How to Make Profit a Habit NOT an Event

Making a profit in your landscaping business is crucial to controlling your finances and allowing you to pay yourself properly. It’s also crucial in order for you to properly put money away, pay your taxes, control your expenses through your operating expense account and to {obviously} – PUT PROFIT FIRST!

Did you know…

Eighty-three percent of business owners are actually living pay to paycheck. Since that number was first published by the Small Business Association, it has fluctuated anywhere from the high 70s to the low to mid 80s year after year. Now more than ever, we’re seeing that landscape business owners are struggling and are unable to actually pay their bills or themselves a fair salary. This continues to be the cycle for this industry because the owners don’t know what to charge or how to make good financial decisions in their landscaping business in order to maintain a healthy profit.

Have you ever said…

With that said, the first statement we often hear is, “We never have enough money to actually pay our taxes.” I can tell you from experience, that Profit First teaches you how to put money aside so that you are able to pay your taxes with no surprises at the end of the season. PLUS, any money that you don’t need to pay your taxes goes straight to your profit account, but we’ll get into that a little bit more as we go on.

Have you ever said:

  • I haven’t even had enough money to take a paycheck.
  • I don’t have anything to show for all my hard work!
  • I don’t know how or have any money to hire more people!

AND here’s a big one:

  • My accountant says I actually made a profit, but where is all the money?
  • It’s not in my bank account so where is it?
  • I don’t know where all my money goes!?!

When you look at a profit and loss statement, that is oftentimes very misleading because if you are showing a profit, then the problem actually lies with your balance sheet. Your balance sheet has liabilities and assets on it and what ends up happening is your P&L is just a snapshot of where your business is on an accrual basis. What you really want to look at on your P&L is can you run on a cash basis. One of the first places to start to answer this question is in your accounting software – aka. Quickbooks. In QuickBooks, you can look at your P&L in a cash basis versus an accrual basis and and see if you are truly making a profit with the money coming in and the expenses going out.

Redefining “Profits”

Profit is NOT what’s left over after paying everyone else. It shouldn’t be thought of as scraps. Profits belong to the shareholders and are not to be used to finance the operations. It really should be your reward in your business. Profit is not an event….it’s a habit!

With the Profit First method, you can make profit a habit by getting into the routine of allocations and knowing what to charge. We’ll talk about that a little bit more later on but it’s important to understand that the business needs to be able to support itself – not YOU supporting the business.

Parkinson’s Law – A Toothpaste Tube Example

Parkinson’s law is kind of like a tube of toothpaste. If you have a resource available, you will use all of it. When there is less of it, your behavior changes.
Same principles apply in Profit First. You might become more innovative, prudent, creative, and find ways to get out of most of what you have. Maybe you’ll take the tube of toothpaste and roll it up and squeezing it really tight to get more toothpaste out in order to brush your teeth. That’s what we really look at with Profit First. We try to make good decisions when we are using our money.

The same scenario would be if you were given a million dollars to build a house. You’d probably use the million dollars or close to it to build a house. But if you were only given a hundred thousand dollars to build a house, do you think you could get it done?

Truthfully, you’d probably could get it done but you’d be more frugal about how you built that house and more frugal about how you spent your money. You’re still going to have a warm house. You’re still going to have one or two bedrooms, but it’s all about knowing what you have to work with in order to make the business work.

Bank Balance Accounting

To start implementing the Profit First method, you need to open up five core bank accounts. These accounts are to be used to allocate: income, profit, owner’s pay, taxes, and operating expenses. The purpose for this is so you don’t have to rely on a P&L statement or a balance sheet on a regular basis. Instead, what you’ll start doing, is you’ll start looking at your bank account balances. And in return, you’ll know the health of the business based on the percentages of money that’s going into those bank accounts (and/or just the total amount of money in general).

This system is very similar to the old envelope system. Back in the day, parents would take a paycheck, get it cashed at the bank, come back home and divide the money into three or four different envelopes (ie. mortgage, groceries, gas, utilities, etc.). Profit First is using the same system but with bank accounts. You’re putting certain percentages of money into bank accounts so that you learn to work with the money you have on hand.

Take Your Profit First – ALWAYS!

It’s time to reverse your thinking! It’s no longer Sales – Expenses = Profit. With the Profit First method you are implementing Sales – Profit = Expenses. This methodology allows you to focus on what comes first. Because as we all know, what comes first is a priority.

Profit NEEDS to be a priority to you.

We know that Parkinson’s Law is a powerful ally and Bank Balance Accounting works because you’re able to see the funds that you have in each account. It’s the same concept as a traditional 401k investment program. These types of programs have been one of the most successful ways to save for retirement. because you are allocating a certain amount of money from your paycheck to go directly into your 401k, and all you see is your net paycheck at the end. Same concept with Profit First. You’re taking your profit out first, making it a priority in your business.

