What Should Your Profit Margin % Be for Lawn Care Business? (Part 1)

Hey, everyone, it's Mike Andes and you're listening to the Landscape Business course podcast and you might be watching on Facebook and YouTube. Thank you for joining us here again. And today we're going to be talking about profit margin. Something I don't think is talked about enough in our industry of landscapers, lawn care services, we always are talking about the number of gross revenue. So when someone asks, well, what, how much do you make last year we, we a lot of times as landscapers, we did 1.2 million or we did 300,000 last year. What I want to talk today about is how much money did you actually make? Because if you made 1.2, I promise that's not what you put in your bank account. Last year you had a profit margin that comes off of that that is actually put into your bank account. And so there's two different ways of looking at profit margin. Today. I'm looking at really the structurally and the real what profit margin means. It's how much the business make. Another way to look at this, if you're really a smaller company, is how much money do you actually take home and put in your own bank account? But that's not the way I want you to think about it. I don't want you to think about profit margin as your paycheck because as your business grows, you really need to separate your personal finances from your company finances. And the best way to do that is not to think of company profits as your personal paycheck. One of the greatest things you can do is take a start taking a salary from your company. The sooner the better. You start thinking as an employee, which is actually a good thing because now you are going to make the same amount of money. Make sure your personal expenses are covered. Obviously, you want to reduce those expenses as much as possible so you can fuel the growth of your business. However, when you start, there's a magical thing that happens when you start paying yourself a salary and you know your personal, your personal expenses are covered, you start utilizing those assets within your business differently. Because now when you make extra money, you don't just funnel that money into your personal business account. Start buying a bigger truck or a nicer boat or a bigger house and increasing your standard of living. Now you're taking a set salary that goes to your personal self that you can spend however you want. And the rest of the money, that profit stays within the business. And it allows the company to grow, get more equipment, hire new people, get another truck for the, the fleet, more trailers, whatever it is to Grow, expand, get, do advertising, get marketing materials. It's just part of the process. Now, today we're talking about gross profit margin. I know there's gross, there's net. Today we're really talking about net profit margin. So gross profit margin is a little bit different than net profit margin. Gross profit margin is basically, if you take a job, you know. The reason I don't talk a lot about gross profit margin is because it's very subjective as far as what do you consider expenses and things like that. And in general, gross profit margin is when you take the cost of a job, and usually you're on 50% gross margin. So it doesn't take into account your overhead. It doesn't take into account your insurance and a lot of the other hidden expenses of business. It doesn't take those into account. It takes usually labor and materials. And that's usually what people are talking about. Like when they say 50% gross profit margin, they're not talking about net profit margin. If. If you did 1.2 in sales last year, there's a very low probability you netted out $600,000, like 50% or so. Like, it's just not usually in our industry standard. And so let's talk about what you should be at. What are the kind of the industry standards? And as far as what I hear from business owners, what their net profit margins are. So this is now after your overhead's been taken out, after all of your insurance and your gas expenses and the office expense and the paper you had to print your estimate on and the web hosting and all the other overhead that goes into running a business. What is the bottom line of your income statement? That's what we're talking about when we talk about gross. I'm sorry, net profit margin or profit. That's what we want to talk about. Now, as an example, I have $50 bills here. And if you're not watching this, you can watch this on Facebook or YouTube. So if you're listening this on Apple or Stitcher, some other podcast, you want to start watching the videos. Because I'm going to start using more and more. For example, so today I'm using this whiteboard showing you some examples of profit margin. And we're gonna break something down. Where you should be with your business, where you should be at with each job. So I don't have a specific. Everything here is a little bit subjective because different markets dictate things. What type of work you specifically do. For instance, lawn care is gonna be a lower margin than landscaping. Landscaping is gonna be less than hardscaping. It's just as far as, it's just how you play the game. So it's a little bit different in each industry. I'm gonna be in generic terms here as far as your profit margins, but here we go. So right here I have $50 bills, I have 20 of these $50 bills and so that's $1,000. And so a lot of times this is what happens. People are like, oh, look at this, I made, let's say I made a thousand bucks. Whether it be on a job, let's just say it's a whole year, $1,000. Now this is the problem. When companies start getting big and they don't the individuals that have much business experience and a lot of times in our industry that is the case. We come as landscapers. A lot of times we don't have a lot of education and that's not a problem. I have no issue with that. I don't think education is going to give you a whole lot of a leg up in this industry. I think common