If you are the owner of a more established landscape gardening business, you may already look at the gross profit margin as part of your regular financial reviews. However, some of you may not have come across this term before. Gross profit margin is the percentage of sales that remain in your landscape gardening business after direct costs have been deducted. The figure can be a useful tool to measure business progress and can be benchmarked for comparison with future periods. Also, it’s helpful to know the industry average, to consider how you are performing compared with your competitors.
The gross profit margin is also known as a Key Performance Indicator (‘KPI’). The reason for measuring KPIs, such as the gross profit margin, is to create a target or a goal for your business. Also, it helps to gauge the progress of the business. You may have heard the saying ‘what gets measured gets done’. You can use the results from measuring the KPIs to make improvements in your business. Keep measuring and fine tuning until you reach your goals.
In a new business, the higher the gross profit margin, the quicker you will reach the break even point. Having a strong gross profit margin is the first step towards achieving a healthy net profit in your landscaping business and the main factors that affect it are pricing, materials, and labour. When all three factors are on point, you will optimise the gross profit margin. Unfortunately, external factors (that are out of your control) can interfere with this, for example the availability of a particular material that causes a delay on a job.
There are two steps you need to take to calculate the gross profit margin. First, subtract the direct costs from the turnover (sales) to get the gross profit figure. Second, take this gross profit figure and divide it by the turnover (sales). This is the gross profit percentage or gross profit margin. (Please note, the gross profit percentage should be fairly high as the gross profit does not include overheads). You could make this calculation on a monthly or quarterly basis, and compare one period to the next, to see if an improvement has been made.
Of course, it goes without saying that you must keep accurate financial records (‘bookkeeping’) to be able to calculate the gross profit margin. Bookkeeping is the financial foundation of your landscaping business and without it you will not accurately understand the position of your business, nor be able to steer it in the right direction. Do you know what the right direction is for your business? If not, the first thing you need to do is to work out what you want to achieve by being in business. Once you are clear on that, it will help you to make the right decisions along the way.