How Much Does a $5M Landscape Company Really Make? | Ep 179

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Most people assume a $5 million business must mean big money for the owner. But in this episode, Steve breaks down the real numbers behind a $5M landscaping company, from revenue to actual cash in hand. Spoiler: it’s not what you think. 

Whether you're in landscaping, construction, or any service industry, this breakdown will help you understand how profit isn't the same as cash flow—and why that difference is what makes or breaks your business. This could change how you read your P&L forever. 

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Transcript

How much money does a $5 million landscape company actually make? Today, I'm gonna break down the numbers all the way from the top, from revenue down to cashflow. And don't worry, you don't have to be a nerd to follow along. In fact, this is for non-financial people.

My goal is to help you to understand the economics of a business like this. So regardless of whether you're in the landscape industry or you're working in the service industry or wherever you are, understanding how numbers work and gaining that confidence with your own numbers is gonna be a really important skill set that will serve you really well. Here's the thing that drives me crazy.

There's so much rhetoric out there when it comes to making money. It's crypto this, Airbnb that, dropshipping this or that, whatever it is, right? There's so much stuff out there. I think you could build a lot of wealth in business by either growing a business or acquiring a business and then scaling it and then having a successful exit later on.

But if you don't understand the story behind the numbers, you're gonna trap yourself or you're gonna trick yourself and you're gonna make a lot of mistakes along the way. Here's why this is important. Oftentimes, I'll hear people say this.

Oh, my buddy over here, he makes $500,000 a year running this landscape business. And I'm like, okay, that's great to hear, but I know the industry and I know the numbers, so let's apply some logic and I'll break down the numbers. And it's like, yes, he's making $500,000 quote in profit, but then when you account for working capital and reinvestments in trucks, trailers, tractors, et cetera, it's not really $500,000, it's a lot less.

So let me walk you through the numbers and give you an example and then I'm gonna provide you with a really cool tool you can use to start applying these things to your business. Okay, so let's go through the numbers. And if you're listening to this, I'm gonna keep it really simple and high level so you don't drive off the road or you don't fall off the treadmill.

And so you don't have to have a pen and piece of paper following along or with your nerdy calculator. Okay, so let's just keep the numbers really high level. Cool? And if you're really technical, if you're an accountant and you're like, actually in section 185-6, it says this, like, of course, I can get super technical too, but I wanna keep things really high level, okay? All right, so let's start off.

Let's say this landscape company, they offer installation and maintenance services to residential and commercial clients. So if you're not familiar with landscaping, let's assume this business goes out there and they install irrigation systems and sod and trees and plants and boulders and fire pits and outdoor kitchens. They put all those amenities in the outdoor space to make them beautiful, right? And then from a maintenance perspective, they mow, they trim, they fertilize, they aerate, they power rake, they pull weeds, they plant flowers.

They do all these enhancements to make the outdoor space gorgeous, okay? So that's what this business does and they generate $5 million in top line revenue. Now, revenue is the same thing as sales. It's basically when you go out there and you sell your products and services, but you actually have to do the work.

Just by selling something and getting a signature on a contract doesn't mean it's revenue. You have to go perform the work. That's revenue, okay? But nonetheless, the company goes out there, they sell $5 million of work, they put it into place the same period of time, and that's their top line, okay? Now, underneath revenue, we have costs of goods sold.

These are all the costs associated with putting that work into place. So think about it, this landscape company, they have to go out there and they buy materials, like dirt, boulders, trees, irrigation parts, right? They also have labor, so they have a foreman running the crews, they have laborers out there doing the installation, and they have designers and architects and whoever else they need to staff to get the work done. So all those labor costs, plus the material costs, and then plus subcontractor costs, so maybe they don't do all the work.

So for example, say they're building a water feature and they need to run electrical to power the pumps, they may not do electrical, so they hire an electrician to do it, that's called subcontracting, and they subcontract out that work, okay? So you have subcontractor costs and other direct, indirect costs related to building these outdoor spaces or maintaining these spaces. Those are costs if it's sold. So let's say those costs if it's sold are $3 million.

