Episode 121: Are Your Profit Margins Good? Let’s Talk Expense Ratios…

Episode 121: Are Your Profit Margins Good? Let’s Talk Expense Ratios…

Announcer:
Grow your cleaning business, make more money, have more time. This is the Profit Cleaners podcast with your host Brandon Condrey and Brandon Schoen.

Brandon Schoen:
If you're building a bigger brand, something more sustainable could potentially exit for a higher amount or even just like I said, once you get it to a certain level, you can really dial in those efficiencies and take it from a, you know, a 15 or a 20% up to a 25 or 30% Profit margin. It's just economies of scale and with sometimes more volume, you can create those efficiencies. And, and so it's, it really depends on where you're at, like what your strategy is. Are you in rapid growth? Are you in, you know, pullback, efficiency kind of mode? And so it's gonna be different for everybody, but I think that'll give everybody kind of a good overview of, you know, what's possible, what's the potential even at that 20% Brandon. I mean, I think that's still more than a lot of businesses out there that you, there's top line revenue, gross revenue, but at the end of the day it's like what are people actually profiting? Even though it sounds low, it's still a great number and you can still increase it beyond that, depending on if you're on payroll, all of things, you know.

Announcer:
Grow your cleaning business, make more money, have more time. This is the Profit Cleaners podcast with your host Brandon Condrey and Brandon Schoen.

Hey everybody. Welcome back to another episode, Profit Cleaners podcast. The only place where you can learn from the top 1% of cleaning business owners from around the world.

Welcome to the show today guys. I'm Brandon Chain, your host, and I'm joined by my fabulous, amazing co-host, Brandon Condrey in the house. Yeah, so let's, let's share some more value today on the show. Let's give everyone a little bit more of what they've been wanting and what they've been asking, which is what we're trying to give you guys here,

which is value, you know, so let's, let's up level your business, take it to the next level. So I, today we're gonna cover another quick episode talking about a very common question we get asked, which is, what is a good expense ratio slash what's a good Profit margin you should be shooting for as you're growing your cleaning business? People ask this all the time and I would say it's a great question cuz obviously you need to make money to,

to be in business, you need to be profitable. We are the Profit Cleaners after all. So we're gonna share some strategies, some ideas on this that are gonna help you guys a lot and let's get into it. Brandon, I think now's the time. Let's do it. Sure. So I wanna be really clear here. You're using the word expense ratio.

If you are a savvy investor type person, expense ratio in the investing world is something that mutual funds use, right? It's how much of the dividends from the fund get used to pay the expenses. Like how much does the manager of a hedge fund get paid? How much do all the little analysts get paid? That's expense ratio. What we're talking about today is what is a target Profit margin that you should be shooting for net income that's Profit and what,

you know, what do you spend on expenses? And so this may be a very disappointing episode for some people. There is no like, there's no hard and fast rule for this. So I'm gonna talk to you today about what our targets are, what we're shooting for and why we picked those targets. I was, I was just gonna say like maybe we should,

cause I just heard this the other day actually, but like maybe just start at like a very basic level of like in general most businesses are actually only at like a five to 20% Profit margin. Just for an example, like e-commerce stores on Amazon do those, you might be doing millions of dollars of volume, but those guys usually operate at a very low margin,

like 5%, 7% Profit margin. So every business is different. You know, retail is usually a lot less, could be even like 2% like grocery stores and stuff, but they're doing a ton volume. Yeah, I think grocery stores are one of the worst ones that they have just the lowest Profit margin. Like, so we're talking in generalities here and then everything that I tell you is gonna come with a big caveat of this is highly dependent upon your market.

Like we got a sweet deal on our building in Albuquerque and they have not raised rents on us a single time. So we've been in there paying the same thing that we were paying for rent six years ago, which is more impressive considering the state of the real estate market right now. So I'm, I'm real happy with that building. But if you're brand new right now and you're in a hot city,

man, you're gonna be paying a lot more than we are for that commercial space to rent. And so like your expense margins on those things are gonna look much different than ours. So generally speaking, what we're shooting for is 20%. We want the cleaning company to be 20% Profit and that's what we've told everyone. An e o s, how did we come up with that number?

