Increase This Metric to Double Profitability
Too many landscape businesses struggle to manage and maximize their field labor ratio. This metric is one of the single most important key performance indicator (KPI) you have in the business. Without it, you will find that profit in the business is being affected. In order to change this, you have to start by understanding how to optimize your field to labor ratio to increase profitability.
Defining Field Labor Ratio
Your field labor ratio is the cost of wages for the field team divided by your sales revenue. Now, the lower that number is the better, because this indicates that you are spending less on labor for each dollar of sales earned. However, it’s good to know that labor is going to be the largest obstacle you will face in your business.
In one of our recent posts on the Facebook business page, we asked: “Where do you struggle the most when it comes to pricing?” We did not find it shocking at all when the the #1 answer was, “labor.”
So what exactly can be done? You can:
- Sell jobs that maximize revenue per hour
- Sell jobs that maximize throughput per hour
- Use more (and bigger) equipment
- Upsell easy-to-install materials (Super Profit Jobs!)
Here’s what each of those look like…
Sell Jobs That Maximize Revenue Per Hour
By selling these kind of jobs, you will know how much total revenue (including revenue earned from materials, equipment, overhead, markups, and profit) is produced each labor hour.
To calculate the benchmark for revenue per labor hour, you need to:
- Figuring out your labor hours available – add up all the anticipated payroll hours for your field staff ONLY (do not include overhead staff). This calculation looks like: field staff x hours each = labor hours.
- Subtract ‘unbillable’ hours – these are the payroll hours that the staff is paid, but aren’t producing any revenue (aka. drive time, shop time, training time, mechanical work, and so on). This calculation looks like: hours @ % productive time = man hours.
- Divide your sales goal by your billable labor hours. This calculation looks like: sales goal $ amount /divided by labor hours = $ per man hour.
Pro Tip: Get a FREE LMN account and start building a budget for 100% free today. LMN has been a game changer in our Linnemann Lawn Care & Landscaping business!
Now, once you have your benchmark for revenue per hour, it should be easier to hit your sales goal. In order to KNOW this, you need to divide each estimate’s selling price by the number of labor hours estimated to get that estimate’s revenue per hour. This number needs be higher than your benchmark so you can beat your sales goal. If it’s lower, then that’s an indicator that the job you are quoting might not be the best job for your business.
Sell Jobs That Maximize Throughput Per Hour
Throughput is a bit different. This is the amount of money left in your company after you pay your external vendors. So to calculate this, you take the job’s revenue and subtract your vendor’s costs for materials, subs, rentals and so on. This figure is considered better than revenue per hour since revenue per hour doesn’t take into consideration subcontractors or sell high-priced materials at a minimal markup. While your revenue may look great, if most of the profit is going towards paying vendors, then it’s hurting the bottom line in your business.
By selling jobs that take into consideration throughput, you’re able to show how much money is left in your business after vendors are paid. Now, if you want to calculate throughput per hour, you can divide each job’s throughput by its estimated labor hours. The higher the number, the better the job and the lower your labor ratio.
Use More (and Bigger) Equipment
Owning the right equipment is a great way to reduce your field labor ratio. Field labor ratio, plus revenue per hour, goes up when you leverage equipment that can speed up jobs. Increasing productivity with the right equipment, can not only speed up the time spent at a job, but ultimately reduce the number of people needed on the job site. Which in turn, will increase your bottom line and lead to profitability.
Equipment that can reduce field to labor ratio:
- Larger Trucks – hauling/delivering materials with your own trucks can save a lot of delivery hours.
- Tracked Skid Steers – they can be used in the Spring/Fall when traditional wheeled machines cause lots of damage.
- Power Wheelbarrows – most contractors will say they can’t remember how they did work without one.
- Mini-Excavators – combined with a few work tools (augers, hammers, grading buckets, thumb buckets), they’re the swiss army knife for landscapers.
While we know that equipment purchases are massive investments in your landscaping business, we also know that owning the right equipment can help you cut costs as well. Click here to use LMN’s Equipment Cost Calculator.
Pro Tip: Don’t just buy a piece of equipment because your accountant told you it was time for a write off. Buy it because you needed it and consistently use it. If you have additional profit at the end of the year, pay yourself more or start an investment account instead of buying something you don’t need!
Upsell Easy-to-Install Materials
“There’s no profit margin like an upsell margin.” No matter what you do, design & build or just offer maintenance, always be looking for things that can be installed with very little labor (patio furniture, lighting kits, decorative structures, art pieces and so on). By adding these into your sales process, you’ll be able to drive your revenue up with very few labor hours added.
At this point, you know that understanding your numbers is critical to your success in this industry. Your field labor ratio is THE KPI to maximizing labor productivity. If you’ll put the above strategies into place to improve your field labor ratio, then you will be well on your way to doubling profitability.
In case you missed last monthly article, “The Importance of Understanding the Numbers in Your Business” check it out now so you can better understand what all goes into those numbers. That article covers field labor, materials, equipment, team benefits, mortgage/rent on your shop or office and more.