Here's the 7 financial terms that home services business owners/operators absolutely need to know to be successful.
Learn these terms and how they interact and you've got the fundamentals down.
Let's follow the cash path and start at the top
Money people pay your for services.
This is not investment money. So if you put in $500 to the bank account to buy a power washer, that's not revenue. Revenue is only from what people pay you for doing a service.
COGS (Costs - Of - Goods - Sold)
Everything required to get the job done.
Painting a house
Labor and paint.
Powerwashing Garbage Cans
Labor, gas, garbage bags (note - NOT! the pressure washer!)
Labor and Soap, Squeegees, rags
Gas, labor, gas, refuse bags, gas...
Refuse bags, labor, bags
This is Revenue - COGS.
This is an extremely important number to know as a percentage.
This is how much Profit (profit = $ you get to keep) that the services itself generate.
So, quick example:
You paint a house.
You charge $10,000, you pay for $400 in paint and pay your staff $2600.
Your gross profit is (10,000 - 400 - 2,600) = $7,000.
Meaning your Gross Profit as a percentage of Revenue (called gross Margin) is 70%.
So if you do 10 jobs for 10 grand you should hit 70K Gross profit.
You should also now know that if you do a job for 20K, your COGS should be 30% ($6,000) and your profit $14K.
Thus, knowing the margin you want can help you bid and scale your service up and down the job size.
If you are not "hitting your margins" as people say (this means to be operating at or above a set Gross margin based on your business) you know that you need to make some changes to how you operate.
Expenses / Overhead
These are products / services that you pay for to help the business itself run.
To keep it simple, this is any expense not directly involved in production.
So, your gmail account? Expense.
Jobber / Housecall Pro / CRM ? Expense.
Thumbtack insurance? Expense.
Now, what about that lawn mower you bought or those ladders you purchased - aren't those used directly on the job?
Yes, they are, but...without going in to an accounting rules shitstorm, it is easier for you as the owner to think of them as expenses.
Por ejemplo, say you do 10 lawn mowing jobs this month, Revenue of $300, cogs of $30 for gas, and then you count the lawn mower you bought for $500 as COGS, your month will look like your gross profit was -$230 dollars and you'll say "well this is dumb i'm out of here."
In reality, your Gross Profit (aka Operating Profit) was $270, at a 90% margin. It will take you just under 2 months ($500/$270 = under 2 more than 1) for your operations to pay for that lawn mower.
So this is a much better picture!
Now I know I have to pay off the mower, but I am Grossing (grossing - gross profiting) $270 a month so it is worth it to continue as I will be in the gravy with the mower paid off in no time and can keep that $270 for myself.
One tip when starting out - KEEP OVERHEAD LOW. Don't buy a new riding mower when you can borrow your neighbor Gary's to validate your business.
Net Profit/Net Earnings
Revenue -COGS - Expenses =Net Profit.
This is how much the entire business profited as a whole.
Your "net" is the take home money. This is known as the "Bottom Line" (this is 'cause it's at the bottom of the Profit and Loss Statement).
This number that you want to go up.
Profit and Loss Statement
This is a report that shows all of the above terms smashed in to a "Map" of the financial story of your business.
Here's what one looks like.
Know simply as a "P and L", this is something that you must have.
If you do not know how much (or if!) you are generating a profit, you are flying blind my friend.
Tools like Xero, Quickbooks Online, and Freshbooks help you sort all your transactions and get this report.
We like QBO for home services ops.
Cash Flow - Your Most Important Friend
When you are operating a business cash flow is your almighty master.
What is it?
Essentially it is three questions wrapped into one phrase - how much cash do I have now, how much cash do I have coming in, and how much cash do I have to pay soon.
Quick example: You run a painting company.
You get a new client - Mrs. Davis.
You land a 10K deal that you know has a 50% margin (5K).You've got 3K in the bank.
If Mrs. Davis says that she will only pay after the job is done, assuming you are not using a credit card, guess what? 3K in bank - 5K needed to do the job = -2K. You cannot work with negative dollars. Sucks to be you.
Even if you maxed out your bank account on materials, you are going to risk paying your guys late.
You know who is having zero trouble finding new employment these days? Good technicians. So don't fucking pay them late.
Now, for cash flow purposes, you should say to Mrs. Davis "Mrs. Davis we'll need 5K down at the signature to book the job, then 5K at the completion of the work."
Now the situation is different. 3K in the bank - get 5K from Mrs. Davis, up to 8K. Kerching!
Your crew completes the job over a week.
Meanwhile, you also have a van payment to make and have to pay for the roaming plan on the van hot spot, so you have say $400 in expenses this week as well.
End week at (8k-5k COGS - $300 Expenses) = $2700 in bank.
We're in the clear!
Without that up front payment from Mrs. Davis, all your cash is gone. If your cash is all gone, you are fucked until someone pays you money again.
NEVER GET IN THIS SITUATION! NEVER EVER DO THIS!
What ends up happening is you take out a loan to cover the cash flow problem, you don't learn your lesson on how to manage your money, and then you can't pay the debt, then you get in to what is wonderfully known as a debt spiral, leaving you out of business.
Main terms and what you want them to be doing (in general):
- Revenue (up)
- Cogs (not up)
- Gross Profit (up)
- Expenses (not up)
- Net Profit (up)
How do you know what is happening with those numbers? - Profit and Loss Report
What do you need to monitor so you don't run out of cash and have to stop operations or take on debt?- Cash Flow
Boom, that's it.
The rest of the terms you hear thrown around pretty much all underneath those 7 important terms.
Make revenue go up without increasing COGS and Expenses at the same rate and you'll have more money.