We recently had a chance to ask one of our long term customers about his success and his business philosophy, specifically as it pertains to profitability. We try to use this space to offer helpful information to small business owners as it is our corporate purpose to change lives by offering a proven way to manage employees and save money on payroll. Sometimes, however, the best advice comes from a comrade who understands the day to day struggles of small business ownership, but yet has found a way to be successful.
David owns a janitorial business in East Texas employing over 100 hourly remote workers and manages well over 100 job sites. We believe that David is more than qualified to share his thoughts and that his insights are valuable to all small business owners. It has been said that many receive advice, but few profit by it. We hope to reverse that trend in this case.
Chronotek: David, we’ve heard that profit margins in the janitorial industry range from 10-28%. Does this sound right?
David: Profit margins do vary quite a bit depending on the size of the organization. Early on, it’s easier to have a higher profit margin as there is much less infrastructure to support. It’s also typical at a company’s start that larger accounts are out of reach so the focus goes to small and medium sized accounts, which generally will produce a higher profit margin, however, that part is mostly due to labor than infrastructure. We all want the highest margins possible while still remaining competitive. I’ve heard of organizations with a smaller profit margin than the 10% you mentioned but that can’t sustain a business for long.
Chronotek: Don’t people vary on how they calculate profit margins?
David: It’s measured differently by organizations. Some will give a number based on how much money the owner has available after paying labor/payroll, bills, taxes and expenses. A truer measure is how much is left after the owner has paid himself/herself. 10% after everything is usually a good target in this industry.
Chronotek: How do you maintain your profit margins year in and year out?
David: The profitability battle is won or lost (in my opinion) in three areas. First, labor is the biggest contributor of all, and also is measured differently depending on who you speak with. I like to fully burden my labor to include taxes (Soc. Security, Medicare, Unemployment Insurance, Worker’s Comp Insurance). Since those numbers are percentage of labor based, it’s not complicated to know what your overall labor burden should be. Total labor cost for a healthy organization should not exceed 50% of revenue. You’ll have some above, some below but on average should be at that number. Proper proposal generation/pricing, having a cleaning strategy in each account, monitoring the time and efficiency and a proper time management system are essential to making that happen.
Second, keeping infrastructure realistic can make or break success. It’s easy to get caught in a growth spurt and suddenly add too many people to manage the business at different levels. Too much too quickly and the profits are gone. I’ve also tried to keep myself involved in areas I do best. The things I did to manage the business were necessary but once I could afford to hire staff, it made sense to hire people who were very competent in the areas I was weaker in.
Third, are expenses. Again, this can come with a little success. Once things reach a point where everything is paying for itself (and the business owner), you start thinking that it’s time for a new office, new company vehicle, increased advertising etc. Slow and steady works much better here. The old adage “don’t spend money you don’t have” is appropriate. While debt is necessary at times, the more you can do without it the better. If it is necessary, managed debt must be the way to go as unmanaged debt will sink a business.
Chronotek: David, thank you for time and your candid, insightful responses. There are plenty of great take-aways for small business owners across all industries.
David: Might be a little longer of an answer than what you were looking for but thought to share.
It’s not often that a successful business owner will share his secrets and strategies with others, so we were blessed that David was so forthcoming. We are still early into 2015 and there’s plenty of time to implement sound business practices that will pay long-term dividends. One great idea is a remote employee timekeeping system. At least David thinks so.