Business | PPC107 June 2022
If you’re serious about growing your pest control business, you will have to learn the basics of business finances.
Reading and understanding a profit and loss report, and knowing where all your money flows in and out from is essential for any business.
We asked the owner of Blu Bookkeeping, Julie Holland MICB, to give PPC readers a handy guide to SME business finance.
Most businesses succeed today because their leader is flexible, a good planner, a brilliant organiser and spent time learning about the numbers.
If you want to build a business to sell on, or even leave to your kids, you need to know and understand your business numbers.
Business finances are nothing more than:
- Knowing where the money came from (and where it’s going to)
- Ensuring there’s enough cash in the bank to cover what needs to be paid
- Knowing what profit you make (otherwise, why are you doing this?).
If you don’t know there’s a problem financially, how can you fix it? This is why it is crucial to get monthly reports and read them!
Let’s apply this philosophy to pest control. For this example, I’ve based it on a sole trader.
Simple overview of a profit and loss (P&L) report
Are you making a profit? I wonder how many of you know what your profit figure is now?
All accounting software has a P&L report. Running and analysing this report is helpful to see sales trends, understand your costs, and
see what your business profit is.
For those not comfortable with numbers, think of it like this:
Sales = invoices sent to the customer
Cost of sales = costs relating directly to making the sale, like pesticides, proofing materials, etc
Overheads = generally all other expenditures related to the business (like van costs, uniform, stationery, insurance, BPCA membership).
The P&L report is split into two profit figures – gross and net profit (often called the bottom line).
It’s a good idea to start monitoring these figures monthly, as these will generally tell you if there are any profitability issues.
Gross profit = (sales)-(cost of sales)
Your gross profit should allow enough of the sales to pay for other business expenses.
Net profit = (sales)-(cost of sales)-(overheads)
Deduct the overheads, and what is then left of sales is your profit – but remember, profit isn’t cash in the bank!
Cash planning
Does a profitable business revolve around sales? Well, yes and no.
Cash is where most businesses crash and burn. Cash is almost as important (and arguably more important) than sales.
Looking after your cash in the bank is extremely important. I cannot stress this enough!
You need a plan for your money. Just because there’s a nice sum in the bank does not mean you can go on holiday or buy a new TV for home.
Plan for the money the business needs, but also include the cash you need personally to pay bills and live your life.
- Make a list of all the money your business needs to spend in a month
- Work out how much you need for personal stuff and pay yourself a wage (can be once a month or once a week)
- Keep personal expenses out of the business – if the item is not ‘wholly and exclusively for business purposes’, it is not allowable by HMRC, plus it doesn’t give a complete picture of how the business is doing if not business-related
- Make sure that you keep enough in the bank to cover everything to keep your business running and to pay yourself a wage
- Think ahead – work out how much you need to pay for tax and NI (National Insurance) for your self-assessment based on the amount you earn each month.
If you’re VAT (Value Added Tax) registered, put away 20% of all cash received in a separate bank account, and you will have more than you need at the end of the quarter.
If you can, run a cash flow forecast at least into the next 30 days to see any ‘pinch points’ where cash is short (and possibly you go overdrawn), then you can take action to cover the shortfall.
More money in...less money out
Upsell your other services
Can you do disinfecting, cleaning, more extensive proofing or other preventative measures while you’re there? Make sure you’re getting the most out of every customer transaction. It’s good for you and your customer, after all.
Review prices regularly
Check the competition but don’t be afraid to charge more. Give value for money with customer service. It’s amazing what value can be added for nothing (listening, advising and smiling goes a long way with people, and a ‘thank you for choosing me’ card, with your business details, of course!).
Be clear about what is included in the price and any guarantees
Don’t get caught up in further visits if not included or paid for. In the bookkeeping world, it’s called scope creep, and because we’re nice people, we like to ‘do a bit extra’.
Growing the business
Taking on a new customer contract can be draining on your cash in the bank, so set up costs need planning.
Growth is good, however, if you have more than one new customer, it may be that staggering site set-up is a good call, so it doesn’t drain your cash.
My best advice would be to invoice in advance and get a payment tool like Go Cardless. Getting paid as soon as possible is your goal; think like an entrepreneur!
Ensure your contract states that invoicing in advance (quarterly is probably best) is how you operate and request payment by direct debit mandate through a payment system. If your customer won’t agree to that, give them no more than 30 days to pay the invoice.
If a contract start date is 1 April, try invoicing on 1 March, thus allowing 30 days for the customer to pay, and you get cash in the bank when the contract starts (in theory, anyway).
If you’re paying out for materials, bait boxes, etc, for a site, you are down that money until they pay their first invoice. So don’t give them 60 or 90 days credit terms, whoever they are.
Understand the costs of employing more staff
Taking on a new employee is potentially more costly than you think. Employer National Insurance contributions have increased by 1.5% in April 2022.
The cost to your business for an employee is an annual salary plus employer National Insurance, employer pension contribution, payroll bureau and pension pot fees and holiday pay. Then you have vehicle costs, uniform, training, insurance, etc.
Again, you must plan strategically for this. You should know your breakeven point for covering the costs, which also equates to how many jobs a day they need to do for you to cover their costs.
Get organised
Make sure invoicing is done on the day of the job. The sooner it’s created, the sooner it’s paid.
Have invoices that offer more than one payment option (bank transfer, direct debit or PayPal, or call to make a card payment).
Take payment upfront, at least a deposit on a big job (like bird proofing) but most definitely do not give more than 30 days credit terms for commercial clients.
If customer debt is escalating, start chasing for payment or, if you don’t have time, get someone to help.
Know your numbers – look at your P&L report every month. Have you captured all your spending, or is a supplier purchase missing? Are all your sales invoices in the correct month?
Use accounting software. Using the right tool will help with several points above. Professional looking invoices can be emailed to customers, for example.
Use a snap capture app (like Autoentry or Dext). Some software providers give you a free app like Xero’s Hubdoc or Freeagent, which work on your phone to store fuel receipts, equipment purchases, and supplier invoices directly to the accounting software.
Paper receipts in a shoebox are not ideal, so get digital and get rid of the paper. MTD (Making Tax Digital) for both VAT (1 April 2022) and ITSA (income tax and self-assessment) (1 April 2023) need digital records.
Have a separate business bank account. This makes identifying business transactions so much easier.
Know when you hit the VAT threshold. It’s based on your sales for the past 12 months, not just for this financial year!
If you’re confident enough, you can set up a spreadsheet of your sales and expenses, but HMRC will need you to interface with their system in 2024 to submit your quarterly returns for MTD ITSA.
You would be better off buying accounting software now and getting used to using it. If you don’t have the time or the energy, invest in a bookkeeper.
I hope this has given you insight into business financials. Learn it in chunks – Work through your reports, ask questions, get a good bookkeeper to explain anything you don’t understand.
Above all – know your numbers!
Want to talk numbers with Julie?
Julie has supported pest management companies with their finances for many years. If you want her to look at your numbers, she’s always interested in meeting new clients.
blubookkeeping.co.uk
facebook.com/BluBookkeeping
linkedin.com/in/julie-holland-blubookkeeping
Source: PPC107