So now that we know what we need, how do we get that information? Well, to get the information you need from your accounting system, you have to start with a plan, how can you get what you want when you don’t even know how you’re going to get it. You need to say, “This is exactly what I need. So here is my plan to get there.” Starting with a templated information. It’s a good starting point but it’s not always best because it’s not always customized to your system. So I use what I call a BASIC system, where I take my clients through a plan, a budget and then we do solid bookkeeping over time, provide information and then make sure to stay compliant, because you could have everything else, but you can refuse to stay compliant, that could really ruin your business.
So, in the last video, we talked about what you needed to have. In this video, we’re going to talk about how to create a plan and a budget from the plan. So, the first thing you want to do is create a plan. And when I say a plan, I’m not talking about a 30-page business plan, nobody really has time to read that. I know I definitely don’t have time to read it, I have more than enough on my plate. A plan is simple, just knowing what you want in design and the way to get there. So, you could sit down and say, “Okay, maybe you’re a cleaning service business, and you say, “Okay, this year I want to make $360,750, how can I make that possible? How does that translate in my business?” So, to make $360,750, I know my average fees are $1.28 per square footage. It means I have to clean 20,000 square area per month to get that amount of revenue.
So, my goal is to acquire a number of clients that could give me that 20,000 square area. So, it might be, it might be ten customers who have 2,000 or 20 customers will have 1,000. Just whatever it is, at least I know exactly what it is I need to do to get to why I want to come, where I need to get. I know the exact amount of area space I need to clean to get my targeted revenue. So, once I have a plan, the next step is the budget, and a budget is simply how do I achieve the plan? You see, sometimes we make things way more complicated than it really needs to be. So, the very first thing we would need in a cleaning business is labor, that’s going to be one of our biggest expenses. So, we know it takes about 0.04 hours per square foot, so we know that, and if you’re trying to clean 20,000 square foot, 1240,000 square foot annually, we’re going to need at least 10,000 labor hours to do that. If the average hourly rate in that area is $12, so I know my labor cost is going to be at least $120,000, so that’s the very first thing I’m going to estimate because it’s going to be the basis for which I also use to asking my overhead.
The last thing you want to do is take all your other expenses and list them. So, at this point, we have our labor cost because it’s our biggest cost as a service business. My recommendation is that your direct materials are directly billed to your customers or clients. So, if you have supplies that you buy, have them reimburse you that is direct for that cost, but obviously we have supplies that is for everybody. So, you buy one solvent and you use it for 20 customers, obviously you can’t charge that to only one customer it’s included in their fees. But if your customer has you replacing products like toilet paper and things like that, you want to charge that to them, and that way it’s not a cost you are absorbing in your business. So be very careful, ’cause those things can really add up, because prices could really increase very quickly. So, which is why I recommend charging it directly to the client.
So, every other expense that you have, just list them out and include the total, because Labor is your biggest cost it’s what drives up your expenses. So, we’ll divide the total of the cost by the total labor hours to get our overhead per labor hour. So, when a person hires you and they’re going to take only one hour, you know that a labor is going to be $12, the overhead is going to be $10.87, so per hour it’s going to cost you $22.87 cents to do that job. And then you want to bill the direct material separately because you want to bill that directly to the client, so if it’s going to cost them $50 maybe they want you to replace light bulbs, that are most like plus $50 per your light bulbs. So that’s billed separately. And so, once you have that per hour, you know what it should cost you per year, so that’s your annual cost. This is the revenue you wanted to have. And so that’s your estimated profit.
Now, the next step is to input this into your financial system. This is why I say you do not go first into your financial system. You want to have this first and then put that into your financial system, and then on a very regular basis, compare, say, “Okay, I said I was going to spend $50,000 for rent, why is my rent 60,000?” You want to compare that on a regular basis, because any expense that goes out of proportion is going to reduce your probability to that you estimated. So whenever things start going wrong, you want to cash that very quickly, so you might not be able to pass on the cost to your past customers but any new customers come in and will have to absorb that new cost.
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