April 24, 2017
Benchmarking your overhead, Part 1
BY MARK BRADLEY
Recently, I attended a meeting at Landscape Ontario with an objective to create financial benchmarks as guidelines for companies in our industry. For the next few articles, I am going to break down some of the benchmarks into real numbers for you. As you’re reading, I hope you clearly understand the objective. The goal is not to define a company as wrong or right, good or bad, by simple benchmarks. The intent is to provide a general framework for success for owners and managers who may lack experience or a strong financial background. The vast majority of us came from the trade, not from an accounting degree.
So read this series with an open mind. It’s not to say you can’t be successful unless you fall into these categories. The purpose is to share some experience and knowledge with those who might be struggling. It’s to provide a simple lighthouse — a general path towards calm waters and safe harbor — for those who are losing sleep at night enduring the ups and downs of managing an unpredictable company in a very unpredictable industry.
Step one: Establish a benchmarking standard
The single most important step to benchmarking your data against industry standards, or even in discussions with your industry peers, is to standardize your numbers. Not understanding or communicating what you count as overhead will likely trigger a big misunderstanding. For instance, if Zeke’s Landscape counts all its equipment as overhead, while Abe’s Landscaping treats equipment as a job cost, they are going to have a significant difference in what they spend on overhead. Both will be confused, unless they figure this out first.Briefly, here’s what we include as overhead cost:
- All non-estimated expenses including, but not limited to: sales and marketing costs, facility rent and operating costs, office expenses, professional services (such as accounting), banking and finance costs, education and safety costs, insurance and more.
- The owners’ salary.
- Any other “office” salaries (people whose time does not get estimated on jobs), including payroll taxes and liabilities for those people.
- All vehicle and equipment expenses not used on jobs (e.g. the owner’s truck).
Step two: Benchmark
Average overhead in the landscape industry is between 20 and 30 per cent of sales. If you’re within that range, you’re close to the industry average.The closer you are to 20 per cent, the more competitive (cheaper) your pricing can be, since your overhead is low. If you’re at or above 30 per cent, you can still be profitable, but your labour rates, etc., are likely higher than industry averages in order to afford your overhead and still make a fair profit.
Step three: Identify and explain exceptions
“What if I’m spending less than 20 per cent of my sales on overhead?” There are a couple of reasons you could be lower and still be “normal.” Run through the following checklist and see if any of these conditions apply to your company:- My office is lean and efficient.
- I don’t pay rent for a shop or office.
- I don’t pay myself very much.
- My spouse or partner has an active role in the business, but doesn’t get “paid.”
- I (the owner) still work primarily in the field.
- I’m just starting my company from scratch.
On the other hand, low overhead can also be a sign that you should (and maybe even need to) invest more in your business, in order to grow to the next level. It could be time to spend more on sales and marketing, pay yourself a better wage, or possibly even hire someone to help you keep your jobs organized and on-time. (If your overhead is low and your labour is high, this is a strong indicator you need some help!).
“What if I’m spending more than 30 per cent of my sales on overhead expenses?” Typically, when companies spend more than 30 per cent of their sales on overhead, they struggle to be competitive on price, or they struggle to make a consistent, fair net profit. But it doesn’t necessarily mean there is a problem; it just means you are spending more than the average.
First, double-check what we defined as ‘overhead’ earlier in this article. If, for example, you included all your vehicles and equipment as an overhead expense, you’re almost certainly going to be higher than average (since we did not). Then run through this checklist to see if any of these apply to your company:
- We don’t have much labour or equipment and we subcontract a lot of our work.
- We recently expanded the shop or office.
- We recently hired more overhead staff to help us grow the business.
- Two (or more) owners in the business are trying to pay themselves too much based on the company’s current sales.
- We recently made a big investment in sales and marketing.
High overhead can be a strong indicator of inefficiency or productivity problems. It’s saying you have the infrastructure and management in place to do more work — but you’re not getting enough sales (so you are spending a higher percentage of your revenue on overhead).
It must also be noted there are many profitable, great companies that run with higher-than-average overhead. These companies typically have great management and facilities in place, and run very efficient field operations. Their “high” overhead consists of great systems and management to effectively control day-to-day operations. Companies in this category can be profitable, since their high overhead is offset by lower-than-average spending when it comes to labour and equipment. They get more work done with less people and equipment.
Coming in June: How Canadian landscape companies are improving their overhead percentages.
Mark Bradley is president of TBG Landscape and LMN, based in Ontario. Financial benchmarks contained in this article are gathered from industry surveys and one-on-one experiences with thousands of landscape contractors across North America. No LMN user data was analyzed or used to provide information for this article.