Frequently people ask me where my
ideas for this column come from. The subjects come from a
variety of source: my clients, inquiries from readers, and
business publications. During the past month or so, my phone
has been ringing off the hook with drycleaners asking, “What’s
happened to my cash flow? I’m bleeding to death!”
The sudden volume of these related
inquiries prompted me to dig for more information.
The first thing to come to light
was that 80 percent of these inquiries came from drycleaners
who are aggressively growing their businesses. In this context,
the term “aggressively growing” refers to expansion
through the acquisition or opening of drop stores and/or
routes.
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Before you look at the costs of
running a drop store or route, you must first determine how
much it costs to operate your plant. Once you determine that
number, you can determine how much volume the new venture must
generate in order to be profitable.
The bulk of your plant expenses
are variable or semi-variable. Very few expenses at the plant
can be classified as fixed. Variable expenses go up and down as
sales go up and down. Variable expenses include productive
labor, packaging supplies, and outside services.
Semi-variable expenses also go up
and down as sales go up and down but they do not fluctuate in
direct proportion to sales. Utility costs and maintenance costs
are semi-variable.
The fixed costs at the plant do
not change as sales change, nor do they fluctuate month to
month. Examples of fixed costs are rent, depreciation and
leases. Your fixed costs at the plant should not exceed 20
percent of sales.
Your Profit and Loss Statement
should look like this:
Total Sales 100%
Labor Costs 40%
Labor Margin 60%
Operating Expenses 16%
Operating Margin 44%
Gen & Admin Expenses 20%
Profit (including officer’s
salary) 24%
Labor costs include: DC labor; shirt/laundry labor;
seamstress; counter labor; shuttle/route driver; outside
services; employee benefits; workers’ comp insurance;
company’s portion of payroll taxes.
Operating expenses include: Supplies (all); utilities (all);
environmental expenses; vehicle expenses; repairs and
maintenance.
General and administrative expenses include: advertising;
depreciation; rent; insurance; office expenses; interest;
professional fees; office salaries; bank and credit card fees;
miscellaneous expenses.
The above expense categories and
the costs as a percentage of sales for each category are real
and achievable. Keep in mind that labor costs as a percentage
of sales are a function of:
• Your selling price.
• The wages you pay.
• The productivity of
your employees.
The next step is to evaluate the
financial performance of existing or potential drop stores. The
industry standard for drop stores is that a drop stores’
actual costs for rent, counter labor, utilities, and insurance
should not exceed 30 percent of drop store sales.
Your monthly report for each drop
store should look like this:
Sales 100%
Expenses
Rent (including CAM) 10%
Counter Labor 14%
Other (insurance & utilities)
6%
Total Expenses 30%
Drop Store Margin (not profit)
70%
A drop store that generates a 70
percent margin will pay for the processing and packaging costs
while earning a profit.
You should track counter labor
costs every week. For drop stores your counter labor costs
become fixed. Counter labor costs at a drop store are a
function of:
• The hours the store is
open.
• The wages you pay.
• The dollar volume of
that store.
When we know how many hours a
store is open and the average hourly wages of the counter
personnel, we can determine what the weekly sales volume for
that store must be in order to achieve a 14 percent labor cost.
Example #1: The drop store is open 60 hours a week
and the average counter wage is $7 per hour (60 times 7 equals
$420).
To determine required sales,
divide 420 by .14. The answer is $3,000 per week. In other
words, $420 is 14% of $3,000.
Example #2: The store is open 12 hours a day, Monday
through Friday, and 9 hours on Saturday for a total of 69 hours
per week.
If your average hourly rate for
counter personnel is $8 per hour then your weekly labor cost is
$552.00 per week (69 x 8 = 552).
Again, to determine required
sales, divide 552 by .14. The answer is $3,940.00. In this
situation, the store would have to average $3,940 a week in
sales for the counter labor to equal 14%.
Let’s look at an actual drop
store in the following case study.
Drop store case study
Average Weekly Sales = $3,200
Average Monthly Sales = $13,900
Situation analysis: This store is
open eleven hours a day for five days and eight hours on
Saturdays for a total of 63 hours a week. The average hourly
rate for the counter personnel is $7.75. (63 hrs. x 7.75 = $488
a week)
With an average of 4.33 weeks a
month (52 weeks divided by 12 months), labor costs are $2,113 a
month.
The rent at this location is
$2,300 a month.
Utilities, phone, insurance and
computer costs for this location are $480 a month.
Total monthly costs for this drop
store are $4,893, or $4,900.
With monthly sales of $13,900,
total drop store costs equal 35 percent of drop store sales.
Therefore, the drop store contributed 65% or $.65 of every
sales dollar to the company’s budget, including profits.
In September 2001, sales in that
store were down 32 percent from September 2000. Sales went from
$13,000 in September 2000 to $8,840 in September 2001. The
costs of running that store did not go down. Costs of $4,900
divided by $8,840 equals 55 percent of sales.
Under these circumstances, the
drop store is currently contributing only $.45 of each sales
dollar to the company’s budget.
This is where the bleeding began!
The business owner in this case study has four drop stores with
sales that declined on an average of 27 percent in the month of
September 2001.
Like many business owners, this
owner became involved with some marginal locations. When sales
dropped, the marginal locations began to suck out the company’s
lifeblood — the cash!
If you find yourself in this
situation, the first thing you need to do is look at reducing
costs.
Recommendations
• Talk to your landlord
about restructuring the rent.
• Review the hours your
stores are open and reduce store hours where possible.
• Review the hourly
output of your production people to ensure that they are not
slacking off.
• Look at tightening
your own personal expenses.
• Look at refinancing.
Today’s interest rates are at their lowest in 30 years.
• Run specials on high
margin items like comforters.
• Run specials that will
increase your piece volume per order — pay for three
pieces of drycleaning and get the fourth one free.
• With unemployment
rising, start searching for new employees who will do a better
job for less money.
Conclusion
It is your business, your equity
and your future that is on the line. If you don’t take
care of it, nobody will.
In the game of business the more you know
the better you can play the game.
Al Robson is a private consultant dealing
with the specialized needs of the drycleaning industry. For
more information, contact him by telephone at (508) 753-6619 or
send e-mail to him at: alan@bizbuilderonline.com or visit the
Biz Builder web site: www.bizbuilderonline.com.
