Using Client Profit and Loss Statements to Trim the Tree

I love trees. I'm a conservationist at heart. If it were up to me I'd buy thousands of acres of land and do my best to grow hardwood trees on them. I'm not an arborist though. If it weren't for apps or outside help, I couldn't tell the difference between a weed and a sapling. 

I also couldn't tell you how to care for trees. This silver maple is in front of our house. I snapped the picture this morning. I don't know if those patches on the trunk are good or bad. I don't know if the discoloration is good or bad. And I can say with certainty that the vertical hanging branch isn't supposed to be like that. 

What does being an amateur arborist have to do with cleaning? Everything.

I had to google this in preparation of this blog post but you're supposed to trim trees. Duh, what do I know?! But apparently you're supposed to regularly trim branches and that helps promote a healthier tree, with stronger branches (especially ones that won't fall...that's over a sidewalk).

Like with trees, we're supposed to trim our business every now and then. We need to cut back on our business, fire clients on occasion, and that'll make our businesses a lot stronger in the long run. 

This post is a companion to the last post on the Pareto's Principle. We utilize the 80/20 Rule knowing that 20% of our clients will produce 80% of our challenges, lack of profits, or headaches, or whatever. We purposely cut 20% of our business annually and rebuild that 20% for a stronger and healthier business.

Here are the benefits of doing this:

• You can replace that 20% with more profitable clients and increase your revenue.
• You can replace that 20% and potentially eliminate 80% of your headaches.
• You can replace that 20% and be much more profitable.
• You can replace that 20% and improve your company's processes.
• You can replace that 20% and improve your overall quality control.
• You can replace that 20% and work less hours.
• You can replace that 20% and have clients that pay on time.
• You can replace that 20% and have clients that align with your core values.

We learned about these benefits purely by accident. We acquired our last cleaning company and we knew we would lose clients. It happens. It's not a big deal if you anticipate it. So when we acquired our last cleaning company we knew we would lose clients. If we didn't lose them, we already had a plan to fire a few because weren't profitable. We ended up losing 25% but our profit margin, without replacing those clients, actually went up because we were no longer carrying dead weight. So the purpose of this post is to share what we do each year and how we make our decisions to let our clients go.

We all have Profit and Loss Statements, right? If you never did one, I bet $5 that you already have done one but you don't know it. If you don't do proper accounting, you already did some P&L Statements through your taxes. Take a look at your Schedule C on your 1040 Return. That's a P&L. It asks for your income. You claim allowable expenses. And what's left is a profit (or a loss). If you have a 1120-S as an S-Corp, or a 1120 as a C-Corp, or Form 1065 and their schedules as a multi-member LLC, you've done (or your accountant has done) a P&L for your company.

Tax accounting aside, you should always do a P&L. It tells you your income, your expenses, and whether or not you made money. If you're losing money, that's a bad thing. If making money, feel free to Venmo Mark Lineberry, my handle is.....well, maybe another day. We use our P&L as part of our pricing formula. Each client pays the same percentage of each expense and we break it down to every single expense within the company. Without our P&L, we wouldn't have accurate pricing.

Here's a basic example of a P&L:

In the above example (all fictional names), you can see a tally of income countered by a tally of expenses. And before anyone jumps to conclusions, I added owner's pay as an expense. So in this 6-month total, in this fictional example, the owner made $22K from $114K in client income. Some people take Owner's Draw or a Salary from the overall profit. Hey, I'm high maintenance; I pay myself first.

Here's where the pruning comes in. It's great that you have a P&L for your company overall. But why not create a P&L for each of your clients? If you do this, then you'll know how much money you make per each client. Below is an example from the above data.

So let's use the fictional client of Lakewood Land Company. They're pulling in $6436/month. Here's their pricing sheet/P&L for their location. You can see total labor. You can see we're there 5X/week paying between $18-20/hr. You can see just under $1000/yr in supplies (depends on the Scope of Work). And you can see that the gross profit per year is over $25K at 33%. You can now determine the profitability by client and even break it down as a rate per hour or rate per sqft if that's your thing.

What if you repeated this process for EVERY client you have? Now you can rank each client to see if they're producing the desired profit you're targeting. Using my first spreadsheet as a guide, let's say that the gross profit margins of Sterling Montessori School, Strength Gym, and First Bank are below ALL of your other clients. If profit were a priority to you, then you can replace THEN eliminate these 3 clients and if your replacements are hitting targeted profits, then you're making more money than before.

Or maybe profit isn't your litmus. Maybe it's the Aggravation Factor. Maybe Dr. Meadows and Gibson Apartments in the above scenario are giving you a TON of headaches. Remember Pareto's Principle? 80% of your headaches will come from 20% of your clients. You can replace THEN eliminate those 2 clients and potentially be headache-free. 

There are a few factors you may want to consider....

• Profit
• Location
• Aggravation Factor
• Complaints
• Time on site
• Propensity to grow
• Stated budget
• Violation of your core values

Back to pruning the tree. It's our goal to let 20% of our clients go once per year. We consider the above factors in our decision-making process by using P&Ls as a guide. That's first and foremost in our decisions. But if the client is a headache or we have a toxic relationship, we'll place that ahead of money. Or if they're always complaining, and we feel that we're operating at 100%, it may be time to cut them loose to find a better cleaning company. 

Don't let your trees look like mine. Prune them. It's ok to fire clients. Always be marketing. If you follow these processes, you'll have a solid business in the long term.

Next on Deck: Addressing Fears When Selling (coming 2-19-25)