Since this is the beginning of a new quarter, I thought it might be a good time to talk about how to improve your cleaning business by understanding the basic financial statements of your company.
In addition to using effective time management skills, having a good quality control system in place and marketing your company via social media, good financial controls are vital to having your cleaning service business run as efficiently as possible. But, since talk of bookkeeping and accounting makes the eyes of many cleaning business owners glaze over in boredom, I promise to keep it short and simple and cover a small amount at a time.
WHAT IS A PROFIT AND LOSS (P&L) STATEMENT?
The P&L statement shows you a financial picture of a specific period of time and you can generate this report for any period you choose. I find it most helpful to look at this by the month, the quarter and by the year.
It can also be used to compare one period to another, so for example you could compare February of this year to February of last year or even five years ago. This can be very useful in an industry such as ours which can be somewhat seasonal. The ability to improve your cleaning business’ profits will be greatly improved when you have the proper tools for measuring and managing change.
At the top of the P&L all of the sources of income will be grouped together. This may include service income from a variety of sources like janitorial, carpeting cleaning, etc. There will be a subtotal at the bottom of this group called “Total Revenues.” Right below that figure, will be the “cost of goods sold.” This is comprised of the wages you paid to employees and subcontractors (perhaps yourself as well) along with the supplies you purchased to perform your jobs. These will also be grouped together and called “Cost of Sales.”
P&L STATEMENT EXAMPLE – REVENUES, COST OF SALES, GROSS PROFIT…
To make this example easy to follow I’m going to plug some numbers into the P&L statement.
Let’s say that Total Revenues equaled $500,000.00
Suppose “wages” were $165,000.00 33%
And “materials” cost $ 15,000.00 3%
That means that the Cost of Sales = $180,000.00 which is wages plus materials.
If you then take Total Revenues $500,000.00
And subtract the Cost of Sales $180,000.00 36%
That leaves Gross Profit of $320,000.00 or 64%
Gross Profit is a percentage you’ll want to become familiar with and be able to track it at a glance.
YOU OWN A CLEANING SERVICE? LEAVE THE WAGES OUT OF YOUR P&L
In the cleaning service industry, wages and subcontractors will represent your single biggest expense and will be a number and a percentage that you’ll watch closely. For this reason, I don’t include my salary in the category of wages.
I believe it distorts the number and doesn’t give an accurate representation of what it costs my company to perform the work we do. If you want to be able to compare your operating ratios with those of others within the industry, I’d suggest that you leave your compensation out of this number and place it under “overhead” instead.
Depending on the size of your company and where you operate, your wages and subs will represent anywhere from 30% – 48% of your total income.
If it’s lower than 30% I believe you’re probably paying too little to keep a steady and satisfied work force (although you could be making up for it in bonuses and other fringe benefits).
On the other hand, if labor is costing you more than 48%, its going to be difficult for you to make a reasonable profit. And isn’t that one of the reasons for being in business?
MAKE A PROFIT WITH YOUR CLEANING BUSINESS
There is nothing wrong with making a profit – you need to do so in order to stay in business. Some small companies have labor as a too large percentage of their revenues, especially in the early stages of their business growth. This will happen when you take yourself out of the field, stop doing the cleaning yourself, and hire others to replace you. This is a necessary step if you want to improve your cleaning business and grow your profits.
Don’t panic! This is to be expected as one of the necessary plateaus in your development.
What it means is that now’s the time to get busy with your marketing activities for your cleaning business so you can bring on new, ideal clients. Once you build your revenues past a certain break even point, the profit margins start to increase dramatically as you add new clients and grow your revenues. That’s when things get really exciting! But, I’m getting ahead of myself. Let’s go back to the P&L statement example.
HOW TO CALCULATE NET INCOME?
In the example above, you had revenues of $500,000.00 with labor at $165,000.00 (33%) and supplies ($15, 000.00) at 3%. This is about as high as you want this percentage to be and ideally it should be much lower. As your company grows, this percentage will shrink, but try to keep it under 3%. So, in the example above, you have a gross profit of $320,000.00 and a percentage at 64%.
This is a pretty good number, but you’re a long ways from being finished. You still have to take into account your general and administrative expenses (G&A), plus your overhead before you can get to the real number that matters the most: net income.
Some companies calculate G&A separately from overhead, and some companies lump them together. Whichever way you choose to do it is fine. Many companies that do contracting with the federal government have them separated as that’s how some contracts need to be calculated. Whichever way works best for you is fine.
So, Gross Profit is $320,000.00
Let’s say your G&A is $107,000.00 21%
And that overhead (w/out your salary) is $ 28,000.00 5.6%
You pay yourself $ 95,000.00 19%
5.6% + 19% = 24.6%
That leaves your net income at $ 90,000.00 or 18.4%
WANT TO KNOW MORE? LEARN FROM CLEANING EXPERTS
Now that you have a basic understanding of what the Profit and Loss Statement means, how to read and understand it, you’ll be in a great position to improve your cleaning business. While it’s certainly fun to get new cleaning accounts for your business, it’s also important to employ great staff, retain your existing customers and have a good grasp on the basic financial reports of your cleaning service company. Now you have another key to success for your cleaning service company.
If you’d like more help on how to build or grow your cleaning business so you have all the clients, money and free time you desire – get one-on one coaching.
You can get help from a cleaning industry expert and schedule a “get acquainted call” to see how we can help you grow your business (in record time) today!
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