An analysis of fiscal 2013

Transcription

1 2014 Operating Cost Benchmark Report An analysis of fiscal 2013 Prepared by Profit Planning Group

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3 Contents Introduction... 1 Executive Summary Overview of Results... 2 Results Summary... 3 Graphical Analysis... 4 Financial Statements & Ratios Return On Investment... 7 Income Statement... 8 Expenses In Relation to Gross Margin... 9 Balance Sheet Financial Ratios Assets, Growth & Cash Sufficiency Employees Operations Ratio Calculation Prepared By Prepared For Profit Planning Group, Inc. Tree Care Industry Association th Street, Suite Harvey Road, Suite 101 Boulder, CO Londonderry, NH v f

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5 Introduction The 2014 Operating Cost Benchmark Report provides detailed financial performance results for the tree care industry based on data provided by participating firms. Results presented in this report are based on income statement, balance sheet and operating data for fiscal The tables in this report are designed to provide a comprehensive but straightforward analysis and comparison of profitability among firms. Methodology Survey questionnaires were distributed to collect detailed financial and operational information. Completed questionnaires were returned directly to Profit Planning Group for analysis. Individual responses were kept strictly confidential by Profit Planning Group. No one from TCIA or any other firm had access to any individual firm s survey or results. Report Layout Executive Summary is an overview of the study results highlighting the differences between the typical firm and the typical high-profit firm. Financial Statements & Ratios is a detailed view of return on investment, income statement and balance sheet items. Financial and productivity ratios are presented with commentary about the importance of these measures. Ratio Calculation summarizes the calculations used in the analysis. Statistics Medians Most of the figures presented in this report are based on medians. The median is the middle value (the 50 th percentile) in the sorted list of all reported values. Unlike averages, medians are not influenced by extreme values and are, therefore, the preferred statistic for this analysis. Medians best represent a typical firm. The N/A Label Throughout this report, N/A designates results which are not available due to small samples. 1

6 Executive Summary Overview of Results The results labeled Typical Member present a typical participant out of the group of all 74 participants. These results are based on the medians of the data collected in the study. The typical participant is at the middle of the values reported for a particular ratio. Half of participants performed better and the other half performed worse. The High Profit results present a typical participant within the group of high-profit participants. This group includes the top 19 of all 74 participants based on return on assets (ROA). The typical high-profit firm s ROA is the middle value in the range of all ROA values reported by this group. Financial performance varied widely between the typical and high-profit groups. The difference can be seen in the following Critical Profit Variables (CPVs). Comparison of Critical Profit Variables Gross Margin Percentage Ability to sell at prices which cover expenses and earn a profit. Operating Expense Percentage Expense control is crucial in achieving adequate profit. Sales $ per Employee Measures employee productivity. Average Collection Period Days Measures accounts receivable collection practices. Profit Margin Percentage Measures the success of combined revenue, purchasing & expense control. Typical TCIA Member High Profit TCIA , , High-profit firms may not always perform better in all critical profit variables but their combined CPV performance produces better overall results. The financial impact of this combined CPV performance can be seen below. Overview of Financial Results Typical High TCIA Profit Member TCIA Income Statement ($) Net Sales 1,032, ,041 Direct Costs 361, ,397 Gross Profit 670, ,644 Operating Expense 603, ,773 Operating Profit 67,090 99,871 Other Income/Expenses -3,096-1,752 Profit Before Taxes 63,994 98,119 Assets ($) Cash 75,004 36,561 Accounts Receivable 48,167 21,609 All Other Assets 220,883 58,638 Total Assets 344, ,808 Return On Assets

7 Executive Summary Results Summary The following summary presents selected ratios for an overview of survey results. Results Summary Typical High TCIA Profit Member TCIA Strategic Profit Model Ratios Profit Margin (%) Asset Turnover Return On Assets (pre-tax %) Financial Leverage Return On Net Worth (pre-tax %) Sales Growth Sales Change (2013 to 2014 %) Income Statement (% of sales) Net Sales Direct Costs Gross Margin Total Vehicle & Equipment Expense Total Indirect Expense Total G&A Payroll Expense Total Other G&A Expense Total Operating Expenses Operating Profit Other Income/Expense Profit Before Taxes Financial Ratios Current Ratio Quick Ratio Accounts Receivable Collection Days Accounts Payable Payout Period (days) Sales to Fixed Assets Debt To Equity EBIT to Total Assets % Employee Productivity Sales $ per Production FTE Employee 151, ,820 Sales $ per FTE Employee 101, ,737 Gross Profit $ per FTE Employee 65,088 65,512 Payroll $ per FTE Employee 51,177 45,990 3