We came up with that number by talking to Corby because Corby's trying to get jobs that are more than 50% Profit and that's the wrong word to use. So like when Corby says that he means that payroll expense for just the Cleaners is 50% or less is what he's shooting at. I think right now we're at like 48, so that's like right on board.

And then when you take into account all the overhead, all the things that were not directly cost of goods sold. So after you, you paid payroll, now you need to buy supplies, pay all your utility bills, you gotta pay for people that aren't Cleaners. So your customer experience people, your salesperson, you, you have to pay for all that.

And then all that's left over is that Profit. And so in Corby's case, that's 20% somewhere around there. And then the other example we used was my old boss who put in some investment funds when we started he was at 22%, so 22% on a distributorship. So like he had exclusive rights to distribute scientific products in the United States from overseas manufacturers and he made 22% and that was after covering everything,

you know what I mean? So, so that's kind of where we're at. We haven't been close to 20%. But another caveat because you could do this differently than we're doing it, Brandon and I are W2 employees. That gives us advantages when we're trying to go get loans for things like cars and Brandon got a travel trailer recently and things like that.

Like you have pay stubs to show that you are getting regularly paid. If we were not on regular payment and we were just taking draws from the corporation, we probably would be a lot closer to that 20% if not over it. But ideally I would like to be on the payroll and get 20% Profit on top of it. So that's, that's why this podcast is called the Profit Cleaners.

So expense-wise, I know that we've talked about this before, I just can't remember whether it was course coaching collar podcast. So if you're hearing this again for the second time, my apologies. So what I'm gonna tell you now is our Profit first allocations, there's definitely some acronym that Mike Michalowicz uses in the book. I do not remember what it is,

but this is where we put the money when it comes in. So we have an income account, all the money dumps into there and then when we make the transfers, 9.5% goes to our Profit account. So hypothetically we're 9.5% on the get-go. We do pay stuff outta that account. So like that's also like the emergency buffer. And so like we're paying a royalty right now on an,

on an investment. And so that's where that comes outta. We put 9% towards sales taxes. So that's not our money, we collected it, but I have to forward it to the government. So that goes away. And then 69.5% goes to payroll, that's payroll at large for everything. So Cleaners are between 48 and 50% of you know, revenue on any given day.

We're kind of averaging 48 I think. And so that other 21.5% is covers me and Brandon, our director of operations, three and a half customer service reps, a warehouse person, a handyman, like there's a lot of overhead in there that you may not have. And so like we know for a fact that Corby does not like Corby does not run it like we do.

Like it's the cleaning is the same, but the business model has diverged a little bit and that that was intentional. Like we, we grew it that way with intention. So then after payroll there's 2.25% goes to insurance, 2.8% goes specifically to marketing. So that's just ads and like we have a marketing assistant that we pay out of there, we have softwares that we use to run ads.

All that comes outta that bucket. And then what's left over is 6.95%. And in the Profit first method that goes into your operating expense account. So if you add up like insurance marketing and operating expense, it's 12%. So 12% of revenue is covering expenses. That's kind of like our expense ratio. 12% of revenue covers expenses, 69.5 is payroll, 9% is taxes,

and 9.5 is this hopeful Profit account, which usually gets spent on something else. And again, this also comes with a caveat because right now we are heavily focused on expansion. So like if we wanted to, we could dial this in, make it super efficient, get rid of this person, get rid of that software, whatever, and just sit on it and grow slowly.

That's not how Brandon and I do stuff. We try to like 30 to 50% growth every year, which is insane. But like that's what we're tracking. And so all that extra money goes towards funding that stuff, man, like growing a business is not inexpensive and we're trying to do it in three cities right now. So that's three rents. Although the two,

two of them are very inexpensive cuz they're storage units. I don't wanna give you guys a false impression that we have all these buildings all over the place. We have two storage units and one real building, but that's all money man. That's all money that we gotta pay out every month all the time. And so like that's why we're running a little bit leaner than many of you might be.

