A very common small business in the service industry is the carpet cleaner. Many owners of such businesses desire to know the margins and of course the associated operating expenses involved. This article addresses these two questions and I’ll provide some insight into operations and finish up explaining the corresponding business dynamics.
Before we begin, you need to understand that this article is rather long and designed to educate and inform those in this industry and anyone desiring to get into carpet cleaning. If you are looking for a quick answer to your question; this isn’t the article for you. Business has no quick solutions to problems.
This particular service based industry is relatively easy to get into, but very difficult to generate significant profits. The primary issue with profitability is competition. There are so many carpet cleaners and so much market that the best key to success is repeating customers i.e. ‘LOYALTY’. In general there is regular ongoing work but from early November to early December, the volume of work increases about 15%. This is primarily due to so many folks preparing for guests for the holiday season.
Although there is plenty of work and margins are generally in the 60% range, gaining market share is the principal barrier to success. I’ll discuss breaking down this barrier in another article, for now; let’s get involved in why the margins are so good.
Margins in Carpet Cleaning
In general, if your margins are greater than 50% then your industry is considered in the high margin business. Yes, carpet cleaning qualifies as a member of this group. The problem is that margin is a dollar value ratio and in carpet cleaning, each job is relatively low price. I mean let’s be realistic here; you will rarely get a job that is billable for more than $250. They will happen, but it will be rare.
Your average billable job is between $140 and $210 depending on the nature of your cleaning and extraction business. Given this, then your margins from each job will approximate $70 to $120. How are the margins determined? To explain this you must first understand the business meaning of margin.
Margin is the value of the sale that is used to offset general operating expenses and contribute profit to the business. It is commonly stated as a ratio or percentage of the sales figure. Simply illustrated, take a look at this simple upper section of the profit and loss statement:
Gross Margin $83
As shown, the margin is 60.6%. This is better than average percentage for carpet cleaning. In general, carpet cleaners range between 53 and 63% of sales as the margin.
Now that you understand how to calculate your margin, you need to understand the definition of the costs associated with carpet cleaning. As an accountant, I have had the privilege of serving seven different carpet cleaning companies, from a one van operation to a fleet of 17 vans. I reviewed their financials and the average margin was a tad less than 55%.
The key is the definition of costs. Here is my list of the direct costs to serve the customer:
- Labor – this is the number one cost. Almost every one of the carpet cleaners paid a commission to the man doing the work. The lowest commission was 23% and the highest paid commission was 27%. The man getting 27% had 4 years of experience and was very good in upselling the services (upholstery cleaning, leather cleaning, stain removal). The better paid cleaners not only could upsell but they were effective in efficiency in delivering service. They tended to serve the better neighborhoods and apartment complexes.
- Labor Taxes and Benefits – remember as an employer you have to match the employee’s Social Security withholding and the corresponding Medicare match. In addition you must pay FUTA and your state’s unemployment insurance. In addition to the taxes, employers often provide some basic benefits including holiday pay, a retirement plan, and now health insurance.
- Cleaning Agents – agents and chemicals will run around four to nine percent of sales depending on your cleaning perspective. Many carpet cleaners rely more on steam cleaning than agent cleaning and therefore have a lower percentage of the sale for the cost of detergents.
- Transportation – this is the cost to operate those vans. Of course the number one cost of transportation is fuel followed by maintenance and any repairs.
- Insurance – insurance includes worker’s compensation, vehicle and general liability to protect the customer.
The following is the presentation format for the costs associated with carpet cleaning and the corresponding percentage standard for this industry:
Costs of Services Provided
Sub-Total Labor 28.5%
Cleaning Supplies 6.3
Repairs & Maint. 2.2
Sub-Total Transportation 7.6
Worker’s Compensation .9%
Auto Policy 1.8
General Liability .3
Sub-Total Insurance 3.0
Total Costs of Services Provided 45.4%
This cost scenario presented means that the margin is 54.6%.
Many carpet cleaners do not include their insurance in costs of services provided and is lumped in with the other insurances in the overhead expenses section of the profit and loss statement. Thus their margins increase because the associated costs (insurance is not included in the costs of services provided) decrease. But in reality they didn’t decrease, the business just classified them differently.
The above margins are typical for your carpet cleaning business operation. They can go higher by reducing benefits for your employees or using less cleaning agents or lower quality agents. In addition, it is possible to reduce costs of transportation by limiting the service zone for your business. This is a lot more difficult to achieve than said.
Now you have an idea of the margin formula for the carpet cleaning business, so let’s look at the general expenses associated with carpet cleaning.
Expenses in Carpet Cleaning
In business, expenses are often referred to as ‘Overhead’ or ‘General and Operating Expense’. Most of the modern day off the shelf accounting software uses the term expenses. In carpet cleaning, they comprise the following groups:
- Office Wages & Officer Salaries – very similar to labor, however this group of labor costs is associated with non-customer service based employees. The most frequently used is wages for the front office receptionist that coordinates the customer’s phone request for service to the technician providing the service. In addition, they generate the data input for invoicing the customer and entering this information into the accounting program. Finally, the front office person usually is instrumental in the advertising and marketing efforts. In addition to her services, the owner’s salary is included too. Don’t forget, this section has its own taxes and benefits associated with these front office folks.