8 Executive Summary Graphical Analysis 80.0 Gross Margin & Operating Expenses (%) Gross Margin % Operating Expense % Typical TCIA Member High Profit TCIA Sales Under $400,000 Sales $400,000 - $1 Sales $1 - $2 Sales Over $ Sales Change From Previous Year (%) Typical TCIA Member High Profit TCIA Sales Under $400,000 Sales $400,000 - $1 Sales $1 - $2 Sales Over $2 4

9 Executive Summary Graphical Analysis 120,000 Sales & Gross Profit per FTE Employee ($) Sales $ per Employee GP $ per Employee 100,000 80,000 60,000 40,000 20, ,010 65,088 Typical TCIA Member 103,737 65,512 High Profit TCIA 81,457 52,508 Sales Under $400,000 93,906 65,512 Sales $400,000 - $1 110,097 71, ,644 69,919 Sales $1 - $2 Sales Over $ Accounts Receivable Collection Days Typical TCIA Member High Profit TCIA Sales Under $400,000 Sales $400,000 - $1 Sales $1 - $2 Sales Over $2 5

10 Executive Summary Graphical Analysis 18.0 Profit Margin (%) Typical TCIA Member High Profit TCIA Sales Under $400,000 Sales $400,000 - $1 Sales $1 - $2 Sales Over $ Return on Assets (%) Typical TCIA Member High Profit TCIA Sales Under $400,000 Sales $400,000 - $1 Sales $1 - $2 Sales Over $2 6

11 Financial Statements & Ratios Return On Investment Return on investment is the most meaningful way to evaluate overall business profitability. It is important to understand how return on investment is calculated and how it can be improved. Strategic Profit Model There are two distinct return on investment measures: return on assets and return on net worth. Return On Assets looks at the economic viability of the firm. Return On Net Worth (or return on owner equity) examines the return being generated for the owners. Both have their own value in analyzing performance. These two return on investment ratios are driven by three performance ratios: Profit Margin, Asset Turnover and Financial Leverage. Each of these represents a different strategy, or profitability pathway, to improve return on investment. These five ratios can be combined into what is commonly called the Strategic Profit Model. The model is simply a graphical representation of a comprehensive return on investment analysis. The figure below presents the strategic profit model for the typical participating firm. Path 1 Path 2 Path 3 Profit Asset Return On Financial Return On Margin X Turnover = Assets X Leverage = Net Worth 6.2% % % The Strategic Profit Model Path 1: Profit Margin = Profit Before Taxes Net Sales x 100 The first, and most important, profitability pathway is profit margin management. In the figure above, a profit margin of 6.2 percent means that for every $1.00 of sales the business was able to produce 6.2 in profit before taxes. Profit margin focuses on revenue, gross margin management and operating expense control. Path 2: Asset Turnover = Net Sales Total Assets Asset turnover reflects the sales the firm produces per dollar invested in assets. The ratio of 3.0 means that the firm is able to generate $3.00 in sales for every $1.00 in assets. If a firm's cash, accounts receivable, inventory, property, equipment, and all other assets can be used as efficiently as possible, then maximum revenue can be generated from a given asset investment. Return On Assets = Profit Before Taxes Total Assets x 100 Return on assets (ROA) is the direct result of the first two pathways; profit margin multiplied by asset turnover. This measure of performance is a good indicator of the firm's ability to survive and prosper. The pre-tax return on assets ratio should at least equal the cost of capital. Path 3: Financial Leverage = Total Assets Net Worth Financial leverage measures dollars of assets per dollar of net worth. The ratio measures the extent to which the firm uses outside (non-owner) financing. The higher the ratio, the more the firm relies on outside financing. A ratio of 1.5, for example, suggests that for each $1.00 of net worth, the firm has $1.50 of total assets. Return On Net Worth = Profit Before Taxes Net Worth x 100 The end result of the three profitability pathways is return on net worth. It is seldom possible to generate an adequate rate of return on net worth by emphasizing just one of the profitability pathways. Each pathway should be examined carefully for improvement opportunities and then trade-offs made in order to increase overall profitability. An improvement plan should not be based upon any single measure of performance, but be developed with the complete picture in mind, i.e., the impact on return on net worth. Typical High Sales Sales Sales Sales TCIA Profit Under $400,000 - $1 $1 - $2 Over $2 Member TCIA $400,000 Number of Participants Strategic Profit Model Ratios Profit Margin (pre-tax %) Asset Turnover Return on Assets (pre-tax %) Financial Leverage Return on Net Worth (pre-tax %)

