Why is Knowing your Gross Margin Important?
Your Gross Margin is what we call the “furnace” that keeps your financials warm. Without the right Gross Margins it will be difficult to cover the “nut” and to make a Net Profit. It will be difficult – if not impossible – to make money if the appropriate Gross Margins are not made. That’s why knowing what the correct Gross Margin needs to be, and then making the right Gross Margin are fundamental to your organization’s financial success.
Key Takeaways:
- Determine Your Current Overall Gross Margin
- Know your Individual Service Department Gross Margins
Determine Your Current Overall Combined Gross Margin
Exercise:
- Take your total Net Revenue and subtract your total Direct Costs to arrive at your Gross Margin dollars.
- Now divide this number by your revenue to determine total current % (percent) Gross Margin
Try this Simple Formula:
Total Combined Net Revenue (Gross Revenue less revenue generated by subcontractors)
Minus
Total Combined Direct Costs (Labor+ Burden + Materials)
Equal
Total Combined Gross Margin
Ask Yourself:
- What is your current total combined gross margin year to date? $ _____________
- What is your current total combined gross margin as a % (percent) of revenue year to date? _________%
- Is this enough Gross Margin dollars to cover the “nut” (overhead expenses) or break even? __________
- What additional Gross Margin is needed to break even? Make a profit? $__________/ average per month?
- How much more revenue would it require at the current Gross Margin to get the additional GM needed to cover the “nut”? $__________/month
Determine Your Current Gross Margin per Department
If you have the financial tools to determine the Gross Margin per department or revenue stream we need to determine the Gross Margin for each of areas. This will show each department’s contribution to the overall combined Gross Margin.
Action Step:
Determine the year-to-date Gross Margins for the following departments within your organization. These should be calculated for each department that represents at least 10 percent of the total revenue of the company:
Design/ Build Gross Margin = $ __________ and __________%
Installation/Landscape Gross Margin = $ __________ and ________%
Maintenance Gross Margin = $ ____________ and __________%
Enhancements Gross Margin = $ __________ and _________%
Tree Care Gross Margin = $ _________ and _________ %
Snow = $ ___________ and __________%
Other __________ = $ ___________ and ________%
Other __________ = $ ___________ and _______%
What departments have the highest Gross Margin? The lowest? Why?
How would having the Right Price be helpful in getting these to the right level of Gross Margin?
The Price is Right – Determining Your Current Gross Margins Summary
You now have determined your overall combined Gross Margin as well as your Gross Margins per department. These will play a fundamental role in determining the Right Price. We refer often to Gross Margin in our Harvest Way Training Program. Knowing, understanding and getting the Right Gross Margins for your organization is critical.
Be sure to leave us a comment below
We track 4 divisions planting,contruction,maintenance and lawncare and track admin/O.H. seaparately then allocate o/h each month to each division. Does it matter whether the allocation is a % of rvenue or a % direct cost of that department for that month?
Great question Tom!
For the most part assigning O.H. as a % of revenue works. If you have very specific OH costs associated with the divisions you may want to assign these costs to that revenue stream. This would include equipment costs for heavy equipment and sales salaries if they only sell for one division. Then allocate the remainder of the OH as a % of revenue.
Thanks for asking and feel free to contact me with any other questions you may have.
Head Harvester Bill Arman [email protected] or 949.466.8837
What is a good gross margin percentage? what range should we be looking for?
Michael, the answer to that is that depends! It depends on the department, fair market value and what OH costs are in place that need to be covered. As in “cover the nut” as we spoke about in several of our blogs.
Roughly here are some ranges for desired gross margins:
Landscape Maintenance: 48%-53% ; Landscape Enhancements: 50% – 55% ; Irrigation Work: 55%-60%
Landscape Installs: 42%- 47% ; Snow Work: 65% + ; Tree Care 58% – 60%
Hopes this helps and please get in touch with either Harvest Ed or Harvester Bill if you would like to learn more on HOW to get to these levels. That is if you think these are good levels, right?
All the best,
Head Harvester Bill