sense and a little bit of business savvy and being able to learn will give you a whole lot more experience. However, that being said, a lot of us don't come with a lot of business acumen, experience, knowledge, whatever. And so a lot of times they think, oh, we made $300,000 last year. I had one or two guys helping me, I'm making great money. This is a great job for me. The problem is if you made $1,000 right away, there's this thing called taxes that's going to come along and it's going to take a good 20, let's say 30% of this just whack right off the top. So there goes that 30% right there in taxes. Okay, now we got all our other expenses we still got to deal with. We got labor. So let's just throw some of this out in labor because that's got to be at least half of half of that right there in labor. And then you got cost of materials and cost of goods sold. So things like your mulch and your bark and your sand and your gravel. So and if you're doing pavers and things like that, maybe it's cost of equipment. So let's throw some of this out. Okay, all right. And now, alright, let's put that there. And now we got insurance, we got overhead, we have market materials, we gotta get printed, we have to make sure we get bonded and licensed. Okay, all right. Now all of a sudden we can Pay ourselves. And now we're down to three out of those 20 bills. We're down to 150 bucks out of the original $1,000. Alright? So sometimes people can be thinking about too much. About. I know this is super, super simple. I know this is very, very, very basic. And as far as just what profit margin means. But think of it in terms of these $50 bills. If I'm making a 15% profit margin. That's what I just showed you right there. I had three $50 bills. So $150 at the end of the day, that was my take home pay or like my net profit margin which we're gonna be talking about today. Out of all of this. All of. Oh man, I'm not very good with cash cause I never carry it. But all of this money was made. And at the end of the day, after all of this money was transacted through my business, this is what I had to show for it. All right? $3. Three notes out of the 20. Now the reason this is so important is because it's very easy to get inefficient within our business. The problem is if I'm 5% less efficient, all of a sudden my 3 gets cut down to 2, which is essentially cutting out a third of my profit margin. So this is the thing. Let's say Bob has a landscaping company. He makes $1,000 on a job. And Bob has a really very efficient crew. Very efficient. He is able to, he has cut out a lot of the inefficiencies. He's made sure that the equipment is the right ratio, has the right amount of people for the amount of work that's being done on this job. So at the end of the day, Bob walks away and he has a 20% profit margin. He takes $200 home with him. Now let's say that Max comes along and he has his landscaping company. He does the same job. It's $1,000, but this time he's just 10% less efficient. He is 10% less efficient than Bob's landscaping services. So what happens now? 10% of this $1,000 is $100. So instead of having $200 like Bob did, all of a sudden 10% of the thousand is 100. We don't take two of these away. We have only half the amount of profit that we had with Bob's landscaping. So essentially the profit margin was decreased by 50% because of a 10% inefficiency. And now you wonder why. I talk about efficiency and making sure that every Little thing with your business has a system because having systems having procedures makes you more efficient. And what efficiencies does what systems do, this is how I want you to think about it is it protects your profit margin because inefficiencies are what easily take this away and what dramatically reduce. A 10% increase in efficiency made Bob. Twice the amount of profit margin on the same dollar amount of a job, $1,000. One guy made $200, another made 100. The other guy made twice as much profit margin, twice as much profit margin because he had a 10% more efficient crew, a 10% more efficient way of using materials, a 10% more efficient way of using his assets to, to create that same job. That's why I think about efficiency so much within your business. If you're a course member, you hear systems, systems, systems, procedures. You see me making guides and procedures for pricing and procedures for making estimates, procedures and systems for your people and how things should be done and checklists. The reason for that is I'm trying to help you save your bottom line. I'm trying to help you save your profit margin because inefficiencies eat the profit margin up of your business. And just small little incremental 10% inefficiencies can dramatically change your bottom line. I've seen so many companies as they get bigger, as you get bigger within your company, it's very common for your profit margin to get smaller. However, it's okay because your revenue is getting 10 times bigger and your profit margin is only decreasing a little bit. So you actually are making more money bottom line. However, your profit margin is getting smaller. If you the smaller that profit margin gets. As you're gonna see in just a second, the smaller that profit margin gets, the bigger a deal. Efficiency is alright because on a 5% of someone is making 5% profit margin, if they have a 1%, a 1% inefficiency, that's 20% of their profit margin. I'll let you do the math on that one. Okay, so anyways, here we go. I'm gonna give some basic outlines. Very objective and I'm sorry, subjective. Very subjective numbers also, but some guidelines because someone of you asked what your profit margin should be. I'm going to give you some kind of guidelines here on the whiteboard. Okay, so when we look at the landscaping industry and I'm losing my white, where's my red marker? Can't find my red marker. But anyways I'll use blue. So. Oh, here it is. Red marker, here we go. I like Red Better. Here we go. So when we look at the landscaping industry and we look at the.

