What to Expect When Your Cleaning Company Reaches $500,000

Episode 24.

 

Ray

Joel, we’re back, and we’re talking about the financial thresholds that business owners have to cover in the cleaning industry. We did $100K, we did $250K. We’re looking at $500K. Is that right, now?

 

Joel

Half million is definitely a next threshold for a business owner.

 

Ray

Now, what makes that so special?

 

Joel

As you’re increasing your amount of sales, one of the problems in our industry is what is called a float or payment terms. Making sure that we get paid and trying to make terms that are user friendly on our end so we get our money quicker. Because you can’t go to the grocery store, walk out of the grocery store, and tell the owner of the grocery store, sorry, we’re going to pay in 30 days. You got to get paid when you walk out, or it’s called theft. Well, unfortunately, when you’re in a service business on a monthly contract, it doesn’t work quite that way. So, you have to try to shift your terms to make them as favorable for yourself without having your client tell you that you’re out of your mind. So, one of the things that I’ve done is I try to bill on the first of every month for that month’s service work because, again, being in New York State, we’re required to pay individuals who are primarily labor on a weekly basis. That’s the law. Not every two weeks, not once a month, every week. So, what do I do to try to recapture that money as quickly as possible?

 

Joel

Is I bill on the first of the month and ask for a net 30 term so that it’s due at the end of the month. And that way I’m even washed on my labor over the course of the month. As you get closer to that $500,000 a year threshold, what you do is you’re holding on to more and more money. And that’s why being in this particular type of industry is very difficult because you have so much money on float all the time of what people owe you. And that’s why you have to negotiate as best terms as you can. As you get closer to that $500,000 a year threshold, you now are holding maybe $70,000 a month in money. So how do you have to do? You have to keep banking that. So again, the money that comes in doesn’t just go into the owner’s pocket. The owner is basically being a bank without being a bank. And most people in our industry will say, well, I’m not a bank. When they’re trying to talk to their clients, they’re like, but I don’t want to pay for service that I haven’t received. So, it’s a very delicate balance where you both have to be very honest and upfront with each other, draw the line in sand and come into some agreement.

 

Joel

So once you start getting close to that $500,000 a year type of business, you might have to start getting lines of credit through banks. You might have to look for maybe a personal investor that’s willing to invest a certain amount of money and expects a certain amount of return. And they don’t care what happens if so-and-so doesn’t pay you or whatever because they are an investor and you’re going to pay them X % every single month, whether you hit it or not. So, it’s very important that you understand, depending on whether you’re a DBA, an LLC, or a Corporation you have to be very, very careful. Every time you go to borrow money, the banks look at you as an individual and they look at your credit rating. And because they look at your credit rating, your credit rating goes down. So, when you go to these banks, you have to be in a positive position. You want to be able to have books because they want two year’s worth of stuff in the books to understand where is your business, how profitable are you, what a risk are you? So, they’re going to look at those items before they extend you a line of credit.

 

Joel

And then based on a lot of factors, they are going to give you a percentage of what your sales were the previous year. So, you may be on track. You’ve signed some big contracts to hit that “million dollars” this year. But you only sold 250,000 last year. They’re only going to base it on the $250,000 you sold.

 

Ray

Okay. Any other warnings for that business owner? In the $250K, we talked a little bit about using HR services to do, Hey, this is way outside our scope. What about HR services now?

 

Joel

Essential! Essential because now you have so many more employees. I’m not saying that employees come in to do a bad job. But if the supervisor is not around and they can cut out a few minutes early, they’re going to cut out. Out of sight, out of mind type deal. It’s a cat and mouse game at times. I’m sure people who are listening to this are laughing because they know exactly what I’m talking about. People who start coming in too late, leave too early, and trying to do all the documentation to properly try to keep the person because nobody wants to fire anybody. Nobody wants to terminate an employee. We really just want the staff members to do what they’re being hired to do. So having that HR piece is more essential the bigger you get because there’s more problems.

 

Ray

Great advice, Joel. Thank you.