Stan golomb

Business, you must get past the point of break-even. Most businesses have fixed and variable costs. The total adds up to the break-even. Once past break-even, profits soar and that’s the key to making real money in

business. For example: Let’s say that an over-the-counter drycleaning plant does a total of $12,000 a month just to break-even. But if sales go over break-even, the cost only goes up by the variable increase. Things like rent, accounting, insurance, advertising and basic utilities are pretty much fixed. If sales increase, these costs won’t increase.

That’s why they are referred to as fixed costs.

Variables are expenses directly related to sales, such as labor, supplies and energy.

Going back to the business doing $12,000 a month, say we now increase sales to $15,000. What happens to the profit with this increase in sales?

First we deduct the fixed and variable needed to break-even at $12,000 a month. Then we add on only the variables such as labor, supplies and energy.

Say the labor cost was 40 percent at the break-even level. We all know that if we have more work to produce, our labor will go up, but not by the 40 percent it took at the $12,000 a month figure.

Some of the help can produce a lot more work with very little extra effort.

For this example, I will say that labor goes up by 20 percent of the increase.

The other expenses will go up only marginally. The supply expense will not go up more than 3 percent and energy will go up, but normally not more than 2 percent.

Trust these figures, but check your own numbers for low and high volume months and you will see that the numbers I projected are correct, give or take a few percentage points.

Now our mythical plant is doing $3,000 more in sales and the only increase in operating expenses is 25 percent for labor, supplies and energy.

This would now give us a monthly profit of $2,250 on the increase. At this level, the plant is showing 15 percent net profit on sales of $15,000.

The statement should also show a 5 percent management fee. The working owner would now show an increase in personal earnings of $150 a month for management but the owner’s salary would probably be the same and not go up with increased sales.

Let’s say the owner is doing a good job and taking a salary of $2,500 a month.

The owner’s increase would now go up by the management fee of $150 to $2,650 plus the profit of 15 percent on the sales of $15,000.

At this point, the owner is taking $31,800 in salary and $27,000 in net profits.

These are the cold, hard facts about the benefits of owning a small business.

The owner of a small business enjoys certain perks, such as the use of his vehicle for business and pleasure, telephone, and other legitimate entertainment expenses such as conventions, hotel and meals.

On the negative side, the owner of a small business will have to face the daily problems of managing a business and the risk of investment. Some people have a very strong desire to run their own affairs and that means being boss of their own enterprise.

There is a great deal of sacrifice involved in the risk of capital, the loss of sleep, and facing a myriad of problems.

The rewards are to build a business, pay it off and grow the business so that some day, it will have a resale value that would yield the owner a substantial increase in personal net worth.

I used an example of a small package plant doing $180,000 a year.

If the example was a plant doing $500,000 a year, the numbers would be different and much higher using the same formula.

If you are in business today, you should find your break-even and then do whatever you can to build sales over break-even for higher profits.

The owner of a plant doing $500,000 over the counter in a package plant could earn as much as $75,000 in net profit plus a management fee of $25,000 and a working salary in line with what it would cost to hire someone else to do that job.

In a plant this size, the owner could justify a salary of $35,000 and with the benefit of profits and management fee could easily earn $135,000 a year.

This is the goal most small business owners see for themselves and if they succeed at this level, they will be in the top 3 percent of all income levels in the United States.

On top of this, they will also enjoy the legitimate perks every business has to offer and will have a business that can be sold for at least $400,000.

I have written about this subject in various forms over the years and my knowledge is based on having studied the P&L statements of literally thousands of plants.

Check these numbers with your accountant and see where you are and how much profit you will generate for added sales over break-even.

Then, if you have the ambition, energy and knowledge, you will take the steps to reach your goal.

Stan Golomb is president of The Golomb Group Inc., a firm that designs marketing programs for drycleaners. Contact him at The Golomb Group Inc., 7664 Plaza Ct., Willowbrook, IL 60521; phone (800) 679-5856. His e-mail address is:
stangolomb@golombgroup.com