- July 24, 2019
- Posted by: Marisa Palmieri Shugrue
- Category: Accounting Advice, Accounting Services
Pest management professionals—and all small business owners—are in constant pursuit of the happy medium between revenue and profits. Questions on this topic abound: Is it possible to strike a good balance? Is there such a thing as too much revenue growth? Is it ever OK to sacrifice profits?
Experts say the answer is yes to all those questions and while there are some guidelines to follow, the right balance between revenue and profit for your firm comes down to who you are and what your objectives are.
In other words, it’s personal. “It all gets back to the business owner’s decisions and the company’s mission, vision and strategic plan,” says Matt Jesson, president/owner of Green Lawn Fertilizing and Green Pest Solutions, based in West Chester, Pa. “Profits should be discussed in the strategic-planning process—what are their goals and how are they going to achieve them?”
Brad Leahy agrees. “The No. 1 thing is knowing where the goal line is, and that will determine how fast you want to grow and how profitable you want to be,” says the vice president of Blades of Green Lawn Care and B.O.G. Pest Control in Edgewater, Md. “That sets the stage for planning.”
Our own Dan Gordon offers some examples. “Let’s say you’re an older person and you’re nearing retirement, maybe you’ve got to have the profits,” he says. “But if you got into this business as a professional investor or you’re young, then maybe you don’t need profit at this time, and you can put it all back into the company’s growth.”
Too much growth?
While there are no hard-and-fast rules about growth rates and company size plays a role—for example 25 percent growth is much different for a firm with $100,000 in revenue than it is for a company doing $10 million—there are some ways to know if you’ve overdone it, Jesson says.
“I don’t think there’s too much growth as long as you’re taking care of customers and team members,” he says. “That’s the most important gauge of what’s too much growth. If you have high turnover or your online reviews are going down, you’re obviously growing too fast or not investing profits correctly.”
Gordon says it often comes down to a sanity check.
“Can you sleep at night or are you stressed all the time?” he says. “And is there a plan? It all depends on what your plan is, your appetite for the growth and your ability to execute it.”
Leahy says scaling up complicates things, namely your ability to hire and train enough people.
“The labor market is difficult,” he says. “We’ve slowed down our growth because we won’t lower our hiring standards. A lot of companies, when they grow exponentially, they end up hiring people they shouldn’t and it ends up costing them more money. A lot of us could grow faster if we could find the type of people we want to hire. That’s the biggest obstacle all companies are facing for growth and profitability.”
Jesson estimates a sustainable annual growth rate is in the mid-teens.
“From my experience looking at companies that have been in business 20 to 30 years, 13 percent to 15 percent is sustainable growth,” Jesson says. “Some years it may be more and some years less. It’s still very difficult to achieve but it’s attainable.”
Dialing in profits
Like with growth, your target profit figure should be tied directly to your short- and long-term goals. As your company evolves there may be some instances where you choose to forgo profitability.
Leahy gives the example of some growth milestones that require spending and hiring to get over a hump that could result in short-term losses. He also says expanding into a new territory, which ratchets up expenses in the short term, may cause a company to lose money for a period of time.
Being in the red in these instances may be acceptable if it’s part of your long-term strategic plan. On the contrary, “If you’re just flying by the seat of your pants and you get to the end of the year and you’ve lost money, that’s a problem,” Gordan says. “It’s OK to lose money as long as you know you’re going to lose money. But if you’re losing it and you don’t know why, it’s a problem.”
In any case, Leahy cautions pest business owners to know any promises made about profitability in their bank loan covenants.
Gordon advises his clients to shoot for the “rule of 23,” which he says is a composite figure that comes from a former Orkin branch manager goal.
“They were looking for 23 percent growth, 23 percent profit or some combination of the two,” Gordon says. “How you determine the optimal level is up to you, but it’s somewhere along the ‘rule of 23.’”
A growth plus profit figure below 23 is an indicator that something is off, Gordon says.
Leahy is one of Gordon’s clients who uses the “rule of 23” as a guideline. He adds that some high-performing companies can get above 30 combined.
“We’re all about growth, so we were in the mid-20s growth range for almost 10 years straight with single-digit profits,” he says. “Cash flow became a problem so now we’re looking to grow 15-18 percent with a higher profit goal.”
“To grow for growth’s sake because you have a 20 percent number as your goal is not enough,” Leahy says. “You have to balance the growth with cash flow and profitability.”