12 Financial Statements & Ratios Income Statement The income statement summarizes the flow of funds. It reflects the ability of the firm to make sales, control expenses, and earn a profit thereby serving as a report card for management's performance over the year. The level of performance depends primarily on control of two areas: gross margin and operating expenses. 8 Typical High Sales Sales Sales Sales TCIA Profit Under $400,000 - $1 $1 - $2 Over $2 Member TCIA $400,000 Typical Sales $ 1,032, , , ,000 1,233,536 3,285,400 Sales Change (2013 to 2014 %) Income Statement (% of sales) Net Sales (net of returns and allowances) Direct Costs Materials (incl. freight-in, less purch. discounts) Direct Mgmt Labor Salary, Wage & Bonus Direct Non-Mgmt Labor Salary, Wage & Bonus Subcontract Labor Dump Fees All Other Direct Costs (permits, etc.) Total Direct Costs Gross Margin Vehicle & Equipment Expense Mechanics' Salary, Wage & Bonus Repair Parts & Shop Supplies Vehicle & Equipment Expense Fuel & Oil Depreciation Vehicle & Equipment Insurance All Other Vehicle & Equipment Expense Total Vehicle & Equipment Expense Indirect Expense Garments & Uniforms Tools & Supplies Safety & Training All Other Indirect Expense Total Indirect Expense G&A Payroll Expense Owner & Officer Salary & Bonus Sales Salary, Wage, Commission & Bonus All Other Salary, Wage, Commission & Bonus Total G&A Salary, Wage & Bonus Payroll Taxes (all G&A & other employees) Group Insurance (all G&A & other employees) Employee Benefits (all G&A & other employees) Total G&A Payroll Expense Other G&A Expense Rent or Real Estate Ownership Communication Advertising & Promotion Travel & Entertainment Insurance (excl, real estate, group, vehicle & equip.) Office Expense Bad Debt Losses All Other G&A Expense Total Other G&A Expense Total Operating Expense Operating Profit Other Income Interest Expense Other Non-operating Expense Profit Before Taxes

13 Financial Statements & Ratios Expenses In Relation To Gross Margin Gross margin represents the income available after paying for all product and service costs. Many firms like to examine expenses in relationship to gross margin. The feeling is that gross margin represents the money available for expenses and profit, so the analysis provides a good basis for control. One word of caution is in order. Gross margins may vary appreciably in the industry. Consequently, an expense item which is a low percentage of gross margin may reflect excellent expense control or it may reflect greater success in producing gross margin. The figures must always be viewed in that light. Expenses In Relation To GM (% of gross profit) Typical High Sales Sales Sales Sales TCIA Profit Under $400,000 - $1 $1 - $2 Over $2 Member TCIA $400,000 Gross Margin Vehicle & Equipment Expense Mechanics' Salary, Wage & Bonus Repair Parts & Shop Supplies Vehicle & Equipment Expense Fuel & Oil Depreciation Vehicle & Equipment Insurance All Other Vehicle & Equipment Expense Total Vehicle & Equipment Expense Indirect Expense Garments & Uniforms Tools & Supplies Safety & Training All Other Indirect Expense Total Indirect Expense G&A Payroll Expense Owner & Officer Salary & Bonus Sales Salary, Wage, Commission & Bonus All Other Salary, Wage, Commission & Bonus Total G&A Salary, Wage & Bonus Payroll Taxes (all G&A & other employees) Group Insurance (all G&A & other employees) Employee Benefits (all G&A & other employees) Total G&A Payroll Expense Other G&A Expense Rent or Real Estate Ownership Communication Advertising & Promotion Travel & Entertainment Insurance (excl, real estate, group, vehicle & equip.) Office Expense Bad Debt Losses All Other G&A Expense Total Other G&A Expense Total Operating Expense Operating Profit Other Income Interest Expense Other Non-operating Expense Profit Before Taxes

