to need labor. This is why it's so low in terms of the profit percentages. Because it's really whoever wins the labor game and gets the most low cost of labor is usually going to win the game of commercial work. And that's why Brightview and all these other players do so well is because they get massive amounts of, whether it be immigrants or H2B programs, or they just hire thousands of people or they do subcontracting. All of that is in the realm of commercial. And typically how you grow that size of business and you grow that type of business is through expanding labor. Now when it comes to simple services, it's a little bit harder to scale this up, but not as hard as the last one. But it's a little bit harder than just scaling labor. And that is gonna be the fact that you need to scale systems because again, if we're doing simple services, everything needs to revolve around efficiency and making sure that those simple services are done in a very, very efficient manner in order to scale up the business. So that is going to be the bottleneck or the thing you need to focus on if you're in the simple services type of business. Now if you're doing custom design and build, the bottleneck for growth in this regard is gonna be capex. That means capital expenditures. The reason it's so hard to really scale up a design build firm is you're going to need to buy excavators and bobcats and track loaders and ditch witches and all these really expensive pieces of equipment. So capital expenditures is going to be usually the bottleneck that prevents a custom design, build, construction, hardscaping business from scaling. Whereas labor is going to be for commercial and then systems. Building out systems is going to be the complex or the Bottleneck part of labor growing a simple service based business that's typically residential. So let's go ahead and look back at this actual formula and punch some numbers in and actually see what happens when we throw in some of these numbers. Let's go ahead and assume the simple services. This is what again we use at Augusta Lawn Care. We have almost 100 locations around North America. And everyone in the system knows that the goal between the next five to 10 years is to build a business that is over a million dollars in revenue and that is 20% in profit. And again profit is after the owner has been paid so local. The very first Augusta Lawn Care location Last year was eighth year in business. It did just under $1.6 million in revenue. It did well over $300,000 in profit distributed to myself as the owner. And that's after I was paid a salary. And I only show up there maybe an hour or so a week or less, one or two times a week. But still I still take a salary from that business as an S corp. And I still want 20% in profit after my salary has been paid in of distributions like money coming out of the bank account to me. So that's what we're shooting for at Augusta Lawn Care. So I'm going to use that as my proxy here for this example. And the reason I'm talking about this is because so many people get so distraught when the first few years of their business, they're not making any profit, they're not working so hard. And I'm growing my business, but I'm not making any profit. And the bottom line is cause this equation is working against you. Cause let's run some numbers. Let's say a first year in business, you really really good after it and you do $200,000 in annual revenue. And so let's again use the 20% as the goal that we're going to have for profit percentage. So that's going to be 20%. So in theory we should be able to have $40,000 in profit from this business. And again that's after I've been paid my salary as the owner. So let's just say I take $50,000 out in my salary and but then I also am going to have $40,000. I'm going to write that here, $40,000 in profit. So theoretically you could say I had $90,000 from the business. But we're not going to look at it like that. The salary, that $50,000 is yours. The $40,000 in profit that 20% profit margin is in the business. However, let's go ahead and assume that you now are going to grow the business from 200,000 to $400,000 in revenue. What that means is, is that your growth Percentage going from 200,000 to 400,000 is 100%. Your growth rate year over year is 100%. What that means is it's going to wipe out this entire profit, that 40,000. We now subtract out 100% of that number. We don't make any profit in the business. We literally just took our salary, and at the end of the day, our bank account was the exact same. At the beginning of the year, we doubled our business. And here's the part that really gets scary is you might say, okay, well, we broke even at least. But the thing is, when you go from a $200,000 business to a $400,000 business, you can't have the same bank balance. You need more working capital because you have more payments, you have more payroll. And so actually, even though it might say, you say, well, we broke even because I had to go buy trucks, I had to buy other things. That growth sucked up a lot of my cash. That $40,000 in profit, however, it's also actually going to take out more, more, because I've got to just get my bank balance higher for working capital's sake. Now, let's say you really scale up your business, you really push it to the next level, and instead of just growing from 200,000 to 400,000 in revenue, now we're going to actually grow from 200,000 to $500,000 in annual revenue. All right, so $500,000 in revenue imputes 150% year over year growth rate. What that means is not only am I going to lose this $40,000 in profit, I'm actually gonna lose another 20,000, or 150% of 40,000 is 60 grand, which means I'm not gonna make 40 grand. I'm actually gonna make negative 20 grand. Now, this is what gets people really, really frustrated. I'm growing my business, I'm trying to build my company, and I can't even take my own salary of 50 grand out of the business. You're right, you can't. Cause your growth rate is so high. And I believe that this equation is works at smaller size companies, and it also works at larger size companies. Let's look at a company that is a little bit more established and is not gonna be growing as much. And this is why I so often say it Takes five years to really grow a good sized business that is profitable. Because you've gotta get to the point where you're not growing a lot, you're not growing 50, 60, 80% a year. Cause as long as you're doing that, all the profit is gonna go into growth and that's fine. And that's normal. So stop judging yourself. If you're in that hyper growth phase, your first three, four, five years of business and