Determining Your Cost of Doing Business – Part 2 of a 3 Part Series

CostsIn part 1 of our series we examined the cost of owning and operating your truckmount for your cleaning or restoration business. We came up with a simple way to determine the cost of running your truckmount, and how that related to the revenue stream you needed to generate to pay for it. You can learn more about how to do that in part 1 of our series by clicking on this link.

Now we are going to look at how to look at the expenses beyond owning and operating a truckmount. In part 2 of our series, we will examine how all the other expenses your company has can be built into an overall cost benchmark:

  • Marketing and Advertising (B)
  • General Liability Insurance (C)
  • Van and Truckmount Insurance (D)
  • Care, Custody, and Control Insurance (if you are hauling or storing your customers belongings. (E)
  • Health Insurance (F)
  • Other Insurance (G)
  • Other Maintenance Costs (Van/Shop) (H)
  • Utilities (I)
  • Phone (Mobile and Landline) (J)
  • Rent/Mortgage or percent of rent or mortgage (if operating out of your home) (K)
  • Other expenses (L)
  • Salaries (Labor) (A)

Just like we did with truckmounts, we are still going to be relating expenses to how much it costs for a specific thing related to a production hour. A production hour means your machine is running and you are making money. It is NOT – selling time, driving photo 2time, set-up time, tear down time, break time – just when the machine in on, you are earning money. Now admittedly, there are ways on a job site to earn money when your machine is not running. Selling fabric protector is one that comes to mind. But essentially, when your machine is on, you should be earning income. When it is off, you are usually not earning any income. I call  this a “production hour.” The easiest way to determine how many production hours you have in a year to pay for all of your expenses is to add up the number of total hours you put on your truckmount(s). The easiest way to do this is via your hour meter on your truckmount as a starting point.

The first thing you have to take a look at to use this exercise most effectively is the number of trucks you have on the “street” on a regular basis for cleaning, out earning money. How many truckmounts does your business operate? If you keep 3 trucks consistently busy, then all of the expenses above have to be covered by 3 trucks, not just 1. All you need to do is add up the hours that were put on your fleet of truckmounts. For instance, if you put 620 hours on truck a, 490 hours on truck 2, and 380 hours on truck 3, then you had 1,490 production hours (620+490+380). If you only have 1 truckmount operating, and you put 710 hours on it last year, your total number of production hours is 710.

Now simply use the expense side of your income statement, and remove all of the expenses related to the truckmount itself. We already determined that in part 1 of this series. The only variable in this list of expenses is the amount of salary and labor you want included in your calculation. If you are the owner, do you want to include your pay in the calculation or do you want your pay decided by the amount of profit the company is making?

To keep this simple, let’s start with a one truckmount operation, and use numbers from expenses 2an “average” income statement for a one truck operation. Let’s say that our 1 truck company has 3 people employed – 1 full time and 2 part time. The full time person is you the owner.  Let’s say you want to pay yourself $60,000 per year. The second person is a part-time technician/helper that you call out on larger jobs to assist, and use as a back-up when you are sick or are out of town. Let’s say last year you paid that technician $14,000. The third person would be a part-time office assistant/bookkeeper, and you paid that person $24,000. That means your total annual salaries and labor is $98,000. The rest of these expenses are simply derived from your income statement. Assume you are operating your business out of your home.

  • Marketing and Advertising (B)   – $8,146/710 production hours = $11.47 per production hour
  • General Liability Insurance (C) –  $1,600/710 production hours = $2.25 per production hour
  • Van and Truckmount Insurance (D) –  $3,600/710 production hours = $5.07 per production hour
  • Care, Custody, and Control Insurance (if you are hauling or storing your customers belongings. (E) $1000/710 production hours = $1.41 per production hour
  • Health Insurance (F) $6800/710 production hours = $9.58 per production hour
  • Other Insurance (G) $250/710 production hours = $0.35 per production hour
  • Other Maintenance Costs (Van/Shop) (H) $800/710 production hours = $1.12 per production hour
  • Utilities (I) $2288/710 production hours = $3.22 per production hour
  • Phone (Mobile and Landline) (J) $3000/710 production hours = $4.22 per production hour
  • Rent/Mortgage or percent of rent or mortgage (if operating out of your home) (K) $4800/710 production hours = $6.76 per production hour
  • Other expenses (L) $3,200/710 production hours = $4.51 per production hour
  • Salaries (Labor) (A) $98,000/710 production hours = $138.03 per production hour