14 Financial Statements & Ratios Balance Sheet The balance sheet is an under-utilized financial statement. If properly analyzed, it provides significant insight into the financial structure of the firm. This page examines the composition of the balance sheet while the pages that follow derive some key ratios from the balance sheet information. Both the assets and liabilities sides of the balance sheet offer insight into the investment posture of the business. The assets side reflects where investments are made and the liquidity of the firm. The liabilities side identifies which business stakeholders made the investment and where the debt lies. Typical High Sales Sales Sales Sales TCIA Profit Under $400,000 - $1 $1 - $2 Over $2 Member TCIA $400,000 Typical Total Assets ($) 344, , , , , ,686 Balance Sheet (% of assets) Assets Cash & Marketable Securities Trade Accounts Receivable Inventory (incl. work in progress) Other Current Assets Total Current Assets Total Fixed & Non-Current Assets Total Assets Liabilities and Net Worth Trade Accounts Payable Notes Payable Other Current Liabilities Total Current Liabilities Long Term Liabilities Net Worth or Owner Equity Total Liabilities & Net Worth

15 Financial Statements & Ratios Financial Ratios Suppliers, bankers and outside creditors have a wide range of financial ratios at their disposal to measure the overall financial integrity of the firm. The following are the commonly used ratios. Current Ratio = Current Assets Current Liabilities The current ratio measures the margin of safety that management maintains in order to allow for the inevitable unevenness in the flow of funds through the current assets and current liabilities accounts. A business needs a supply of current funds to be assured of being able to pay its bills when they come due. Quick Ratio = (Cash + Accounts Receivable) Current Liabilities Quick assets include cash, marketable securities, and current accounts receivable. Presumably, these items can be converted into cash quickly at approximately their stated amounts, unlike inventory which is the principal current asset excluded from this calculation. The quick ratio is, therefore, a measure of the extent to which liquid resources are readily available to meet current obligations. Accounts Payable Payout Period = Accounts Payable (Direct Costs 365 Days) The accounts payable payout period measures the timeliness of paying suppliers. This figure is related directly to the normal credit terms of the business' purchases. Debt To Equity = Total Liabilities Net Worth The greater the proportion of its financing that is obtained from owners, the less worry the business has in meeting its fixed obligations. At the same time excessive reliance on owner financing slows the rate at which the firm can grow. The debt to equity ratio shows the balance that management has struck between debt and owners' equity. EBIT to Total Assets = Earnings Before Interest & Taxes Assets x 100 EBIT to total assets is a return-on-investment ratio that provides a profit analysis that is based on earnings, before interest and income taxes. This ratio is best compared with a company's annual interest rate on borrowed funds. If a firm's EBIT to total assets ratio is higher than its cost of capital, there is a favorable spread between the two. Times Interest Earned = (Profit Before Taxes + Interest) Interest This ratio measures the number of times earnings before interest and taxes will cover interest payments on debt. It also shows the level to which income can decline before a firm is unable to meet its interest obligations. Typical High Sales Sales Sales Sales TCIA Profit Under $400,000 - $1 $1 - $2 Over $2 Member TCIA $400,000 Financial Ratios Current Ratio Quick Ratio Accounts Payable Payout Period (days) Debt to Equity EBIT to Total Assets % Times Interest Earned

