Pest management revenues can be categorized into three main areas: route work, renewals and new sales. When setting up your budget, it’s important to enable your organization to monitor these revenue groups individually.
Most pest control firms sell recurring revenue service contracts. By making a few calculations, you can predict — with great accuracy — how much revenue you’re going to produce for the year in terms of route work and renewals.
New sales are the wild card, but even they can be predicted with some accuracy, based on historic factors. Regardless, getting your revenue forecast close is extremely important; it helps you set up your cost structure.
What is my cost structure?
Your cost structure begins with direct costs such as technician labor, service vehicle costs and materials. How much annual revenue should one of your technicians produce? Each firm is different. But if you divide your total revenue forecast by that annual expected technician production number, you will come up with the number of technicians needed to achieve your revenue goals.
Every technician needs a vehicle. Armed with this knowledge, you should be able to budget for direct labor costs and vehicle costs, including lease payments, fuel, repairs and insurance. You also should have a good idea of what your material cost should be as a percentage of revenue. Therefore, you should be able to estimate your material costs based on the revenue forecast.
Once you are armed with a revenue forecast and a budget for direct costs, you can calculate your forecasted gross margin (revenue minus direct costs expressed as a decimal). You should shoot for a gross margin between 50 percent and 55 percent. Gross margins are the most important key performance indicator (KPI) when growing a pest management company.
Budgeting sales, Marketing
Below the gross margin line, you should have your sales and marketing category. I caution against using a straight percentage of revenue-to-budget for marketing. While many do it this way, I would argue that you should budget for growth. Ask yourself: How many new customers do I want? How much am I willing to pay for each of those new customers?
As a reality check, look at that number and decide whether you can afford it. If you can’t, but you are committed to growing by your projected number, you will need to find some outside financing.
The amount you want to spend on marketing, and the methodology you used to calculate that number, is very important. I’ve seen many firms overspend themselves into financial troubles by being too aggressive in their marketing spend — and too optimistic in the predicted results they will get from that spend. Be careful!
Factor in General costs
Once you’ve budgeted for revenues, direct costs, sales and marketing, it’s time for the last piece of the puzzle: general and administrative (G&A) costs. These are the costs of running your office and include customer service representatives (CSRs), rent, utilities, and copier and computer leases. Look at your prior year profit and loss (P&L) statement and determine which costs will increase and which will not. List all of them on your budget.
Once you subtract G&A from gross margin — less selling and marketing — you will be left with projected net income.
The bottom line is, know where you want to go in your business in terms of growth, profitability and timeframe. Make a plan. Reduce the plan to a line-by-line budget, and execute the plan. If you take these steps in the future, you should find that you have better visibility — and may avoid costly errors.