Earlier this year, we did an exercise with the entire Grunder Landscaping Team to talk about profitability and explain where all the cash goes in our operation. To simplify the conversation and put it into terms that are easy to understand, we used the trusted "Penny Exercise" or the "Where does $1.00 Go" method.
Here’s how it works:
You start out with $1.00 = 100% of revenue and then show exactly where each $1 that comes into our business goes as a cost or expense. Here’s an example based on industry standards:
For every $1 in revenue, we have:
$0.53 Cost of Goods Sold (Direct Labor, Materials, Subcontractors, and Rentals)
$0.40 Expenses (Salaries, Marketing, Fleet/Equipment, Insurance, Rent, Accounting, Legal, Office, Software, etc)
If we subtract our costs and our overhead; we are left with $0.07 (7%) in Profit. Which is great, but it doesn’t end there from a cash outlay. What about taxes?
Let's say we had just $0.03 as S Corp taxes.
What’s left now? $0.04.
That $0.04 doesn’t just get deposited into the owner’s bank account. It represents what we have available for:
- Reinvestment in trucks, equipment, and facility
- Cash reserves for slow season or slow-paying clients
- Paying down debt
- Owner distribution
We’re transparent with our team and believe in open book management, and sharing the numbers this way puts it into terms that everyone on our team can understand. The collective feedback we received: “Wow, I didn’t realize our margins were that tight.”
And when we explain what the profits go for, there’s a clear cause and effect relationship that highlights how each team member impacts the company’s success or failure in a year. If we have:
- Equipment or property damages
- Jobs finishing above bid hours
- Less sales and revenue than we budgeted for
It means our margins are squeezed and if our cost of goods sold and/or our expenses increase even by 1% we may not have the funds to do things that we all want to do as a company, and we may have to say “not this year” to things like:
- Replacing some of our older trucks and equipment
- Adding new team members
- Renovating parts of our facility
- Additional bonuses or raises
This exercise is a great way to help your team understand what’s on the line year after year, and get them bought in and taking ownership of their role and the impact it has on the team as a whole. Try it with your own team this Fall, I think you’ll be pleasantly surprised by their reactions.
Vince Torchia
Vice President & Director of Strategy
The Grow Group & Grunder Landscaping Co.
P.S. Come see Grunder Landscaping Co. for yourself this fall during our GLC Field Trips. We have just 2 date options left this year, and our October event is close to selling out. Mark your calendar and claim your spot now!