16 Financial Statements & Ratios Assets, Growth & Cash Sufficiency The cash sufficiency examination in this section uses a number of financial ratios that are not well understood. However, these ratios provide insight into how fast the firm can grow, the cash flow required for additional sales growth, and ways to enhance growth with existing cash balances. Sales to Fixed Assets = Sales Net Fixed Assets The landscape and lawn care industry requires a significant investment in fixed assets, particularly equipment. To reach a sufficient level of profitability, these assets must be used as efficiently as possible. This ratio provides a basis for comparing fixed asset utilization across different types of operations. Average Collection Period = Accounts Receivable (In-House Credit Sales 365 days) The average collection period can be evaluated against the credit terms offered by the company. As a rule, the collection period should not exceed 1 1/3 times the regular payment period. That is, if your company's typical terms call for payment in 30 days, then the collection period should not exceed 40 days. Growth Potential Index = Profit After Taxes (Accounts Receivable + Inventory - Accounts Payable) The Growth Potential Index (GPI) measures approximately how fast the firm can increase its revenue each year using only internally generated funds. Increasing revenue faster than the GPI will reduce cash on hand. Increasing revenue slower than the GPI will create additional cash reserves. Cash to Current Liabilities = Cash Current Liabilities x 100 This is the most stringent test of the ability of the firm to meet its short-term obligations with existing cash balances. To be truly conservative with cash, this ratio should be in the 10 to 20 percent range. Defensive Interval = Cash (Operating Expenses Other Than Depreciation 365 days) The defensive interval measures how long the firm can operate using nothing but existing cash balances. It provides a worst-case analysis of the adequacy of the firm s cash position if sales and collections suddenly deteriorated. Ideally, this ratio should be 10 days or more. Sales to Working Capital = Net Sales (Current Assets - Current Liabilities) Measures the ability of the firm to generate sales without tying up high levels of investment in working capital. A ratio of 6.9, for example, means the firm can generate $6.90 in sales for every $1.00 invested in working capital. This ratio can be impacted by changes in any of the three working capital items: improving inventory turnover, reducing accounts receivable collections, or obtaining more favorable accounts payable payment terms. Typical High Sales Sales Sales Sales TCIA Profit Under $400,000 - $1 $1 - $2 Over $2 Member TCIA $400,000 Asset Productivity Sales to Fixed Assets Average Collection Period (days) Customer Payment Terms (% of sales) Cash & Checks Bank Credit Cards In-House Credit Total Sales Growth & Cash Sufficiency Growth Potential Index (%) Cash to Current Liabilities (%) Defensive Interval (days) Sales to Working Capital

17 Financial Statements & Ratios Employees Employees are the lifeblood of the organization. Without a properly motivated and compensated workforce, few firms can produce much more than basic levels of performance. Employee payroll costs make up the single largest expense category on the income statement. The key to success controlling employee payroll is not the absolute level of compensation, but rather the productivity of employees. The two key employee productivity ratios presented in this report are sales per employee and the personnel productivity ratio. Both ratios are measures of employee output. Sales Per FTE Employee = Net Sales Total Full-Time Equivalent Employees This is simply the level of sales generated per full-time equivalent (FTE) employee. In calculating the ratio, two part-time employees are considered the equivalent of one full-time employee. The ratio provides a means to estimate how many additional employees will be required as the firm expands its sales base. G&A Personnel Productivity Ratio = G&A Payroll Expense Gross Profit x 100 The personnel productivity ratio (PPR) expresses total G&A payroll expense as a percentage of gross profit. Total G&A payroll includes not only salaries and wages, but also all payroll taxes, insurance coverages and other fringe benefits. The ratio measures the portion of each gross profit dollar that must be committed to G&A payroll. This is one of the few productivity ratios where a lower figure is desirable. Typical High Sales Sales Sales Sales TCIA Profit Under $400,000 - $1 $1 - $2 Over $2 Member TCIA $400,000 Personnel Expense (% of sales) Direct Mgmt Labor Salary, Wage & Bonus Direct Non-Mgmt Labor Salary, Wage & Bonus Mechanics' Salary, Wage & Bonus G&A Payroll Expense & Burden For All Emps Total Personnel Expense Hours Worked 19,500 9,880 5,930 11,549 23,656 64,720 Work Profile (% of hours worked) Owners/Officers Sales (incl. sales managers & estimators) Tree Care & Other Production Clerical, Administration & Maintenance FTE Employees (full-time equivalents) Owners/Officers Sales (incl. sales managers & estimators) Tree Care & Other Production Clerical, Administration & Maintenance Total FTE Employees Staffing (individuals) Average Number of Employees Average Full-Time Employees (% of emps.) Employee Turnover (%) Employee Productivity Sales $ Per Production FTE 151, , , , , ,868 Sales $ Per FTE 101, ,737 81,457 93, , ,644 Gross Profit $ Per FTE 65,088 65,512 52,508 65,512 71,530 69,919 Salary $ Per FTE 43,544 40,108 32,701 38,901 47,769 49,919 Payroll $ Per FTE (incl. burden) 51,177 45,990 36,223 45,990 56,767 58,954 G&A Personnel Productivity Ratio Salesforce Productivity Sales Calls Made (annually) 1, ,618 3,648 Sales Calls Resulting In Revenue (% of calls) Lowest Volume Salesperson Sales $ 310, , , , , ,120 Highest Volume Saleperson Sales $ 666, , , , ,453 1,029,230 13

