Let’s face it, keeping up with accounting is nowhere close to the excitement that comes from setting a climbing line with a Big-Shot, suiting up in your climbing harness, hearing the “clicks” when attaching your multi-colored carabiners and lanyards, making a smooth climb with your Unicender and finally taking in a view at 100-plus feet.
The adrenaline rush with climbing is addictive, but is it possible also to experience a little thrill from the world of business accounting? Well, only when you understand what your numbers mean and how to use them to grow your tree care service.
You may conduct many different types of inspections within your tree service. For example, pre-trip, climbing and tree inspections are routine in this industry. But how often do you consider conducting a financial inspection?
A financial inspection can be boring, and certainly is not as interesting as learning about advanced-climbing hitch configurations. But it is, without a doubt, important to the life of your tree company.
It all begins with having a great accounting system in place. Accounting is simply addition and subtraction; however, by understanding it, you can multiply your business, while not knowing your numbers can lead to the division of your business. Ouch!
Sometimes we have to understand the big picture in order to grasp the value of subjects that appear mundane. Here are three thought processes to internalize to help you see the importance of keeping a pulse on your operations through your numbers.
Measurement = Improvement
You never know where you stand unless you track and monitor your current position. According to Peter Drucker, often called the father of modern management, “We manage what we measure.” In other words, if you never keep a gauge on where you are, it will be more difficult to improve your position.
Profitability = Opportunity
Thumb through any arborist-supply magazine, and you will see that the cool gear doesn’t come cheap. Without profit, you may have a harder time retaining good talent, investing in good equipment, getting the best climbing tools or having the funds to market effectively and efficiently. Profit is critical to survival.
Relationships = Revenue
People buy from those they know, like and trust. When you better understand your clients, their needs and what they value, you can develop better service offerings and distinguish your company from being just an ordinary “tree-cutting” service to being an expert tree care organization.
Accounting is a lot like arboriculture. Both areas are a beautiful blend of art and science.
The whole idea of accounting is to have a system in place to help the business owner have a good set of books, or financial statements, at his or her fingertips to keep a pulse on how their service is operating. Keeping proper records helps you monitor your progress throughout the year, prepare financials, keep track of deductible expenses and facilitate tax-return preparation.
Assessing your financial picture
There are three levels to assessing your financial picture: the bank statement, financial statements and KPIs (key performance indicators).
Trying to run your tree care business by only looking at your bank-account balance gives you a limited view into your company. This is because the numerous transactions on your statement will not be categorized in a meaningful and actionable way. If you would like to establish a bank-account threshold that must be maintained, sure, you can use your bank balance as a gauge. But again, insight into your operations will be limited.
The next level is using your financial statements. Your three core financial statements include the profit & loss, balance sheet and cash flow statement. All three have their place because they reveal different aspects of your tree service.
The profit & loss (P&L) will highlight the activities or “actions” of the business, such as the sales generated and costs incurred by the service. It starts simply as revenues less expenses to derive either a profit or loss.
To get a sense of the worth of the business, the balance sheet is viewed. It is just like your personal net-worth statement, which lists your assets, liabilities and total equity/net worth.
The cash flow statement gives us a more detailed breakdown into how cash is generated and used by the business. It also bridges the gap between the profit number on the income statement and the cash amount on the balance sheet. For example, a service can, in fact, be profitable and still have negative cash flow if you are generating sales but customers are paying 30, 60 or 90 days out. Your P&L might appear fine, but your cash flow statement will reveal the lag of cash coming into your organization. Your balance sheet would carry an account receivable (AR) balance also. Other terms for AR are open invoices or money due from clients.
Key performance indicators
While reviewing your financials is a major step up from just looking at a bank statement, the information on a financial statement is still historical, or after-the-fact data. What we need is information that is even more actionable or current; that’s where key performance indicators, or KPIs, come into play.
Tracking KPIs – and more important, acting on them to improve your operations – puts you in the driver’s seat; or, a better analogy for our profession, it gives us a better tie-in point from which to move around in the canopy. KPIs are essentially statistics or metrics used to drive production or accomplish a goal. They are levers that can be controlled, the things that influence the numbers on your financial statements. You have to “climb” a little higher to establish metrics or even compile the data, but the outcome of having easy-to-understand metrics, while having your team contribute to improving your selected KPIs, is astonishing and can build unmatched morale and camaraderie.
A KPI can be as simple as tracking the number of new leads each day, leads that are converted to clients, gross profit per job, average working days to complete a job or average sales transactions per job. The point is to consistently measure an area that has a critical impact on sales, production, efficiency, etc.
For example, find out how new clients are discovering you. Did they come from past clients, new referrals, billboards or social media, for example? When you get a new inquiry, always ask them, “Mr. Washington, I’m just curious. How did you hear about us?” This helps you gauge your marketing efforts, see what actions are generating the most sales and make your marketing strategies as precise as your felling cuts.
Remember, everything begins with having a well-organized accounting system in place to capture your business transactions. Next, routinely monitor what is going on so you can make course corrections along the way – instead of being hit with surprises around tax time!
Pick of handful of KPIs to focus on to create production awareness. About three total is a good starting place. Each department can have some KPIs to track. Review your financials on a consistent basis to monitor trends. Don’t forget to have your bank/credit accounts reconciled every month to catch errors. These simple steps will help you develop stronger numbers and allow you to engage in more high-octane tree care action. Always remember to be safe, and keep climbing!
Edward Morrow is a Certified Arborist, tree risk assessment qualified (TRAQ) and an author . With his accounting background, he created Next Level Arborists (www.nextlevelarborists.com) to help other arborists understand their numbers and improve the financial picture of their tree care service.