Feb 2023 Why You Should Know Your Critical Percentages
When working with a new client, in the first 2 sessions I will analyse their P&L and highlight their four main expenses (as a percentage of their sales) and compare these to what the targeted percentages should be. As you may know, I have created a financial model that allows any landscaper or horticulturist to know immediately what expense is too high in relation to sales for a landscaping or horticultural business.
It could be that one or more of the following expenses are too high: materials, site labour, subcontractors, and business running costs. So knowing what their expenses should be, allows us to create a clear path ahead to rectify lack of profit. These are your four critical expenses:
Charge out rates and material mark-ups
Knowing the critical numbers also allows you to know what the charge out rates should be in your quoting system, what the material mark-ups should be, and whether the jobs are still being under-quoted.
Obviously this simple analysis of a P&L tells us if all the clients job installs have made the gross profit they should have over the last 12 months. The same applies to horticulturalists. Analysing on site labour and materials figures can tell us if their jobs are making enough gross profit, or if changes need to made.
Running Costs
Then I will go further down the P&L into the running costs section of the P&L, and show a client if these expenses as a total are fine or too high in relation to sales.
I think every business owner should know these key percentages as mentioned above. It allows them to know what area of their business is, or is not working in terms of profit, and how to go about fixing the problem.
What about quote conversion rates?
Knowing how much you need to win each month and what percentage of jobs you have been winning is important. This info is particularly useful because it tells you if your sales process is effective enough. It can also tell you if you are too competitive with your quoting (if you are winning too many jobs and prices should increase). But keep in mind, some businesses with a high profile/high following may win a larger number of their quotes because clients only want them to design and build their gardens.
If this is too confusing for you, or talking numbers gives you a headache – ask your bookkeeper to help. If you do know your critical percentages, then I urge you to measure them at least every quarter. I have seen some business owners stop giving attention to their key numbers for a few months and their project profits started declining.
Remember the saying – “whatever you give attention to expands”.
So if you don’t know your critical percentages, make it an exercise to learn and understand them. It will help build confidence, and that has a ripple effect on everything else.