And certainly like companies like Launch 27 with a contractor model, those are almost always more profitable. Yeah, yeah, I was gonna just say that there's, it really comes down to like how aggressive are you being with your growth? Are you kind of in, you know, efficiencies mode where you're like, Brandon said you're pulling back and you're cutting costs or maybe replacing someone with something else or AI's coming now and it's gonna make things even more lean,

but it's like, that's one way to look at it. That's really where Corby's at in Denver. He's been there for a while. He's just like, I'm at the level I wanna be at. Let's dial in those efficiencies. Like less is more. He's only got a couple people running the all of his dozen teams now and he, he keeps it very lean,

very easy, you know, so no expansion, no extra growth, just keep it the same. So whereas Brandon and I are all in, we're we're going into new markets expanding all the time. We're, we're pushing faster growth. And so when you're doing that, there's less of a intent on creating more efficiencies and it's like Brandon said, you're putting more of that money back into growth,

into expansion. And so you're not gonna be as efficient when you're doing that. However, the long-term bigger picture is, once we get to a certain level we can, you know, leverage more of those things or AI or different technologies or just becoming more efficient with what we're doing and that we can hit those higher Profit margins. And like Brandon said,

oftentimes you'll hear a lot of the contractor models where that means you don't have full-time employees or I've talked to people that are doing 30% or 40% Profit margins. However you're in my opinion, you're, you're kind of not looking at the whole picture because a lot of that money is not going back into investing and building a brand or building long-term employees cuz you don't have employees.

You're maybe possibly gonna grow to a certain amount at that Profit margin, but sometimes with that business model you're gonna run into other issues of scaling, of you know, not having sustainability or having reliability from full-time employees or other systems or other things that, that you're building into a brand that's gonna cost more money, you know, upfront or as you're going.

But long term it can really pay out in the end because, you know, if you're building a, a bigger brand, something more sustainable, you could potentially exit for a higher amount. Or even just like I said, once you get it to a certain level, you can really dial in those efficiencies and take it from a a 15 or a 20% up to a 25 or 30% Profit margin.

It's just economies of scale. And with sometimes more volume you can, you can create those efficiencies and, and so it's, it really depends on where you're at, like what your strategy is. Are you in rapid growth? Are you in, you know, pullback efficiency kind of mode? And so it, it's gonna be different for everybody, but I think that'll give everybody kind of a good overview of,

you know, what's possible, what's the potential. But even if even at that 20% Brandon, I mean I think that's still more than a lot of businesses out there that you, you know, you might, it's like there's top line revenue, gross revenue, but at the end of the day it's like what are people actually profiting? And most businesses are five or 10% even,

you know, so it's even at 20%, even though it sounds low, it's still, you know, a great number and you can still increase it beyond that, you know, depending on if you're on payroll, all those things, you know, Hey Profit Cleaners, if you're interested in growing your cleaning business and joining the top 1% of cleaning business owners,

well now's the time We're launching our new business out in Texas and documenting everything. So you're gonna want to join us and you're gonna see how six and seven figure cleaning businesses are built from the ground up so that you can do it too. To get started on this journey with us, head over to our free Facebook group now and watch the masterclass pinned to the top of the group.

Just look up top 1% cleaning business owner club on Facebook or go to Profit Cleaners dot com slash facebook and watch the free masterclass pinned to the top to learn more. Dude, I mean I would be super psyched with 20%, like we're talking about doing, you know, 5 million bucks I think is our EOS target this year. So like let's say we hit that and we were at 20% profitability,

that's a million dollars in Profit. That means Brandon and I would be flying planes and buying beach houses like next week. I don't see that happening this year. I think most of that excess Profit is going back into just growing the business more. But like there will be a time, like you said, when we get to the point where all right,

all these, all these other cities that we propped up are now like stabilized and rents there, staffing's good, the systems are working, everything's dialed in. Like that's, that's when Profit happens. And so you can reverse engineer this any way you want Brandon and I think big man and that's, you don't have to be what we're trying to be. You can be a one location,

