While green industry business owners have varying levels of financial knowledge, few have a solid understanding of the mechanics of money. The reason is most landscape contractors are great technicians, but perhaps not financial wizards. The ultimate goal, however, is to be successful, profitable, scalable and salable.
For most landscaping business owners, the first few years are the toughest time to create a profit. Why? The majority are more concerned with cash in, not the cash remaining. Sales are easy to measure, whereas calculating costs requires infrastructure.
Once you understand how to run the business by the numbers, it becomes second nature. This is something you need to learn, though, so make time to drill down on numbers. This analysis keeps you accountable and improves your ability to sleep.
Remember: It is simple. Money comes in. Money goes out.
As a business owner, the following three financial reporting documents are your friend because, together, they provide the business performance details you need:
1. The monthly balance statement, which is a picture of an event, delineates the business’ financial position at the end of each month. Its purpose is to provide a clear picture of your assets, liabilities and equity. Assets are what you own that drives revenue or supports business operations. Liabilities are long-term or additional obligations you have to gain assets. Equity is the leftovers when taking on liabilities to acquire assets.
2. The monthly income statement (or profit and loss statement), which is a picture of the process, elaborates on business during the month by chronicling its level of profitability over the month. This a critical document for bankers and other lenders to determine if the business is a good risk. It is a picture of revenues and gains, and expenses and losses. It explains how the balance statement changes from month to month.
3. The monthly cash flow statement, which is an explanation of the process, reveals how the income statement created the balance statement. It reorganizes the information from the income statement into operations, investing, financing and supporting. Operations addresses the sources of cash. Investing covers acquiring the assets needed to operate and grow the business. Financing refers to shares and dividends. (Most small business owners do not take or pay dividends during the company’s early stages, so this is usually blank.) Supporting covers non-financial transactions and taxes paid during the month.
These financial statements report the health of your business, and are useful for making decisions on expansion and financing. The data can also figure into marketing decisions by showing which aspects of company operations provide the best return on your investment.