Why Your Cleaning Business May Be Doing More Work, But NOT Making More Money!

Ever felt that way?

Ever wondered why it seems you’re cleaning more accounts than ever, but not making any more money?

How can this be? It’s enough to drive you nuts!

You ‘know’ you’re bidding each new cleaning job the same -at least, you think you are.

So, what the heck is going on?!

Well, it might come down to one thing:

…. OVERHEAD.

What’s that? What’s does overhead mean in a cleaning business you ask?.

Well, ask a hundred people and you’ll likely get
a hundred answers.

But, for today, let’s define overhead as…..

all your expenses over and above wages and payroll taxes. (sometimes called ‘burden’)

So, we’re talking about things like: cleaning chemicals, rent, utilities, gas and any training, managerial or admin wages or salaries not covered by the direct wages of an individual account.

So, ‘overhead’ is an expense category that’s normally shown as a percentage in order to calculate how much each account needs to ‘carry’, ‘kick in’, or contribute – to pay for expenses other than wages and payroll taxes.

It’s a little hard to get your ‘head around’ but it’s important, because overhead, or more specifically, - not accurately accounting for overhead – is where… the trouble can start!

Let’s take a look:

-when you buy add’l chemicals and equipment
-hire more managers or office help
-invest in a new software
-spend more on gasoline or repairs….

Yep, all these things can increase your commercial or residential cleaning business’ overhead, and if you haven’t accounted for it in your pricing… you may begin to feel like…

You’re doing more work…but not making more money!

Yeah, trouble.

You may be bidding using a simple method you’ve always used, where you just multiply the hours you think it will take, by some hourly billing rate you think is fair, not realizing things have changed.

That’s right, your old way of bidding may not be taking into account your new higher level of fixed expenses.

Let me tell you a story…

Years ago, we were humming along, thinking everything was going great. We were quickly picking up accounts and starting them just as fast.

Wonderful, right?

Wrong!

We kept running into a problem month after month.

When we looked at how we priced each job, it looked like each account was making money, but our P&L wasn’t showing the same profit, not even close!

Why?

Well, because at that point, we had not yet begun to accurately factor in overhead when calculating prices.
We had set an overhead % of let’s say 35% (of labor) but when we really looked at all of our expenses, it turns out that the overhead % needed to be more like 50% to cover everything.

That’s a big difference – in our case, it was the difference between making money and losing money!

Ouch! Now what?

Well, we eventually created a sliding scale approach to assigning overhead to each bid we do.

No matter how you bid your jobs, you need to be looking at having each account pay’ its ‘fair share’ of overhead.

The end of the story is when we finally applied the correct (higher) overhead to our P&L calculations… you can imagine how each accounts profitability looked… yeah, pretty bad, but actually, for the first time more… realistic.

They finally reflected what was really going on.

It was a wake up call I won’t ever forget.

I hope it’s a lesson your cleaning business won’t have to learn as painfully as we did.

Discover the Guru in YOU,

Dan

3 Responses to “Why Your Cleaning Business May Be Doing More Work, But NOT Making More Money!”

  1. Kevin Baker says:

    Our Lawn Care business is like that. We get more accounts and have no more money after the overhead is paid. Problem is we can’t charge anymore because we have too many other businesses around us doing it cheaper. I can’t see how to cut the overhead. So we are just doing what we have, not trying to get more accounts for now. I do not know how the others are getting any profit other than they do crappy work.

  2. Tony says:

    Perhaps some of your competitors are not operating legitimate businesses. By that I mean they may pay workers cash, not report some income or may not carry insurance. There are growing pains when you take your business to the next level. Perhaps you could do an individual account analysis to determine which accounts provide the greatest return and least return. You may find that you can make the same profit from fewer accounts by continuing to service them and either raise the price on the lowest margin accounts or sub them to a smaller vendor or drop the account all together. Best wishes.

  3. Robert Rivadeneira says:

    Hi Tony and Dan,

    We are also trying to accurately figure out our true cost of servicing our accounts and profitability. We have typically used a $/hr overhead model based on monthly indirect costs divided by a total of monthly hours worked at all locations.

    We then add this $/hr overhead figure to the labor rate plus payroll tax and profit to get the hourly service rate that we charge.

    We have been in the same position that this article refers to, that it seems like we are treading water and not gaining more profit with more revenue that we bring in.

    We obviously have to change the model. What are your thoughts on the hourly model I described above, does it seem like an accurate way to determine overhead?

    How do we calculate a % based overhead rate as you mentioned in the article? We know what are monthly indirect expenses are, but what do we factor this against to get the % rate?

    Thank you in advance for your help!

    Robert

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