one city and have a very successful business. When we started, that was the plan. Like we did not branch out to hey man, we need to go to multiple states, you know, until we got a little bit more into it, a little more confident. So if you just wanna replace yourself, cover expenses, get some extra money to like,

you know, live the lifestyle you want, I think that's relatively achievable and certainly at less than 20% Profit margin, like five, 10% is totally doable. It's just how you dial it in and what kind of corporate culture you create, you know what I mean? So like a corporate culture that's strictly high Profit all the time is miserable to work in because usually they are laying off staff,

people have to pick up extra work, they're changing your tools that you use from this one that worked great to this one that sucks cause it's way less expensive and sometimes you'll see that happen when like private equity steps in and they'll buy something. A lot of private equity firms just exist to go in and cut, cut, cut, cut, cut, cut and then great,

now it's 33% Profit and then they turn around and sell it. There's a lot of private equity firms that just kind of flip businesses like that and then it's like someone else's problem to actually run it successfully in there. So, you know, we strive for a more inclusive and fun working corporate culture. And so that means that we spend some of that money on things like we're having our annual company like picnic thing next month and that's,

we're covering admission to like this state park that has a floating obstacle course and we're covering food and beverages and transportation and all that stuff. A lot of companies just don't do that. And I think that's way more common now. Like I remember when like early nineties, my mom's company would've a big company picnic every year and all this cool stuff was included.

I just don't think a lot of companies do that. So again, this, this is like reverse engineering what your goal is. So is your goal to have a ultra efficient, high Profit margin thing where everyone's kind of on edge to work there? That's totally fine, you can do that, but it's just that, you know, one, our system does not have to be your system.

So these numbers don't have to be your numbers is what I'm saying. You can tweak these, Yeah, you can model what works, but also make it your own. And also, like something you said I wanted to point out, Brandon is like you said, we started out like here's our goal, here's our vision. It was, it was one town,

one city, but then this is what's gonna happen as you're on on the progress of your, of growing your business, you're gonna hit this next potential. Your your goal is do this, you're gonna, you're gonna get there and then you're gonna realize, well I hit my potential but now there's all this other potential. Now your potential expands and you're like,

well we could go here now. So you might start out at five or 10, 10% profitability and as you grow and then you hit those levels and you hit your initial goals of, you know, 20 50,000 a month, whatever it is now, now you've hit a new potential, a new level. And so now you can expand and, and and potentially get more profitable,

potentially pour that money into more growth. You know, even just going into new markets, Brandon you mentioned our, our sales tax, it was like eight, 9% or whatever. I mean if you're in a state like Texas or Florida or some of those places that don't have state tax, that that shaves off 10% right there, you know, so there's all sorts of things.

Oh they have sales tax income. Yeah, that's what it is. Income tax. So, But Texas does have sales tax, it doesn't have income, tax doesn't. So if I was an employee in Texas and renting a house, that's when you get the most benefit the way that Texas makes up for it. Let's see, Texas and Nevada do not have income tax,

personal state income tax, the way they make up for it is property tax. They have very high property tax rates and so they get that money either way, it just, if you're renting then you're good. Like your landlord's paying the property tax, I dunno if they're states, Colorado doesn't have sales tax on services, they only have sales tax on goods.

So if you bought a physical thing, like you gotta pay sales tax at the grocery store if you buy clothes, but Corby doesn't, there's no tax. So like there's no tax on that, which I think is great. Yeah. And depending also where you are at in the world, it could be very different, you know, so there's so many factors,

different markets, different ways to grow your business. But you know, I think that'll give you guys a good insight on like what's possible, what's normal, what, what are some things that you can shoot for? And, and like Brandon said, reverse engineer, what's your goals? What are you shooting for? Reverse engineer that and just know that,

you know, if you get to that point, your potential can expand and you can get more profitable, you can be more efficient, you know, but in the beginning, especially in the beginning, that's when you're really putting a lot of the upfront work and a lot of the hardest work getting the, the momentum going. You're gonna be less profitable in the beginning cuz you're pouring that money back into growth,

into new systems, into new people. And so just know that you gotta have a, a big mindset. You gotta think three years out, five years out, 10 years out and what's your bigger vision and what's your reason why? And that's gonna help you drive past those points of maybe you're having lower Profit margins in the beginning, but that's okay knowing that you can hit this potential in the future and keep going from there.