you're not seeing any, all the profit is simply going into growth. Buying more trucks, getting more equipment, hiring more people, all the marketing it takes to get the leads required to actually see that growth. That's what's sucking up all the cash. But now let's look at a more established company. Let's say that this company is gonna do $800,000 in revenue. And the owner's like, you know what, we don't really need to grow a bunch. We kind of like this size, maybe get a general manager. But at the end of the day, I'm going to be a simple service based business mowing. I'm going to work on my systems. That's how I got to 800,000 revenue is building out my systems. But we're going to shoot for that 20% profit margin. So 20%, there we go. And we're not going to grow a whole lot like this past year. Let's just say we grew 10%. Okay, so 10%. Now let's run the math on that. So if we take out our calculator, we're going to do our revenue, which is $800,000, open up the trustee calculator, $800,000 and we're going to multiply that by 20% or multiply by two. So now our profit on this business is going to be $160,000. Okay, so $160,000. Now I'm going to grow the business though, from $800,000 to $880,000. So 10% growth year over year. And that might literally just mean raising my price a little bit. That literally might lead to a 10% bump in your top line revenue. At the end of the day though, I'm just gonna assume that I'm gonna grow 10%. Now I need to take off 10%. So I'm gonna essentially multiply this by 0.9. That's gonna equal $144,000. That's what I can expect in actual bottom line at the end of the day, after I have been paid as the owner, profit from this business. Now if you don't get grow at all. If I had zero percent growth, I have that 160 grand in my pocket after my salary's been paid. But if you're going to grow, you have to realize that growth sucks. Cash. I literally lost out on $16,000 in profit in order to grow the business by 10%. And that $16,000 of profit probably went towards another crew, another truck, another piece of equipment. That's what allowed me to get from $800,000 in revenue to $880,000 in revenue. So if you're growing your business massively and you have a 50, 60, 70% year over year growth, you can absolutely expect to not make much profit. Let's run the exact same numbers. But now assume that this owner wants to grow a lot. Instead of growing 10%, they want to grow 50%. Okay, they're going to go from 800,000 in revenue. And next year their projection, their goal is to get to $1.2 million in revenue. Let's see what happens now with this formula. So we're making the same amount of money, $800,000, but now we're going to try to grow up to 1.2 million. That's the year over year growth that we're trying to achieve. Alright, now let's run the numbers. $800,000 in revenue multiplied by 20%. We're still having that $160,000 in profit, but now we got to subtract our growth rate and that's going to be what? $80,000. And this is what gets people really frustrated. Because if you do $80,000.

That'S not a lot of money. It's like, man, I'm growing, I'm putting money into my business, but I just don't see it. Because at the end of the day, I might need to have my bank balance go up by 30 or 40 grand. You know, this might need to be cash out in order to be going into my bank account just to keep my working capital up high enough. So I'm not actually going to even see this $80,000. Because when your growth rate is high, you need extra cash to actually keep your working capital high enough in your bank account. So this is what gets people really frustrated. At the end of the day, this owner might literally make, I don't know, maybe 70, $80,000 in actual take home profit on an $800,000 business. But if they're growing to 1.2 and their year over year growth projection is 50%, they're probably not going to bring A lot down to the bottom line, even after their salary. So this is extremely important to remember. If you're growing your business and you're growing top line revenue, you're essentially building your assets. You're not going to see that in the form of cash. You're building your assets because you're buying equipment, you're hiring staff. And if you're building a business that is doing more and more in revenue, assuming that there's good systems in place, you're actually building an asset that is gaining value. It's like a piece of real estate. It's growing in value, it's appreciating. And so it's not a bad thing if you're growing to not have a lot of profits. This is why people get frustrated though, because in their first three years they might go from 100,000 to 200,000 to 400,000 to 800,000 in revenue. That first four years they literally, because they're growing 100% year over year over year, that means they literally had like $0 in profit. And because of their being just, well, we broke even, that's fine. No, because they have to have more working capital, it's actually going to be a negative number that they can actually take out for their own personal use. This is the number, this is the formula I recommend you would use. And so when someone says I'm making X amount of dollars in profit and I only run X amount in revenue, what you have to step back and ask is what is their growth percentage? This is the thing that really moves the needle. Whether or not you're going to actually be able to take that money home is because if a business has been around for 10, 15, 20 years and it's just relatively stable in terms of their revenue, they don't have a lot of growth. They're going to probably be really, really profitable because they're not trying to grow their business. So this is always why I say years three to five is when you start to see profit because you're going from 100%, 150% year over year growth down to 20, 30, 10, 5% year over year growth is absolutely where you're going to maximize your profits simply because growth will no longer be sucking a large portion of your cash. I hope that made sense in the comments below. Let me know what you're doing in revenue and then what you're doing in profit after your salary's been paid. Take home profit money in the bank after you've been been paid. I hope that was helpful. Click this video here about the stages of growth as you grow your business from zero to past a million dollars in revenue and see how this percentage actually does change. Because when you first get started you can have really high profit percentage. As you grow it begins to go down. But then as you achieve scale you get economies of scale and therefore this profit percentage actually goes up. Check this video out right here.