How Much Money Should You Set Aside For Your Junk Removal Business?
“You have to save your money for a rainy day.” That is a saying we all know. It’s been instilled in us since we were kids. Our parents said it, our grandparents said it, our teachers, etc. But they never said how much should be saved and, chances are, many of those people telling you all that had actually never saved up enough to withstand a rainy day. It was just as elusive to them as it is to you. Then you went and complicated things further by starting your own business. Here’s everything you’re wondering about your junk removal business money reserves.
With business, there isn’t one number I can tell you that you need to either have saved or have access to (more on this later) in order to save for a rainy day. It isn’t a certain percentage of sales. It isn’t a number of months of your business expenses, at least not completely. Instead, it is a combination of all of these factors and more. There are a few things you need to understand to begin making this determination:
- Savings is how much money is liquid (readily available) in all of your accounts.
- A cash flow statement is a statement of how much actual cash your company brings in every month less the amount it spends out. This includes loan payments as well as capital financing (money received from a loan).
- Cash flow positive is when your company brings in more money in a month than it spends. Cash flow negative is when it spends more than it brings in.
- Fixed costs are any expenses that you must pay every month irregardless of how much money your junk removal franchise brings in. For example: building rent, truck payment, management salary, etc. would be fixed costs.
- Variable costs are expenses that vary based on how much work your junk removal company has. For example: hourly labor, fuel, vehicle wear and tear, workers compensation insurance, etc.
New Junk Removal Business Money Reserves Equation
Another determination to consider is whether you are already in business or whether this a new junk removal franchise you are opening. If it’s a new business, you’ll need to record some expected expenses. Here is what you are typically looking at as far as fixed expenses for a new junk removal business:
- Rent: $3,600 to $24,000
- Auto and General Liability Insurance: $3,000 to $5,500
- Scheduling Software: $2,000
- Telephone: $2,400
- SEO: 0-$25,000
- Truck Loan Payment: $0 to $12,000
Possible Total: $71,000/12=$5,900 a month
That means every single month your junk removal business is going to spend $5,900 even if you don’t bring in a single job.
Variable job expenses are expenses that occur as a cost of providing your junk removal service. We track them based as a percentage of income.
- Labor: 20%
- Fuel: 6%
- Vehicle Wear/Tear: 3%
- Workers Comp Insurance: 3%
- Advertising: 5-25%
- Disposal Fees: 10%
- Credit Card Fees: 2%
- Tools and Office Supplies: 3%
Possible Total: 52%-72%
For example: If you had $1,000 in income you’d have between $520-$720 in expenses with the above example.
Using Cash Reserves To Cover Unexpected Junk Removal Expenses
So, back to the main question. How much should you save up? Having a minimum of three months of your fixed costs is smart. In the example above, you’d need to have or have access to $17,700. This is a decent rule of thumb and should be the minimum savings you keep on hand. Even then, it isn’t 100% fail-proof and doesn’t account for major issues that might occur. This simply accounts for those times your business gets slow but doesn’t account for equipment or your junk removal truck breaking down.
The largest unexpected expense that you will generally face in your junk removal business will have something to do with your junk removal truck. Fuel injectors, transmission, the entire engine, the dump pump, and more could go out at any point. These expenses can run thousands or tens of thousands of dollars. So you must account for that and anticipate it. I’d recommend saving an additional $15,000 or so for every four trucks that you own to prepare for these unexpected costs.
Other unexpected expenses could be click wars with your Google Ads account. Or you could get an unexpected Workers Comp bill. You could have to unexpectedly leave your current office space and move to a more expensive one. These are all possibilities. You shouldn’t worry excessively over these things; however, it might not hurt to allow another $5,000 to $10,000 or so to cover unexpected expenses such as these.
Utilizing Available Credit For Your Business
Despite what I’ve said about the importance of your junk removal business money reserves, you should also always look to put your money to work as much as possible. So, having these cash reserves can cut returns back on your investing. If you are extremely busy and need another truck but buying a truck is going to drop you below the above threshold, then you have a decision to make. You need that new truck. But you are worried an unfortunate event will put you in a very bad situation. This is when you need credit available.
One of the easiest forms of credit to obtain is a credit card, obviously. The interest on a carried balance is high for credit cards, however. Having a high credit limit is a good start to having some additional cushion. One of the best options is getting a business line of credit. With a line of credit, the bank will allow you up to a certain limit of unsecured debt. For example, if you have a $20,000 business line of credit for your junk removal franchise, you can borrow up to $20,000 in cash for anything you’d like to use it on and will make interest-only payments on it until you’d like to pay it back.
Banks typically want you to bring down the line of credit to a zero balance at some point throughout the year for one complete month. A line of credit is intended to be used as a temporary hold over for an unexpected large expense, slow time, etc. It isn’t meant to be used for long term needs.
So back to the core question: How much money do you need to save for a nest egg? The proper question is how much money do you need access to. Our recommendation is to have saved or have access to three months of fixed costs and approximately $15,000 for every four trucks you own. Of course, your junk removal business might run a bit differently and this isn’t exactly a one-size-fits-all equation for junk removal business money reserves. Part of the answer will also be how comfortable you are living a bit on the edge. If you are more of a risk taker, you might push it a bit closer. But keep in mind you can’t win the race if you wreck out.
Always remember, though, income solves everything. Get your income up high enough and your money cushion will follow.