And, you know, maybe, maybe get to where corby's at and just be like, I'm good, you know, a dozen teams or so I'm good. I don't need to grow anymore. Let's tweak a few things and keep it at 20% or 25%. Or if you're like us and you're like, let's take on some new markets, you might have to,

you know, not compromise, but just, just be okay with making a lesser mar margin while you're investing in the opportunity cost in the future and, and what is to come and, and the new potential. So, so yeah, I mean there's lots of ways to do it. There's no one way to, to run a business, but I think you guys can model a lot of what we're talking about and at least have a better idea of,

of that concept and you know, what to expect with Profit margins. So Yeah, so there you go. I mean that's like if you've run a business before, like none of that should be surprising to you. If this is your first business, you may be weirded out that I don't have like a blueprint for you to follow, but it's, these,

these are just highly variable man. This is like looking in someone's like kitchen and wondering why they put the silverware over here and not over here. Cuz it would make way more sense if the silverware was over there or the glasses were in this cabinet. It's just highly variable dependent on the business and the setup that they got going on. And so, you know,

like don't just just do it how you want to do it. And so like what John, our CFO has always said is like, look for Profit that you, you literally have two things that you can control. That's it. There are two levers to pull inside of the business that is more sales, less expenses, top line minus bottom line equals Profit.

And you want to get that number from red to black. And so over time you gotta do that. We have focused more on sales and we've done, you know, market corrections and price increases and stuff for the customers over the years, which is something that you should be doing. We have total episodes on just pricing, you know, over and over and over again.

But that's it, man. Those are, those are the two things that you can control, which is actually wild. It's wild that every business that is on Wall Street or any other place, two things, money coming into the top and expenses going out at the bottom. That's it. So trim those two things. If you are paying for class a office space somewhere as a cleaning company,

no, don't do that. The customers are not going to see you. You do not need a storefront. You do not need to be in a high traffic retail area because sometimes a broker will sweet talk you into something. You need to be in a rundown looking warehouse in on the outskirts of town. Like that is primo. That is the best case scenario right now.

So, you know, there's, those are things that you can look at and you know, the bigger the expense, the bigger impact it's gonna have. We switched, we spent so much money on software right now, which I never thought that we would do. We looked at Zendesk in the very early days. I was like, oh my god,

this is so expensive. And now we gladly pay it every month because it makes a big difference for customer retention and bringing on new sales. So man, all this is with the greatest salt is what I'm trying to get at. So just look at those two levers, see what you can control. If you haven't done a price increase in a while,

jump at it, man. Like this is, yeah, Just capital. Just thinking about all those, you know, once you have that structure and those systems in place, it's just continually getting better, continually optimizing those little kind of breaking points in between where, you know, money gets lost if, you know, every business has these little points where it's like from,

from getting an ad to your website to checkout to a customer, to shipping supplies, to all the, all the things that make the business go. Every one of those connection points, there's, that's where money is, is made and lost. And so if you can increase those efficiencies of, you know, being like, like recently we just shared the,

on the last episode about the insurance. You know, if you can save thousands of dollars a year on insurance and, and optimize that piece, if you can optimize your ads better, if you can optimize your sales process better and, and, and with the future of AI coming and all these things to just keep automating things and making things more efficient over time,

that could be a lot higher number. It's just, you know, continue to, to optimize, continue to get better, have that growth mindset of like, you know, we can do better and what's next? And so that's really it. And you, you can, you can get better and you can get more profitable along the way, but have that big long-term vision and so you don't get burned out when you're kind of down in the trenches more,

you know, just realize the potential can be a lot bigger. That's where it can be. And that's what you're shooting for. So there you go. So I think that was an awesome episode. I, I learned some stuff. I I learned something every time. So here we go. Well, hope you guys got a value outta the show today.

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