National Clothesline

very day it is becoming more difficult to make money in the drycleaning business. Most cleaners are experiencing flat or declining sales volume while costs continue to rise. In hard times like this, you must start managing your business by the numbers. To do this you must understand

the effect that volume has on costs and profits. Once this is understood, the proactive decisions that must be made to protect your company and your future become much easier. Doing a cost-volume-profit analysis (CVP analysis) for your business does not require a degree in accounting or a CPA. What it does require is a basic understanding of how your fixed, variable and semi-variable costs are affected by volume.

With labor costs being the single biggest expense in the drycleaning industry, we must first determine which cost category each labor department belongs to.

Fixed costs are those costs that do not change when volume changes. Furthermore, fixed costs normally do not change for 12 months. Labor costs that fit into the fixed cost category are: owner’s salary, office salaries and manager’s salary.

Your payroll costs in these departments do not change as volume changes.

Other examples of fixed costs are: rent, insurance, advertising and depreciation.

Although you do not write a check for depreciation, it is an actual expense. Depreciation equals the actual price you pay for capital equipment, with the IRS dictating how that cost can be expensed.

For more detail on this subject visit the library on my website, www.bizbuilderonline.com, and use the keyword “depreciation.”

Variable costs are the costs that vary in direct proportion to sales volume. This is the one area where many drycleaners have shot themselves in the wallet. You cannot properly manage your business when you put all your employees on “salary.”

All production personnel are considered direct labor because their earnings must have a direct relationship to the amount of work they are producing.

Your payroll for the employees who are processing the work in the plant must vary up and down, in direct proportion, as your volume goes up and down. If you do not control your variable labor costs, you will not survive in a slow economy.

Semivariable costs are sometimes called “mixed costs” because they contain both a fixed and variable component. Thus, they will go up and down as sales go up and down, but not in direct proportion.

Counter labor is a perfect example of a semivariable labor cost. To simplify this example, we will use the counter labor of a drop store.

The rule of thumb for counter labor is that one person working the counter can handle up to $4,000 a week in sales. This is for waiting on the customer (incoming and outgoing orders), marking-in and racking orders. It does not include assembly and bagging.

Obviously, this figure depends on pricing and the shopping habits of your customers, but under normal conditions, this is an achievable number.

The key here is “up to $4,000 a week in sales.” Thus, if a store is open 68 hours a week, that store will not require more than 68 hours of counter labor.

What if this store does $2,000 a week? Your counter labor costs will be the same because the store will be open for 68 hours. Therefore, we can conclude that counter labor costs for this drop store are fixed when weekly drop store sales range from zero to $4,000 per week.

When sales increase to over $4,000 a week, you can break counter labor activities into specific labor categories. The counter labor is fixed at 68 hours per week at $4,000 in sales.

Over that volume, we can begin to look at marking-in as a variable cost because the time spent performing that task should reflect the volume of pieces. When you have a fixed cost mixed with a variable cost, that cost becomes a semivariable cost.

Other examples of semivariable costs are supplies, utilities, and vehicle expenses. These are semivariable expenses because some supplies are variable (hangers) and some are semivariable (soaps, solvents and poly).

To recap: For fixed labor, you cannot assign a unit cost (or per piece cost) unless your unit volume does not change for a significant period of time – at least three months.

For variable labor, you can assign a specific unit cost for each operation in your plant by establishing and maintaining production standards at each operation.

For semivariable costs, you can only assign a unit cost range, i.e., from a low of $.05 per piece to a high of $.09 per piece. This range depends on how much your volume fluctuates up and down and it must be re-calculated every three months

Furthermore, the value of trying to determine the unit cost of a semivariable such as counter labor is a total waste of time.

Applying the numbers

Now that we have labored our way through some basic accounting, let’s look at how this information will help you make more money. We’ll begin with fixed labor.

Fixed labor includes owners, office staff and managers. One of the best forms of proactive management is “management by example.”

If your sales are down 20 percent, then it is time for you to take a 20 percent cut in pay. I know, it’s easy for me to say because I don’t have to face your significant other! Bottom line: a little pain today will go a long way in securing your long-term pleasure.

Once you bite the bullet, the rest gets easier. What about your office payroll? Many companies have put full-time salaried personnel on a 32-hour week (four days for eight hours or fives days at six to seven hours) and reduced the salaries accordingly.

You can maintain your production manager’s salary when, and only when, your manager reduces direct (variable) labor costs by 20 percent.

If you have fallen into the trap of guaranteeing your production people a 40-hour week, stop it. Inform each and every production employee that starting next week they will be paid for the hours they work and they will only work the hours needed to get the work done.

Don’t tell me that they will all quit because they won’t. Where will they find another gravy train? They won’t!

As for controlling your semivariable labor cost, this is more difficult. Remember, this cost is part fixed and part variable. In our example of a drop store doing $4,000 or less a week, your hands are tied because the counter must be staffed the hours you are open. Above and beyond $4,000 a week, you must start to measure the time that it should take to mark-in the work and add those hours to the hours you are open. This will give you control over this semivariable cost.

One more recommendation: If you are paying your production employees for their one-half hour lunch, stop! It’s your money and if you don’t keep it on your side of the ledger, no one will!

In the game of business the more you know the better you can play the game.

In the game of business the more you know the better you can play the game… play to win!

Alan Robson is a private consultant dealing with the specialized needs of the drycleaning industry. Contact him by telephone at (941) 408-8819 or send e-mail to him at: alan@bizbuilderonline.com or visit the Biz Builder web site: www.bizbuilderonline.com.