Profit or loss
There are lots of areas of your financials that deserve attention: revenue, equipment, salaries, tools, rent. But few are more important than gross margin – a key metric that determines your company's financial success. It's just as important as revenue, cash flow and accounts receivable.
Remember that without the right amount of gross margin, you won't be able to pay your overhead costs and have enough left over to make a net profit.
The gross margin of your company pays the overhead, which includes indirect costs like gas, equipment, vehicles, supervisors and mechanics, as well as SGA costs (sales, general and administration) like salespeople, office staff, administration staff, yard rent and your salary.
Whatever is left over after paying for the overhead costs is net profit. Without achieving the right amount of gross margin, we just become very hard working folks making a living and not a profit.
And, ultimately, you are in business to make a fair and reasonable profit. Profit is not a four-letter word. If you don't focus on gross margin at the beginning of your pricing process, you will go out of business.
Getting to know gross margin.
Understanding gross margin requires a keen understanding of your direct costs – what it costs to actually perform the work you've sold. These are the out-of-pocket costs or the costs that were included in your estimate to perform the work.
In the landscape industry, labor costs are the greatest expense line item. Normally, materials will range from 2-6 percent of revenue in maintenance operations and as much as 30 percent of revenue with installation operations. However, the labor to perform the work will range from 25-55 percent of revenue, depending on the type of business you have. These direct costs are the foundation of understanding and calculating gross margin.