Profitability Reporting – What is it and what does it mean?
And more importantly, why is Profitability Reporting critical for the success of landscaping business?
First, being a landscaping industry pro can be really challenging.
There’s a lot of competition.
Technology is constantly changing.
There’s a million variables to consider for every job.
Labor costs are always a hot topic.
So understanding which jobs are contributing to your profitability, and which ones aren’t will help you be a better operator. And it will help you be more efficient in you’re in a finance role.
Understanding WHY you’re hitting or missing profit goals will ensure the ongoing financial health of your business – no matter the size, service offering or business model you operate in.
Next time you hear someone say “You have to know your numbers” – this is what they’re talking about.
Profitability reporting is a financial analysis process that helps businesses evaluate their performance and measure their ability to generate profit. It involves assessing various aspects of a company’s operations to determine how efficiently it is utilizing resources to generate income and driving profit from the revenue the business is generating.
Profitability reporting begins with an analysis of the company’s revenue streams. This includes examining sales figures, revenue trends over time, and the sources of revenue (like products/services sold or geographical regions).
Cost Analysis
Businesses need to understand their costs thoroughly to assess profitability accurately. Cost analysis involves identifying and categorizing all expenses incurred in running the business, including direct costs (fleet, subs, materials and labor) and indirect costs (like overhead expenses and administrative costs).
Profitability Metrics
Various financial metrics are used to evaluate profitability. Common metrics include gross profit margin, operating profit margin, net profit margin, return on investment (ROI), and return on assets (ROA). Understanding your return on assets like vehicles and heavy equipment has always been a major challenge for landscapers. Momentum solves this by automating the depreciation and cost-per-mile of ownership calculations. These metrics help assess how effectively the company is managing its costs relative to its revenue.
- Gross Profit Margin
- Gross profit margin is a financial metric that measures the percentage of revenue that exceeds the cost of goods sold (COGS). It represents the portion of revenue that a company retains after deducting the direct costs associated with producing the goods or services sold.
Formula: Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue * 100%
Gross profit margin indicates the efficiency of a company’s production process and its ability to generate profit from its core business activities.
- Gross profit margin is a financial metric that measures the percentage of revenue that exceeds the cost of goods sold (COGS). It represents the portion of revenue that a company retains after deducting the direct costs associated with producing the goods or services sold.
- Operating Profit Margin
- Operating profit margin is a financial ratio that measures the percentage of revenue that remains after deducting operating expenses, such as wages, rent, utilities, and depreciation, from gross profit. It represents the profitability of a company’s core operations.
Formula: Operating Profit Margin = Operating Income / Revenue * 100%
Operating profit margin provides insight into a company’s ability to generate profit from its primary business activities, excluding non-operating expenses and income.
- Operating profit margin is a financial ratio that measures the percentage of revenue that remains after deducting operating expenses, such as wages, rent, utilities, and depreciation, from gross profit. It represents the profitability of a company’s core operations.
- Net Profit Margin
- Net profit margin is a financial metric that measures the percentage of revenue that remains as net income after deducting all expenses, including operating expenses, interest, taxes, and other non-operating costs. It reflects the overall profitability of a company.
Formula: Net Profit Margin = Net Income / Revenue * 100%
Net profit margin is a key indicator of a company’s overall financial health and efficiency in managing expenses to generate profit for shareholders.
- Net profit margin is a financial metric that measures the percentage of revenue that remains as net income after deducting all expenses, including operating expenses, interest, taxes, and other non-operating costs. It reflects the overall profitability of a company.
- Return on Investment (ROI)
- Return on Investment (ROI) is a financial ratio that measures the profitability of an investment relative to its cost. It evaluates the return generated from an investment compared to the initial investment amount.
Formula: ROI = (Net Profit / Cost of Investment) * 100%
ROI is used to assess the efficiency and profitability of investments, helping investors and businesses make informed decisions about allocating resources and evaluating the success of investment projects.
- Return on Investment (ROI) is a financial ratio that measures the profitability of an investment relative to its cost. It evaluates the return generated from an investment compared to the initial investment amount.
- Return on Assets (ROA)
- Return on Assets (ROA) is a financial ratio that measures a company’s ability to generate profit from its assets. It evaluates how efficiently a company utilizes its assets to generate earnings.
Formula: ROA = Net Income / Total Assets
ROA indicates the effectiveness of asset utilization in generating profits. It is used by investors and analysts to assess a company’s profitability relative to its asset base and to compare performance across companies and industries.
- Return on Assets (ROA) is a financial ratio that measures a company’s ability to generate profit from its assets. It evaluates how efficiently a company utilizes its assets to generate earnings.
Momentum automatically collects all of the data you need with GPS devices AND makes all of these financial calculations automatically.
Comparison and Benchmarking
Profitability reporting often involves comparing the company’s performance against industry benchmarks or competitors. This comparison provides context for understanding whether the company’s profitability is in line with expectations or if there are areas where it could improve.
A common benchmark for profitability in the landscape industry is 10 – 15% net profit for commercial jobs.
There’s a large number of landscapers who buy into the “50% rule” as popularized by Keith Kalfas. The 50% rule is a solid rule of thumb. This post isn’t about debating his theories. It works for him and many others. But all of his pricing principles are still based on assumptions and averages.
Keith mentions “going over all the math” on overhead like time, labor, materials and administrative costs in this video.
This is typically where profits are lost because everything is based on assumptions. That’s a dangerous game to play for a lot of landscape companies, especially since all of the costs Keith listed (and more) are actually variable costs that should be associated with individual jobs and customers, not at a company level.
It’s worth noting that this type of “on the spot” math and quoting might work for small and medium operations, but not for large, sophisticated landscape organizations that operate in multiple geographic areas.
Trend Analysis
Examining profitability trends over time is essential for identifying patterns and assessing the effectiveness of business strategies. By analyzing trends, businesses can understand whether profitability is improving, declining, or remaining stable and can make informed decisions about future actions.
Built for commercial maintenance landscape companies that invoice clients on a monthly basis.
The burndown analysis shows the amount of budget that’s been used for each job site visit and the total amount remaining. This is all based on the contracted amount you’ve agreed on with your customer.
You can use the Burndown Analysis to predict the likelihood of staying profitable on your maintenance contracts because you can see the cost impact of every site visit.
It’s great for staying aware of scope creep or when enhancement requests are fulfilled by field crews but aren’t accurately accounted for. On-the-spot enhancements will skew your profitability reporting because your crews will spend more time than originally budgeted at the job site.
The Burndown Analysis isn’t just excellent for financial reporting. It provides insight into your operational performance.
For example:
If you notice that work is consistently finished in less time than budgeted this might be a sign that they aren’t committing to enough time on the job. Quality issues might exist.
If crews are consistently over the estimated time on job, then they might’ve been committed to too much work or more resources need to be allocated to the job
The burndown analysis helps to ensure you’re hitting your profit goals on every job. And the best part about it, is that all of the data used to create this report is captured automatically with Momentum’s internet connected devices. So you never have to worry about inaccuracies or time consuming data entry.
It’s financial sophistication without the complexity that plagues other software systems.
Check out this Burndown Analysis explainer video.
Root Cause Analysis
Profitability reporting may involve conducting a root cause analysis to identify the factors influencing profitability. This could include examining changes in pricing strategies, fluctuations in demand, shifts in market conditions, or inefficiencies in operations.
Decision Making
The insights gained from profitability reporting are crucial for decision-making processes within the organization. Businesses can use this information to make strategic decisions about resource allocation, pricing strategies, cost-cutting initiatives, investments, and other aspects of operations.