4 Steps to Profit First

Step 1: Multiple Small Plates. You’re going to look at your five Profit First bank accounts like small plates at the dinner table. Bear with me, we’re going to relate this back to a lesson in the health industry. Small plates = five core accounts. Here is an example of the plates.

  1. Real Revenue (income) Account – income minus materials and subcontractor(s) pay.
  2. Profit Hold Account – A business doing a hundred thousand dollars in revenue, you should be able to put five thousand dollars away into the profit account.
  3. Owner’s Pay Account – 50% should be allocated here.
  4. Tax Hold Account – A business doing a hundred thousand dollars in revenue should put away 15% or $15,000. for taxes.
  5. Operating Expenses Account – A business should be able to operate on 30%.

Note: These numbers can fluctuate a little bit depending on the size of the business and the revenue, so don’t stress out. These are where really financially healthy companies are hitting and if you’re heading anywhere close to these, you’re probably doing pretty good.

Step Two: Vegetables First! This is something I know you’ve heard your doctor say. The first thing you should be eating at every meal is your vegetables. Same goes with profit. You always want to follow the sequence – allocate, distribute, and pay your bills.

If you’re not sure how to allocate money into the five accounts, don’t worry, that’s what a Profit First Professional does for your business. They determine the allocations percentages based on where your business’ financial health is now right now. They do this by getting TAPs (target allocation percentages) figured out and implemented in a way to grow your business profitably.

Step Three: Remove Temptation! We like to take those five bank accounts and take it one step further. Don’t just open those accounts at your local bank, set a couple up where you have to drive 30-40 minutes away. This removes the temptation to remove unnecessary money from those accounts.

Example: What you do is when you move your money to your profit and tax account, you actually transfer that money to a different bank to a profit hold account and a profit tax account. By doing this, you’re taking that money and you’re moving it out of sight, out of mind – removing all temptation.

Step Four: Be Consistent! Start by doing your allocation weekly. Then once you get the rhythm down for a few months and you feel comfortable that you know when your money comes in and when you pay your vendors, then it’s recommended to go to twice a month. Those days could be whatever days of the month you want them to be, but as a generally rule we say around the 10th and the 25th of the month.

Profit First for Landscapers Tip: If you’re in the FREE Profit First Facebook group, I remind everybody it’s allocation day and it’s time to go ahead and do your allocations on the 10th and 25th. So if you want this reminder – join us!

Allocation Process: All you’re doing is taking your money (aka. deposits from clients), whether that’s checks via mail or money from credit card processing, and putting that into your income account. Then once a week or twice a month you’re taking all that money in your income account and you’re distributing it into your other four accounts – profit, owner’s pay, taxes, and operating expenses. Lastly at the end of every quarter, you do a profit distribution. This is where you take a small amount of that profit and celebrate. A big part of Profit First is celebration.

Reminder: Quarterly CAPs may need to be adjusted if you do quarterly celebrations. CAPs are your current allocation percentages and then the TAPs are your targeted allocation percentages.

Ways to increase Profit

There’s three ways to increase profit in your business – increase sales, increase margins, and/or reduce expenses. One of the biggest expenses that we see inside service industries, is labor. If you want a way to increase profits, then look at your labor. Try to get the most billable hours out of your team members as you possibly can.

Another way to increase profits is to reduce expenses and one way to do this is to buy it in bulk. Stop going to the landscape supply yard and paying twenty dollars a scoop for mulch. If you have space at your yard to store materials you regularly use, then buy them in bulk…..BUT keep charging your clients the same amount.

These are just a few ways that you can start increasing your profits.

Listen in to hear more about how you can increase your profits, expand your cash flow and start charging what you are worth:

Ask Yourself 3 Questions

Before you make a purchase in your business ask yourself these three questions.

Is the purchase good for the company?
Is the purchase good for the customer?
Can the purchase wait?
This is the test on which you base all decisions on before you buy anything in your company.

Question: Where will you be a year from now if you don’t solve your profitability problem today?

As you think on that question, we invite you to join our Profit First for Landscapers Facebook group. This group is where we share with you tips and tools you can use to implement the Profit First method in your business. With over 2100 members, we are growing this group in order to put an end to entrepreneurial poverty in the #greenindustry.

Who am I to be telling YOU what’s crucial for your business?

I’m Adam Linnemann, owner and CEO of Linnemann Lawn & Landscaping. I started my business when I was 14 years old. Then back in 2017, my wife and I started The Green Executive, a landscaping industry specific consulting firm. From there we became Certified in the Profit First method. As Certified Profit First Professionals, we actually went through about six months of stringent training in order to learn the Profit First method. We were coached by no other than Mike Michalowicz himself, as well as the co-founder of Profit First Professionals Ron Saharyan. During this training we actually had to implement Profit First in our own businesses The Green Executive and Linnemann Lawncare and Landscaping, as well as, run beta clients (and what not) in order to actually become certified.

Let us help you do the same in your business >> click here!