Budgeting for a cleaning business

At this point, you should be proud of how far you’ve come. You’ve generated those leads and now that you know how to quote and estimate for your cleaning business, you’re closing deals and making money! This leads us to the next step in your business journey--budgeting.

Budgeting is a critical component in the success of any business as it will help you limit your spending and track your expenses. It will also provide invaluable insight into the health of your business as you plan for the future and set your financial goals.

In this article, you’ll learn how to budget for the equipment and tools you’ll need to run your cleaning business.  We’ll also take a look at a few of the most important financial documents to be familiar with, and go over how to do payroll and pay your taxes.

Let’s dive in.

Equipment

Cleaning companies have relatively low equipment requirements, but at a minimum, you should budget for the following: 

• A reliable vehicle
• A variety of cleaning products (many customers today expect eco-friendly/non-toxic cleaning options)
• A vacuum, mop, bucket, and duster

When you’re starting out, you may be able to use clients’ supplies, but over time you will want to invest in your own setup. This will ensure that you always have the right equipment while making you more independent as well. It will also help you look more professional.

Financials

There are three basic financial statements your bookkeeper should prepare for you. It is not recommended to DIY your books. You may be able to do your invoicing, but the goal is that the bookkeeper does your bank reconciliations and prepares your financial statements

• Balance Sheet: What you own and owe.
• Income Statement: Sales and expenses.
• Cash Flow Statement: Where the cash came and went.

Additionally, it is good to have a cash flow forecast. This is typically a 13-week forecast, but you may also have an annual budget/forecast and update the actual numbers monthly. This gives you insight into how you did against your goals. The less cash you have, the more often you should update your projections to ensure their accuracy.

Financial Terms / Glossary

• Top Line Revenue: The revenue earned by the business by selling services and is reported in the income statement for a defined period.
• Variable Expenses: The costs of production that vary directly in proportion to the number of jobs produced. Variable costs often include labor expenses and material costs.
• Fixed Expenses: An expense whose total amount does not change when there is an increase in an activity such as sales or production. 
• Gross Margin: Also known as ‘gross profit’, it represents each dollar of revenue that the company retains after subtracting COGS (cost of goods).
• Overhead: Business costs that are related to the day-to-day running of the business and support the overall revenue-generating activities of the business. 
• Net Profit: The measurement of a company's profit once operating costs, taxes, interest and depreciation have all been subtracted from its total revenues (also referred to as net income or bottom line).
• P&L (profit and loss) Statement: Refers to a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a quarter or fiscal year.
• Cash Inflow: Money going into the business (ie Sale /Revenue).
• Cash Outflow: Money going out of the business (ie Expenses).
• Payroll Taxes:  A percentage (based on wages, salary and tips) withheld from an employee's pay by an employer who pays it to the government on the employee's behalf.
• Vacation Pay: A benefit that employers typically give full-time employees that allows the employees to take a paid vacation. Check the percentage requirements for your area: 

• Canada: See how to calculate vacation pay according to the  Canada Labour  Code.
• USA: See the U.S. Department of Labor for vacation leave.

• Accounts Payable: Amounts due to vendors or suppliers for goods or services received that have not yet been paid (ie invoices to be paid).
• Accounts Receivable: Any money your customers owe you for services they purchased from you in the past (ie payment owed on a job).
• Cash Accounting: Recognizes revenues and expenses when the money leaves or enters your bank account (record transactions as soon as you send an invoice or receive a bill).
• Accrual Accounting: Recognizes revenues and expenses when the transaction happens (money a client owes you).
• Depreciation: An accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value over time.
• Amortization: An accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time.
• Prepaid Expenses: Payment for expenses by a company before the purpose of the expense is used.
• Retained Earnings: Amount of net income left over for the business after it has paid out dividends to its shareholders. 
• Chart of Accounts: An organizational tool that provides a digestible breakdown of all the financial transactions that a company conducted during a specific accounting period, broken down into subcategories (click here for a Chart of Accounts example).

Payroll

Payroll is an essential part of any business because it’s how you pay your employees. To keep them happy, it’s important that your employees are paid regularly, on time, and at the agreed-upon rate. 

It’s common for many small business owners to handle payroll themselves to save money. For those opting to do their own payroll, there are many platforms to choose from. Here are a few of the most popular:

• Canada: 

• ADP Small Business Payroll
• Quickbooks Payroll
• OnPay
• Xero

• USA:

• ADP Small Business Payroll
• Quickbooks Payroll
• OnPay
• Xero
• Gusto

Some business owners prefer hiring an accountant instead. If you go this route, payroll will be taken off your plate entirely and allow you to focus on other things. 

Payroll Taxes

Your federal payroll taxes will depend on whether you’re operating in the US or Canada. So, let’s take a look at the most common taxes you can expect to pay in each country.

USA

In the US, you’re required to pay federal income taxes in addition to Social Security and Medicare taxes. There are also state income taxes and other local costs (which can include unemployment insurance, school district taxes, and state disability).

Make sure that whoever is handling payroll has a firm grasp on the specifics of calculating these taxes for your state because you could face penalties for any mistakes.

• For more information, see the “Employer’s Tax Guide” from the IRS: www.irs.gov/businesses

Canada 

In Canada, your obligations include the federal withholding tax in addition to payments for the Canadian Pension Plan (CPP) and Employment Insurance (EI).

• To learn more, the Canada Revenue Agency is full of useful information: http://www.cra-arc.gc.ca/bsnsss/menu-eng.html

Please keep in mind that the taxes mentioned above are not exhaustive, and there may be more taxes, fees, or levies that apply in your area of operation. We recommend familiarizing yourself with the local laws to ensure you don’t miss anything.

Cash Flow vs. Profit

Cash flow and profit are not the same thing, and it’s important to know what these terms mean and how they differ.

• Cash flow: The net balance of cash flowing into and out of a business at a specific point in time.
• Profit: The amount of money remaining after operating expenses have been subtracted from revenue.

It’s very common for first-time business owners to focus solely on profit, but this is a mistake. Your cash flow needs to be tracked and taken into account as well, or else it can be hard to budget and plan accordingly. 

A company can be profitable and yet still have a negative cash flow (which means more money is going out than coming in), and on the flip side, a company can have positive cash flow while not making a profit. That’s why you should have a solid understanding of both cash flow and profit before making any big decisions or purchases for your cleaning business.

Break Even Point

The break-even point is where your total costs and total revenue are equal. In other words, you’re not making a profit, but you’re also not losing any money either. Reaching your break-even point is a watershed moment for any business. It’s also a significant turning point worthy of celebration--once passed, it means your business is now profitable!

By calculating your break-even point, you’ll know what your minimum sales have to be in order to make money. It can guide your decisions regarding things such as price changes and lowering costs.

Here’s how to find your break even point: 

Break-even point = Fixed costs / (Price - Variable Costs)

Success: It’s In The Budget

Budgeting is a fundamental aspect of any business. By keeping track of your income and expenses, budgeting can help you create strategic plans for the future while also showing you the overall health of your business.

The key financial reports are the balance sheet, income statement, and cash flow statement. It’s critical that you as the business owner understand them and the relationship between them--regardless of whether you hire an accountant or not. When it comes to payroll, your tax obligations will vary depending on where you operate, so please familiarize yourself with all of the local rules and regulations.

Careful budgeting and planning will enable you to manage your money more effectively, monitor performance, and make better decisions. And the best time to start is now! Once you’re done, make sure to come back for the last post in this series--how to successfully operate a cleaning business.