As you look over these numbers (or your own if you have calculated them) what MUST jump out at you is your cost of labor. Cleaning carpets and floors is a labor intensive business and your #1 expense by far is labor. That has always been true in our industry. The second thing that should jump out at you is where so may cleaners spend so much time worrying about cost – things like their truckmount, or their chemicals, or trying to xDRIVE on Locationstrong that 12 year old van along another year. If you look back at part 1 of this series, we calculated the cost of owning and operating a BOXXER 318 truckmount in a van at $30.18 per production hour. Your equipment and chemicals job is to make your labot more efficient. The way to prosperity in our industry starts with using equipment, tools, and cleaning solutions that make you faster – makes your labor dollar more efficient. There are other things that are important, but you need to start with that in mind. Simply increasing your average square foot per hour cleaning rate by 50-100 square feet can make an incredible difference.

Now, let’s add up all of the costs per production hour:

  • Owning and operating your truckmount (from part 1 in our series): $30.18 per production hour
  • Marketing and Advertising (B)   – $8,146/710 production hours = $11.47 per production hour
  • General Liability Insurance (C) –  $1,600/710 production hours = $2.25 per production hour
  • Van and Truckmount Insurance (D) –  $3,600/710 production hours = $5.07 per production hour
  • Care, Custody, and Control Insurance (if you are hauling or storing your customers belongings. (E) $1000/710 production hours = $1.41 per production hour
  • Health Insurance (F) $6800/710 production hours = $9.58 per production hour
  • Other Insurance (G) $250/710 production hours = $0.35 per production hour
  • Other Maintenance Costs (Van/Shop) (H) $800/710 production hours = $1.12 per production hour
  • Utilities (I) $2288/710 production hours = $3.22 per production hour
  • Phone (Mobile and Landline) (J) $3000/710 production hours = $4.22 per production hour
  • Rent/Mortgage or percent of rent or mortgage (if operating out of your home) (K) $4800/710 production hours = $6.76 per production hour
  • Other expenses (L) $3,200/710 production hours = $4.51 per production hour
  • Salaries (Labor) (A) $98,000/710 production hours = $138.03 per production hour

Your total cost per production hour for this business is: $218.17. Now before you freak out that this can’t be possible and it is way too high – first, calmly look through the numbers. What could you reduce? What expenses do you have control over? You could do without health insurance, but you would be fined by the IRS under ObamaCare, and God forbid, what if you racked up some serious medical bills. You could certainly pay yourself less. You could not list any rent or mortgage expenses if you are operating out of your home – but that means you may never be able to afford your own building.  You could cut your marketing and advertising budget way back – but what would that do to your income? Secondly, when I first started to teach carpet cleaners this exercise in the mid 1980’s, their production cost-per-hour for a single truck operator was usually around $110 – $120. You don’t think expenses have doubled in the last 33 years?

Now let me talk you off the proverbial ledge. Come back for part 3 of this series. In part 3 we will do 2 final exercises.

  • The first one is, how to use this calculated cost to determine your price you how-much-should-I-chargeneed to charge.
  • The second one is perhaps even more important for the purposes of your sanity – What about all those carpet cleaners in your town who clean for somewhere between $6 and $20 per room? What about that one cleaner that has the same truckmount as you do, that seems to undercut your bid every time?

One of the potential “punishments” of being in this business is that you can go bankrupt so slowly, and you never know it until it is too late. I will show you how in part 3.

What I would prefer though,  is to show you how to use this information to prosper. Let me show you how to use this information to your advantage. Stay tuned for part 3.

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