18 Financial Statements & Ratios Operations Typical High Sales Sales Sales Sales TCIA Profit Under $400,000 - $1 $1 - $2 Over $2 Member TCIA $400,000 Accredited Firms (% of firms) Certified Treecare Safety Professionals Workers' Compensation EMR Accident & Repair Expense (out-of-pocket) Firms With Accident Expenses (% of firms) Accident Expense $ 1, N/A 546 4,077 Accident Expense % (% of sales) N/A Firms With Repair Expenses (% of firms) Repair Expense $ 1,500 1, ,500 4,201 Repair Expense % (% of sales) Revenue Profile (% of sales) Tree Pruning & Takedowns General Tree Care Landscape Installation & Maint. (incl. tree inst.) Utility Line Clearing Sale of Chips (to biomass plants, for mulch, etc.) Other Revenue Total Sales Customers (serviced annually) ,435 Sales $ Per Customer 1, ,208 1,837 1,758 Customer Sector Profile (% of customers) Residential Non-Residential Utility Total Customers Customer Revenue Profile (% of sales) Residential Non-Residential Utility Total Revenue Sector Revenue Per Sector Customer ($) Residential 1, ,108 1, Non-Residential 1,700 1,184 1,013 1,663 2,449 2,756 Utility 24,645 N/A N/A 1,598 N/A 137,517 Work Orders (completed annually) Number of Work Orders 1, ,287 5,026 Sales $ Per Work Order , ,208 Gross Profit $ Per Work Order

19 Ratio Calculation Ratio Calculation Comment Accounts Payable Payout Period (days) Average Collection Period (days) Asset Turnover Cash to Current Liabilities Current Ratio Debt to Equity Defensive Interval (days) EBIT to Total Assets Financial Leverage Gross Margin Growth Potential Index Profit Margin Quick Ratio Return on Assets Return on Net Worth Sales per Employee Sales to Fixed Assets Sales to Working Capital Times Interest Earned Accounts Payable Cost of Goods Sold 365 days Accounts Receivable Credit Sales 365 days Net Sales Total Assets Cash x 100 Current Liabilities Current Assets Current Liabilities Total Liabilities Net Worth Cash (Operating Expenses Depreciation) 365 days (Profit Before Taxes + Interest) x 100 Total Assets Total Assets Net Worth Gross Profit Dollars Net Sales Profit After Taxes x 100 AR + Inventory AP Profit Before Taxes x 100 Net Sales Cash + Accounts Receivable Current Liabilities Profit Before Taxes Total Assets Profit Before Taxes Net Worth Net Sales Number of FTE Employees Net Sales Net Fixed Assets Net Sales Current Assets Current Liabilities Profit Before Taxes + Interest Interest Measures the promptness of paying suppliers Measures the promptness of paying suppliers Measures sales generated per dollar of assets Measures ability to pay short-term debt with cash Measures ability to pay short-term debt with current assets Measures balance between debt and owner equity Measures how long the firm can operate on existing cash balances Measures earnings from operations before interest and taxes as a percent of total assets Measures assets financed per dollar of net worth Measures profitability after the costs of making or buying the product are subtracted from sales Measures how fast the firm can grow using internally generated funds Measures profit earned as a percentage of net sales Measures the ability to pay short-term debt with assets that can be converted to cash most quickly Measures profit earned as a percent of assets Measures profit earned as a percent of net worth Measures sales generated per full-time employee Measures the productivity of each dollar invested in fixed assets Measures ability to generate sales without tying up working capital Measures number of times earnings will cover interest payments 15