Profit margin ranges, a common number on the low end is 5%. This is gonna be a lot of times companies that are doing high volume, they are doing a lot of commercial work, they're having low wages, they are constantly having high turnover because they're competing for the lowest dollar amount of jobs. These are companies that are doing 5, $10 million sometimes in business, but their profit margin is low. However, their revenue is so large they can get away with it because they can still bring a couple hundred thousand dollars to the bottom line even with this small of a percentage point. Because if you have a 5% margin and you are running a 4 million dollar company, you can still make $100,000. You can still make $200,000 actually with that kind of a profit margin, you can still make decent money, alright? You can still pay yourself a good $2,000 a week salary even with a 5% as long is large enough. Now this is not where most companies are. This would be a company that I would really fear. I feel like you're fragile if you're in this market, if you're doing $4 million and that allows you to take a $200,000 to the bottom line. Now remember, so a 5%. Let's just for sake of numbers, let's do a million dollar. Let's pretend someone has a million dollar a year business, a million dollars in revenue. Okay? So we're gonna assume that this individual, this business owner is doing 1 million in sales. And this 5% margin is gonna equal out to a $50,000 per year net profit margin. So I'm gonna do profit margin, alright? So $50,000 profit margin for the year at a 5% profit margin on a million dollars in revenue. Alright? Now this is the first case scenario. You don't wanna be here. This is where you're fragile for that is this. If an economic hard time comes, you're going to get wiped out. Because when you go to reduce your price by just a little bit because everyone else is, and you're going to start losing market share immediately, your profit margins get knocked out immediately. If you start losing people or you have to increase.

Your labor rates because in our state we got minimum wages going up to to the roof, it's going to go up to $15 a year pretty soon. That's a real thing that kind of cuts into Your profit margin 5%. You're leaving yourself wide open with this example of having these 20s. I mean these 20 bills here are 50. You are coming out the end of the day with one of these, just one. That means that everything's got to go right within the job. To get this one out of the 20 bills, that's just very risky. One thing happens wrong, you know, a callback material isn't shipped on time, someone doesn't show up to work, all your profit margins gone 5%, you're leaving yourself wide open for you're running very fragile. You're usually running. People are usually running on credit card lines because during the summer, during the winter, you don't have enough money to pay your people and pay your bills. And so you're using a credit line 5% very vulnerable. The problem with this, you're making 50,000. Some of you are like 50,000 sounds great right now. The problem with that is $50,000 is your profit margin. It's not what you're taking home because your business still needs money to grow, to operate. And you say, well, I'm not growing, I don't need to take a bunch of my profit margin. I can just take that all home because I'm not growing my business. Well, guess what, on a million dollar company, you have equipment and that equipment gets broken and you need to buy new equipment and that's gonna come out of your profit margin. And so if that number isn't high enough, you aren't gonna be taking no money home out of that $50,000. Because you also have to retain a certain amount of money inside of your bank in order to just keep the money, keep the business afloat. It's called working capital. Alright, now 10%, this is where a lot of companies are in our industry as far as profit margin in the 10% range and so on. A million dollars a year in revenue, this is going to be $100,000 in profit margin.

And this is decent because at $100,000 you can still keep $50,000 in the business, make $1,000 a week as far as take home money. So let's say you take a $52,000 salary for a year. This is take home pay, take home pay over here. And this is $52,000. That's $1,000 per week in a salary you take home. Alright, this is a 10%, this is decent. You will survive and this will be survival. You will have hard times. The winter will still be hard for you if you're not full, if it slows down at all, or if you have a bad winter and you don't have snow plowing or something like that. This can. You're still vulnerable here. That's the 10% range. This. Now between the 10 and 15% range is where most, most landscapers are. In between this 10 and 15, somewhere in between that. That is going to be now $150,000 in profit margin, and someone's gonna still take home probably 60, 70 grand, let's say 70 grand. And see, this is the beautiful thing about it. You see here.

The profit margin as it grows higher. This individual now has $80,000 left over after they take their money home to now go spend on growing the business, they have $80,000. Because you have 15% of your total revenue being your profit margin. This is your profit margin right here. This becomes profit. $150,000 out of the 1 million. 15%, that's your profit. And now you take home pay. $70,000 is a decent wage. You can get by with that. But now you have $80,000 left over to put back in the business. This is how you grow. And if you want your company to grow, you've got to get to that 15% margin. You've got to get there if you want to have lots of money to grow. Not lots of money, just money to grow. If you want to scale up, if you want to get more crews, if you want to hire more people, this is your target 15%. So sorry, I gotta move my microphone a bit here. I don't want to block your view, but this is where you want to be at. You want to be around this. If you're getting too far, close to this 10, you start getting a little bit fragile, you're getting a little bit. You're starting to risk things a bit. Now, our company, this is where we're shooting for. And this is why we're franchising our. So this is probably where I was at about 12 to 14.

