By Jeff Birkholz, Partner, CFO Performance Group
Can you change the culture of your company with finances? The following case study shows you can. Utilizing principles of disciplined financial management process, an incentive plan was designed to specifically accomplish the company’s strategic goals, and align management with ownership’s interests.A commercial landscape firm had five divisions, each handling a different geographic area of the company’s marketplace. In the past, the five division managers were incentivized on topline revenues. In 2014 the company experienced a nice increase in revenues; however, both gross and net profits were relatively unchanged. More revenue and activity, but a stagnant bottom line. An analysis of their financial information showed the division managers’ crews were running 130% of available hours, i.e., lots of overtime. The division managers preferred to have smaller crews (less to manage) and initially, the employees liked the additional income.
At the end of 2014, a new realigned plan was put in place, changing the division managers’ incentive plan from topline revenue to gross profit. Now employee wages, equipment repairs, and maintenance became a factors in the plan. In July of this year at the company’s second quarter State of the Company meeting, the company shared the financial results for the first six months of 2015 in comparison to the same period of 2014. The improvement in gross profit was more than 6%! With annual revenues on pace for $8 million, that was a $240 thousand increase in gross profit in six months with much of that gross profit falling to the bottom line.
How was this accomplished? The division managers were now incentivized to act more like owners. Utilizing a Contribution Model, the division managers were provided with a financial management tool to determine exactly how many employees they needed to maximize profitability. They did this by hiring additional landscapers and gardeners. Now instead of running 130% of available hours, they were running 102%. Additionally, equipment was being better maintained. Finally, the division managers’ incentive pay increased appropriately and company shareholders’ value improved.
It is easy to allow day-to-day demands on our time to delay strategic thinking and planning. As the above case study shows, the investment of time in utilizing a disciplined financial management process to develop a strategic plan can have short term pay-offs as well as aligning your company and management team for long term profitable, sustainable growth.
For further thoughts about this feel free to contact Jeff at Jeff@CFOPG.com or 530-305-5958