Metrics that Matter Chapter 1. Profitability
January 17, 2020
January 17, 2020
Chapter 1: Profitability
5 easy steps to knowing how profitable your janitorial company is
Janitorial company owners come from a variety of backgrounds. So it’s hard to say where the skill set of any one business owner lays. That being said, we here at Swept hunkered down and did some homework on the kind of metrics that would add the most value to their daily lives. First up to bat, Profitability! We’ll keep the next 4 chapters a secret for the time being, but you’ll be hearing about them soon!
Running a business means that you need a certain degree of know-how with dollars and sense (see what we did there), but not everyone will be comfortable or even have the time to monitor their company’s overall financial health. Looking at how many facets, accounts, deductibles, numbers, amounts owing, arrears, etc, can be daunting, and difficult to keep track of. This guide will serve the purpose of giving you a bird’s eye view of the big-picture, and empowering you to maintain profitability.
What you can expect from this chapter:
Understanding Your Operating Expenses
Analyze your Gross Profit Margin
Know Your Net (Profit Margin)
Projecting Your Prospects
1. Understanding Your Operating Expenses
Revenue increasing but profit decreasing? Seeing fluctuations in your profit in spite of steadily increasing revenue? More often than not, the answer to this pickle can be found in your expenses. Are they going up at a faster rate than your revenue? When janitorial companies are in a growth stage, it’s easy to forget to ensure you aren’t spending more than you’re making.
Try looking at your average month-over-month expenses in comparison to average revenue for the same time period. Keep your eyes peeled for patterns and trends. Are expenses quickly gaining on your revenue, or even surpassed them already? If you caught an unhealthy expense pattern, its time to course-correct and act quickly to balance them out. It may seem like common sense not to let your spend outweigh your gain, but it’s not always easy to catch when you aren’t specifically looking.
Check out some of these free Profit and Loss Charts to make this step easier on you.
Once you notice a steady balance, you can start predicting your profit better, and avoiding pitfalls well before you arrive at them.
Of course, it never hurts to have some accounting software handy as a second set of eyes on what finances are coming and going from your company.
2. Diagnose Your Gross (Profit Margin)
Gross profit is potentially a strong indicator of your profitability. When viewing total income after deducting the cost of supplies, payouts, and other potential business associated costs you may incur. Doing the math is fairly straightforward, but much of the time with cleaning companies, especially with supplies, it can be hard to keep track of all the supplies bought in a given month or year. To calculate gross profit:
Revenue – Cost of Supplies/Expenditures = Gross Profit
Be sure to include payments to cleaners, supplies, and any additional expenditures you may have when doing this math. If you miss some massive expenditures like wireless vacuum’s for all locations, your results will be far from accurate.
Gross Profit Margin should identify the percentage of profit you’re retaining, compared to how much your business is costing. The formula is:
Gross Profit / Revenue = Gross Profit Margin
A higher percentage means you’re keeping lots of profit compared to product cost. Anything less than 50 percent means your product is costing over half of your sales revenue.
A lower percentage is fine as long as your sales volume is high enough to pay your expenses. What gross profit margin shouldn’t be doing is decreasing. If that’s happening, it’s time to raise your prices or find ways to cut product costs.
Is your gross profit margin good but your net profit is decreasing? The best idea is to take a look at your overall expenses, like overhead. Product cost isn’t your problem.
3. Don’t Fret Your Net (Profit Margin)
Net Profit is a paramount number in identifying your company’s profitability. Just like above the equation is pretty straightforward”
Revenue – Expenses = Profit
Say a company that has with revenue of $86,000 in annual revenue, and incurs $66,000 in expenses. That company has an annual net profit of $20,000. Easy peasy right?
Here is a handy free calculator you can use. A positive number means you’re turning a profit. If it’s a negative number, your business is losing money. Zero means you’re breaking even.
Now as contracts come and go frequently in the janitorial industry, and cleaner turnover rate can be as high as 300%, It’s vital to look at profits on a monthly basis in addition to annual. Check the month over month profitability can help you see patterns in your industry like seasonality, end of quarter, or tax season (these affect the way your customers spend their money). Having market trends fresh in your mind can help you make better decisions with better results!
4. Check Formation of Profit Per-Location
Not every customer/client is made equal. Some generate more profit than others while others can be “tire kickers” and cost you more in terms of hours and attention. A clever business good owner needs to be aware of which clients are bringing in the most profit, and which ones cost more than they are worth.
Occasionally a client that seems to generate the most profitable, can be the worst ones to have. Even if you’re charging these clients more, you could be suffering more expenses than you realize. Often you refer to these as healthy customers and unhealthy.
Knowing your profit per location/client is vital to success. Here’s the basic equation.
Total Location Income – Total Location Expenses = Gross Profit Per Location
5. Project and Protect all Aspects of Your Prospects
There are a lot of variables that will cause fluctuations in your company’s income. Some can be predicted such as seasonality, and some (called an X-Factor) cannot. Try to be prepared for X-factors, but concern yourself more with the variables you can control. Your company’s Profits should be as evenly dispersed throughout the year to help with cash flow. Of course, the best-laid plans of mice and men, as they say. In other words, things can, and often will go wrong. That is the nature of running a business. But you can reduce the harm caused by unexpected pitfalls by being aware of everything mentioned above, and expecting the unexpected.
Make plans to increase your marketing in months you know are traditionally slow business months, or head out and do some networking. Conferences like ISSA are great for drumming up new time-saving tech, new business, and potential new partners. Another good idea, don’t putt all your eggs into one basket. Security and reliability are great things to have in business, but of your cleaning company depends on a single company to survive, then that company is solely going to control your income, growth, and success. Which kind of defeats the purpose of owning your own business doesn’t it? If you know this customer to be reliable and have a good, trusting relationship, then great. But the fewer customers you have, the greater the potential risk to your success.
This brings the first chapter in our Metrics that Matter series to an end. Did you find this helpful? If you did, we’re happy to say we have 4 more chapters coming our over the next several weeks covering a wide variety of metrics that will guide your company to greater success through greater knowledge!
Swept is dedicated to highlighting stories that touch everyone in the janitorial industry. Having started as a commercial cleaning company ourselves, our hearts go well beyond the janitorial software we offer. Learn more about Swept’s cleaning company software here. And to keep up on all the trends in the janitorial services industry, subscribe to our blog!