So $5 million in revenue, minus $3 million in costs if it's sold, that leaves them with $2 million in gross profit. Now gross profit isn't the same thing as profit profit, that's profit before overhead. In other words, when you go out there and you do the work, and then you assume all the costs to do the work, to put the work in place, what's left over is your gross profit before you pay for rent and salaries to run the office and advertising and sales and et cetera, which I'll get into here in just a second.

Gross margin's really important because it'll tell you how effective is the company at pricing its products and services, and then selling those products and services at a particular volume, and then doing the actual work at a profitable rate. So for this company, $5 million in revenue, $3 million in costs if it's sold, or cost of revenue, leaves them with $2 million in gross profit, and $2 million divided by $5 million in revenue is a 40% gross profit margin, which is good for a landscape company. Okay, now underneath gross profit, let's assume their operating expenses are $1.65 million.

You're like, Steve, where did you come up with that number? It's kind of random, right? Well, the reason why I use that number is because that's their overhead, right? General and administrative salaries and wages are coming out of that. Rent, sales and marketing, insurance, office supplies, everything to run the business, which would leave them with an operating profit of $350, which is 7% of their revenue. Whoa, I just blew your mind probably, okay.

I told you I wasn't gonna be using a bunch of crazy numbers and confusing you, because like I said, I didn't want you to fall off the treadmill here, but stick with me. Basically what I just did is I walked you down to operating profit. Okay, so revenue minus cost if it's sold equals gross profit.

Gross profit minus overhead, or operating expenses, equals operating profit. So all I'm saying here is that this landscape company, the shortcut is, they're earning $350, I said 350, but it's $350,000 on $5 million revenue, which is 7%. Now the cool thing is, if you're in construction, you can always go to coltivar.com/benchmarks, and I have profitability benchmarks for all different trades.

So be sure to check that out. So for this landscape company, they're earning a 7% operating profit on their revenue, which is standard, it's average, okay. They're not doing great, they're just performing like the rest of their peers.

So this is where the brag comes in. This is where somebody says to their buddy, hey, I'm making $350,000 a year in profit. That's where it stops.

Let's further dissect this and see what the owner of this business is actually bringing in, okay. Next, we have to account for taxes. And I'm gonna keep it really simple here, I'm not a tax person, I'm not gonna get into all the mechanics and the breakdown of how taxes work, but let's just assume for easy math, out of the 350, they're paying 100 in taxes, 100,000, okay, which is about 20.5%. Okay, so let's just make that assumption to keep the math simple.

That means that if you take 350 in operating profit minus 100 in taxes, that leaves them with $250,000 in net operating profit after tax. One thing to note here is I'm using the word operating profit because there's other income and other expense, but I don't want to account for that because I just want to know how much profit is the core of the business spinning off. So things like interest income, interest expense, the gain or loss on a sale of a piece of equipment, insurance proceeds, et cetera, all those things are recorded in the other section, but they're not part of normal operations of installing landscaping jobs or maintaining landscapes.

So I'm just excluding that. I wanted to see how the business is performing. So we have $250,000 in net operating profit after tax.

Follow? Good? Okay. Then we have to add back depreciation and amortization. So when you go out there and you buy a truck for $50,000, you can't just write it all off in one year.

You can technically under section 179 depreciation, but that's a whole nother conversation. But according to GAAP and IFRS, these are accounting standards, they want you to record the economic usage of that truck over its life. In other words, it's a $50,000 truck.

It's gonna last for five years. You would record $10,000 in depreciation expense every single year to account for what you're using up in its useful life. Because remember, you want to record revenue coming in and expenses in the same period.

So if you just record that truck in one year, you're capturing five years of usage in one year, and that's incorrect, okay? So we're gonna add that back, because I'm gonna get you down to cash flow. I debated whether to even talk about adding back depreciation and amortization, because I didn't want to confuse you. But just know that you need to add back depreciation and amortization, because I'm trying to get to cash flow, and it was deducted up above for taxes, but taxes and profit after taxes is not the same thing as cash flow, okay? So we're gonna add that back.