- Facilities – the most impacting of the facilities expense includes rent. After rent comes the real estate tax, condo association fees or if located in a retail center, common area maintenance fees. In addition, there are repairs and maintenance to the building and of course cleaning services for the building.
- Taxes and Licenses – most service based operations pay some form of a business license or business revenue tax to the local government. In addition, the equipment is taxed for personal property. Most small businesses of this nature are incorporated and the state typically charges some form of franchise tax or corporate renewal fee. Notice that the van’s taxes and DMV fees are included in the costs of services provided section.
- Communications – landline, mobile communications and internet access are expensed to this account.
- Utilities – self explanatory
- Insurance – the auto and general liability insurance is a function of costs of services provided section whereas the property insurance, key man, umbrella and disaster based insurance is expensed to this account. If you are relatively new entrepreneur, you may wish to visit the insurance section of this website for more information related to business insurance policies.
- Office – office expenses go beyond your typical office supplies, it often includes the accounting software, appointment scheduler, copier fees, general fees, and miscellaneous costs.
- Marketing and Advertising – most carpet cleaners still rely on the phone book as their primary source of new business. Others expense the different programs whether they are weekly zip code based coupon packages delivered to residential areas or inserts, door hangers to this account.
- Professional – legal and accounting
- Banking & Discounts – your monthly banking fee and of course the credit card discounts are customarily expended to this account.
- Capital – depreciation and interest on the debt is included here.
At the end of the day, the following is an illustrated format of the expense section of the profit and loss statement for your standard carpet cleaning operation:
Salaries and Wages:
Office Wages $ZZ,ZZZ
Officer’s Salary ZZ,ZZZ
Payroll Taxes Z,ZZZ
Sub-Total Salaries and Wages $ZZ,ZZZ
CAM and Taxes Z,ZZZ
Repairs and Maintenance Z,ZZZ
Cleaning Services ZZZ
Sub-Total Facilities ZZ,ZZZ
Taxes and Licenses:
Revenue License Z,ZZZ
State Franchise Fee ZZZ
Property Taxes Z,ZZZ
Sub-Total Taxes and Licenses Z,ZZZ
Office Operations Z,ZZZ
Marketing and Advertising Z,ZZZ
Professional Fees Z,ZZZ
Banking and Discounts Z,ZZZ
Interest on Debt Z,ZZZ
Sub-Total Capital Costs ZZ,ZZZ
Total All Expenses $ZZZ,ZZZ
For your smaller carpet cleaning operations with one or two vans, the usual volume of expenses range between $75,000 and $110,000. The primary determinant of this total relates to the Officer’s salary. Naturally the higher the salary, the higher the overall expenses for the profit and loss statement. Facilities range between $9,000 and $26,000 per year depending on the type and location of facilities you rent. Naturally, the more vans you have, the larger the facility you’ll need to accommodate the equipment and supplies.
Those operations with more than five vans usually require more office space as you’ll need one clerk to manage and schedule 3 vans. In these situations, the expenses will range in the $125,000 to $190,000 spectrum.
Many carpet cleaning operations exist under the franchise system. In this form of business operation, franchisors charge a flat rate or a percentage of the sales. Franchise fees range from 4 to 7 percent of the sale. The franchise fee is an adjustment to revenue if is a percentage of revenue formula. If a flat rate, include this in your Taxes and Licenses expense line of information.
The expenses are critical to understand as they determine the volume you will need to successfully run your operation.
Operations and Business Dynamics
Operationally, a single van if operated efficiently will earn around $145,000 to $165,000 per year. If you use the margin formula from above, a van will generate around $79,170 ($145,000 * 54.6% margin) to offset expenses. A small operation can get by on a single van. You are not going to make a lot of money; you will barely get by in business. Let’s see what happens with three vans:
Sales $435,000 (3*$145,000)
Gross Margin @54.6% 237,510
Expenses 172,000 .
Now we are talking business! That kind of profit would be something to be proud of in business. Why does this exist? It is because you are leveraging the front office operations in the form of the office clerk and the costs of facilities. Most of the expenses related to having more vans do not increase. They are similar to fixed costs in nature. The only expenses (not the costs of services provided) that are variable related to an increase in operations are advertising and the cost of capital, more specifically the interest for debt service.
If it is so profitable to be a carpet cleaner, how come more people are not involved? Well, there are several reasons:
- Gaining market share is extremely difficult and expensive
- Holding market share is also time consuming
- It isn’t one of your more glorious types of businesses; think about it for a moment. How many business owners have you run into that say, ‘I clean carpets!’?
- This industry has significant decreases in sales when unemployment increases; it is highly dependent on the local economy for available discretionary dollars.
For those of you that are new to this industry or desiring to enter into this form of service; if you have a strong work ethic and can accept rejection; you can make money. The key to success is gaining market share.
If you want to learn more, I have another article that goes into some of the auxiliary services involved in carpet cleaning. Please explore the service industry section of this website for more information. Act on Knowledge.