This is where I was at a couple years ago. And as we scaled the business and made it more efficient and we've worked on our systems and procedures and really worked on things, now we're more up around 20 to 25.

So I know for a fact last year where our profit margins were. We're on 22. And I think this year we're going to be a little bit higher than that, just because we're not going to be investing as much in equipment as we did last year. And we got a new facility this year, things like that. So 20 to 25% now you're taking home. Let's just call it 20% for now. Just to make the numbers work here. So now at 20% profit margin.

You'Re going to take home is going to be 200k profit margin. And if you want to take 100 of that home, that's just fine and dandy.

This is what I do. I'll tell you what I do to make some people ask me all the time, how do you grow your business so fast over the course of the past three years? And you talk about your course going from 0 to 100,000 in 36 months. How do you do that? I'll show you right now. I'll lower my mic there. Sorry about the audio, but this is how I do it. I basically eliminate this so I don't have to take any money home. Or very minimal. Let's just say for the sake of getting by, I take $25,000.

Home. What that allows me to do is still have $175,000 sitting here in profit margin in order to allow me to grow the business. So people wonder like, are you going in debt for the second location? No, we were able to pay for it because I didn't take money out of the business. So you just have to ask yourself, okay, what's my profit margin? That's the number one thing you should be working on. Systems, product, procedures, efficiency, how do I retain more of these dollars on each job? That's the number one thing you should be working on. Cause that will fix this number here. How much money is your take home pay? Then figure out what you need to live and try to minimize that so you can retain money, retained earnings in the business. That's what you can invest and that's what you can use to grow your business. Now I wanna make one quick demonstration here. I and talk about on a per job basis, I'm gonna make some really round numbers. But I think it's gonna help some of you. So let me erase this real quick. We're gonna talk about profit margin on a job, on a landscaping job. Let's just say this is a cleanup job. So we will take out. Cause I know a lot of people listening here are not landscaping and hardscaping. You're a lot of lawn care cleanups and things like that. So let's talk about. And just so you know, a lot of times people transition. They go from lawn care and, and cleanups and leaf cleanups and things. Then they get more into landscaping. And then they kind of got to decide if they're going to scale up the maintenance side or if they're going to go Hardscaping to scale their business. So that's a natural progression of our industry. So let's just say this is going to be a thousand dollar.

Thousand cleanup.

And we're going to assume that there's going to be some leaves and we're going to be trimming some bushes and shrubs. This individual was a great mowing client and we mow their grass weekly basis. Now it's the fall, there's a bunch of leaves, all the trees and shrubs need to be trimmed. The rhododendrons need to be cut back, the hydrangeas need to be deadheaded, the roses need to be cut back. And so that's what we're gonna be doing for this client. Okay? So the thousand dollars is gonna be the revenue from this job. That is what is gonna be billed to the customer. Obviously there's going to be tax on top of this, but that doesn't go into your pocket. That goes into Uncle Sam's pocket. So we got our thousand dollars. Here we go. Got $1,000. We're going to start off with this job. This is the money that's going to be given to us.

From this individual. Now I'm going to work these numbers. I hope they work out because I have not ran these before. So let's just assume on this thousand dollar cleanup, and we're making 1,000 bucks, okay? So we are going to assume that a crew of two can do this in. Let's just say, let's say a crew of. Let's say a crew of three guys are gonna take an entire day and they're going to do this cleanup. Okay? So I'm just gonna make these, I'm trying to make these numbers work and hopefully we come out with a good result. So I'm gonna have three. Three guys, three employees. And they are going to work a total of eight hours.

For a total of 24 hours. 24 man hours.

Okay? So we got 24 man hours in the job wrapped up and we got that happening. Now let's just assume that we pay our guys pretty decently. Let's say they make something like 15 bucks an hour. But with payroll taxes and all the other workers compensation, all those things, you basically got to say it's 25 bucks an hour. And so let's just say we got $25 per hour. Okay? So at this, this is gonna be our labor cost right here. So labor on this job of $1,000. We got 24 man hours because we got three guys at eight hours, $25 a piece. So if we do the math on that, get my account.