It's a non-cash item. And let's keep moving from there. So if I add back $175,000 for depreciation and amortization to net operating profit after tax, 250 there, I end up with 425 grand, okay? 250 plus 175.

Now, this is where it gets interesting. We have to also account for working capital. So think about it like this.

If you're a landscape company, and you go out there and do work for a commercial client, and you say, okay, I'm gonna send you an invoice, and you have 30 days to pay me, you record that as revenue on your books, because you invoice them, but you haven't got the cash. That 30 days that you're floating that invoice for them, you're saying, hey, you can pay me in 30 days, that money is recorded as accounts receivable on your balance sheet. So it's showing up as profit, but you don't have the cash.

But guess what? You still gotta make payroll. You still gotta pay for those materials. So that's what working capital is.

It's the difference between your current assets, like accounts receivable, inventory, work in progress, et cetera, and your current liabilities, like accounts payable, et cetera. So working capital can be deadly in a business, especially if you're doing commercial work as a contractor, because there's also retention. I didn't even mention that.

But if you're doing a job for a big GC, a general contractor, they may withhold a certain percentage of the contract value until you finish the job. That's called retention. And it can be 10% sometimes, or even greater.

So you have to account for that money tied up, because you're showing the profit on your books, but you don't have the cash yet. So let's just say the company has $200,000 in working capital, which is pretty normal. It's about 4% of their revenue.

And then we also have to account for the cash going out the door for trucks, and trenchers, and tractors, and rototillers, et cetera. And let's just say that's the same as depreciation, just to keep it simple, 175. So I take my 425 in profit, after I add back depreciation and amortization, I subtract out working capital of 200, and capex of 175, and I'm just using sample numbers that are pretty standard with the industry, okay? So don't get too lost or hung up on the numbers.

But I end up with 50. And this is what I want you to understand. $50 is my cash flow.

That's 1% of the revenue, okay? 50,000 is 1% of five million bucks. Crazy, right? And that's what I want you to hear and take away from this episode, is that your buddy may be bragging about making five in your grand, or three in your grand, or whatever it may be, but what I would ask in my head, if you don't want to ask them, is how much money's tied up in working capital and your investments back into the business, your capital expenditures, your trucks, your trailers, your tractors, et cetera? Because maybe on your income statement, you're showing this profit, like in this situation, they're showing $350,000 in operating profit, but at the end of the day, the owner only has $50,000 in their pocket. That's a big difference.

That's why so many companies go bankrupt, because they don't understand the difference between profit and cash flow. In fact, 70% of companies that go bankrupt are profitable when they close their doors. They run out of cash.

So you have to understand how this all flows. You don't have to be a nerd. You just have to understand what is the difference between profit and cash flow, and that's what I wanted to walk you through today, and there's a big difference, okay? So I'm not saying landscape companies are bad companies.

You just need to understand the numbers, because in this situation, the owner is running a $5 million landscape business. He's looking at his P&L, thinking, I have profit. His accountant's telling him he has profit, but he's pulling on his line of credit to make payroll, because he doesn't have cash flow, and that's why the cash flow crunch happens.

Okay, I did something amazing. I think it's amazing. This is the tool I want to leave you with.

At byfiq.com, boosting your financial IQ, you can go there, and I just started putting up lessons. So I call it the lesson of the week, and on the website, byfiq.com, on the homepage, you can access the lesson of the week, and I'll walk you through a real company and their numbers, and I'll show you how to analyze their income statement, how to measure KPIs, how to do a valuation across multiple lessons. The current lesson right now, as of the time of this recording, is the valuation of a landscape business, and I walk you through their income statement.

I show you how to find their break-even point, the four levers to pull, and which lever is the most important to focus on. It's a case study. Boom, you could do it.

You could apply it to your business, regardless of whether you're in landscaping or some other industry altogether, but it's super helpful to apply these principles of finance in the real world, and that's what I want to leave you with. All right, that's what I have for you. I wish you all the best as you apply this in your business, and I look forward to the next episode together.

Cheers.