2.2 Your cash flow projection
Your cash flow projection is basically an educated guess about future scenarios. It shows how the cash in your account will go up and down over the months that you are in business. It has nothing to do with how profitable you are. If you see a negative number in the cash flow, you are out of cash. By looking ahead, you can foresee this possibility and make plans to cover the situation in plenty of time.
For now, concentrate on forecasting your cash needs for your first year in business. The cash flow into your business depends on how many people want your cleaning service at the price you charge. Understanding the cash needed to maintain your business and ensuring that more cash comes in than goes out is the major goal of your financial planning.
All the costs you incur during operations are listed under “Expenses.” The first month shows initial start-up expenses such as equipment and supplies, and other one-time expenses. Salaries will be low for Month 1; usually you are not open for the first month because you are setting up your office and training staff. Operating expenses for the first month will also be low. Some of your start-up bills will actually be paid in the second or even third month, when the invoices arrive. These invoices may include legal and accounting fees, or may be for your purchase of extra equipment. Your first few months in business will have many of these one-time costs as you add to your business.
The figures for sales will be guesses but they are still useful in terms of seeing how sales affect your business. It is not unusual to find that your expense predictions are within 10 percent of what you will actually spend. That said, you should reward yourself for each month your actual figures are close to your projected figures.
Review your cash flow projection on a quarterly basis at the very least. You will have to update this form to reflect any changes. For example, the rent for your office may increase, you may want to plan for a major purchase, or you may want to hire employees.
2.3 Calculating your break-even point
Your break-even point is the amount of income you must generate each month in order to cover your expenses. Your initial budget should cover your income and expenses only. In the beginning, there is no work, so no salaries have to be paid. Once you need staff, remember to budget for training sessions.
Work backwards from what you know to arrive at a useful figure. Take the total expenses from each month in the chart that you have worked out and multiply it by ten. This is a quick rule of thumb that is surprisingly accurate. You can also elect to pay staff monthly, holding the first month back to ensure that income is received prior to expenses incurred by staffing.
You need to know if your plans are reasonable. By adjusting your costs and the other things you need to run your business, you will get an idea of what works and what does not. Ask yourself the following questions:
(a) Are there enough homes in my area to support my plan?
(b) What do other business owners think about what I propose to do?
(c) Can I compete with the cleaning services that are already outthere?
You won’t have a clear yes or no answer to all of these questions, but when you weigh your break-even numbers against them, you’ll see where the flaws are in your thinking. Or you may be able to take comfort from knowing that the numbers show that you have a wide margin of error before you have to worry.
Your break-even point should be at approximately two months, when the full impact of your advertising campaign has taken root. Then the company should continue to grow. Effective advertising and advertising strategy is discussed in further detail in Chapter 5.
3. How Much Should You Charge?
Pricing is tied to marketing. What you charge your customer has a direct effect on your potential sales. If your price is too high, you may be cutting off clients from your market. If your price is too low, clients may assume that your work is of poor quality.
Finding the right price means balancing profits versus market rates. Consider these factors:
(a) How much does it cost you to provide your service?
(b) How sensitive is the market?
(c) What image do you wish to project for your business?
(d) What does your competition charge?
You must determine your hourly rate. What hourly rate do you need in order to maintain your cash flow? Suppose your goals are modest compared to a business like The Cleaning Company Inc., and you want to make $20,000 a year from your cleaning service. How many days will you work and how many hours in that day will be billable? There are 365 days in a year. If you plan on one month’s vacation time, deduct 31 days for a total of 334 days. If you also don’t want to work on the weekend, deduct 127 days (104 weekend days plus 23 vacation days exclusive of weekends) for a total of 238 working days. Let’s say you plan on six billable hours per day; six multiplied by 238 gives you a total of 1,428 billable hours per year. When you divide $20,000 by 1,428 you will see that you must clear about $14 per hour to make your desired income. To make sure that you clear $14, you must log enough hours to cover overhead and expenses.
What is the going rate for a home cleaning service in your area or market? If the going rate is $7 an hour, there’s not much point in trying to charge $14.
Remember, you must allow for overhead expenses; don’t undercharge. If your business grows to the point where you must hire employees, consider the additional overhead that will accrue.
Develop a formal pricing plan: it will be invaluable when you need to meet with a banker or accountant to organize your company’s finances. For more about pricing for specific cleaning services, see Chapter 6.
4. Keep Your Forecast Up To Date
Your initial forecast is only the beginning. Once you begin billing your customers, there is an even greater need to keep on top of things. Set aside time each month to review your cash flow. How does your forecast measure up to the reality of running your business? Watch for client trends or requests for special cleaning services. Note other influences that affect your clients’ demand for your service. Is there a seasonal dip in the summer when people go on vacation, after the busy spring months when everyone wants spring cleaning? Do things pick up again toward December and the New Year when people plan to entertain? Monitoring when people request your service is important, and it will help your forecasting.
Eventually, you will be able to forecast past your first year and begin forecasting for year two, year three, and beyond. The successful business owner always knows how financial commitments will be met; forecasting allows you to do that.
5. Raising The Money
Starting and running a cleaning business takes money. Without sufficient funds a business can quickly become tiresome and stressful. Be certain that you have enough money to start off your business.
Your business start-up capital can come from a variety of sources: personal savings, relatives and friends, banks, government, and private investors are all possible sources. If you have enough money saved to meet your first year of expenses, this can be a good way to start. If you don’t, consider waiting until you have enough saved so that you can start your business with your own funds. Most new businesses are financed by the individual: The banks are not the major source of start-up capital.
If friends or relatives will lend you the money, you can plan to pay it back from your profits. Your cash flow forecast will tell you whether this is reasonable. Be aware that there is always a danger in mixing money with a personal relationship, despite one’s best intentions. Consider whether your business is worth the risk of a friend or family member’s money.
The bank is another source to approach for start-up funds. If you want to convince