Posted in Planning

Do the math

Too often new business owners are eager to get more work. So eager that they don’t notice that they are being conned. It could be a more seasoned business owner and it could be a client. Bottom line you need to understand what your numbers are, and when to take a job or when to just say no.

Remember don’t get excited about getting more work, get excited to get paid

I have a friend who has a cleaning company. The business is relatively new and before that he used to be a chef. So he has no prior business experience. He came to me with an offer he got a while back. I would like to go through that offer with you, maybe I can save you some money and heartache.

The offer:

He was contacted by a real estate developer who just finished constructing three buildings. He needed somebody to clean those buildings. He already found a contractor cleaning one of the buildings and they were negotiating on the second.

The offer was as follows:

He would get $1,000 to Clean one floor. The building has 20 floors and on each floor, there are four apartments. To finish cleaning a floor he has to clean all four apartments, the hall, and the stairway. The reason he was offered $1,000 is that the contractor was cleaning the first building is working for that price.

Let’s break it down

If he will take two employees to work with him he would finish the floor in about two to two and a half days work. Even if he was paying the employees $75 per day that’s still $150 per day. Multiply that by two and a half and we get $375. Notice we didn’t even take him into account. We need to see what we have left over to know how much profit he can make.

In addition to the salaries, he has to buy the cleaning products and tools. He has to pay for transportation for him and his workers. Don’t forget taxes and bankrolling the job.

I say bankrolling the job because he’s going to get paid after the job is done. and he needs to pay his employees paychecks way before he gets his money. 

Let’s assume that the cleaning products cost him $100 per floor. And that transportation costs him about $30. We reach a grand total of $505 and that doesn’t include any backup what so ever. I advise you to take a backup budget into account at all times. Something will inevitably go wrong and you want that expense to be paid by the clients. And if nothing goes wrong, more profits for you. Remember Warren Buffett two first rules. Rule no.1 don’t lose money. and rule no.2 see rule no.1.

The smart thing to do is to add another $100 to the expenses and triple it to come up with your price. Why triple you ask? I’ll explain.

When pricing your product or service you want to make sure you cover all your bases, and you still don’t know what they all are. Among them, you want to make sure that you cover your taxes and still have some profits. A simple way to do that is to take your expenses and triple them so that one-third goes to expenses, the second will cover your taxes and the third will be your profit. Of corse, things don’t always work the way we intend, but after the dust settles you will still have a healthy profit.

Here we run into our main problem, the competitor. This idiot took the job for peanuts and now the contractor will not pay anyone else one cent more. This guy is most likely going to go out of business for this one deal. Even if his company is a few years old, unless he has a few thousand dollars to lose on this deal he’s dead in the water and he still doesn’t know it.

And we still didn’t talk about when he’s getting paid. The contractor pays after the work is done but the check is at least a month or two in the future. So between paying salaries, taxes, and interest to the bank, he might not have anything left over.

So, what should the price be? 

As I said, we should take the expenses plus the backup that totals in $605 and triple it. The price should be $1,815 per floor. Sound too expensive to you? Take into account that in the end with $1,815 he might have $500 profit per floor. At 20 floors we’re talking about $10,000 for a job that can take about two months. Does $5,000 a month sound like a lot? Didn’t think that would be all he had left, did you?

My point is, this should not discourage you from starting a business. I just want you to understand what so many businesses close. Don’t be one of them, do the math.

I hope you found this post helpful, if so like it and share it with your friends. And while you’re at it, check out my ebook ‘level up your business’ a guide to starting your own business the right way.


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