Finding your break-even point
wning and operating
a drycleaning business can be an exciting way to serve your
community; create financial security for you and your family;
and earn a comfortable living along the way.
After all, these are the reasons you
became an entrepreneur, right?
 | ||
To be successful in this industry, you
must deliver above-average service and your customers’
garments must be ready to wear.
Once you accomplish these daunting tasks
(and they must be daunting because too many cleaners have not
figured out how to accomplish them!), you can focus on managing
your business.
One of the oldest and least understood
management tools available to help you in the decision-making
process is the “break-even point formula.” This
formula is easy to use and can show you:
• Sales volume needed in order to
break even.
• How much money you will make when
you are above break-even.
• How much you will need to increase
sales when adding new overhead costs such as rent for a drop
store, a truck payment, etc.
Simply stated, the break-even point is the
point where sales are enough to pay all of the company’s
bills but not enough to generate a profit.
If your fiscal year ended on December 31,
this is a great time to calculate your break-even point for
2003. To do this you will need a copy of your Profit & Loss
Statement.
Because the drycleaning business is a
service business we do not have a “cost of goods
sold” (COGS).
Instead, as a service business, we have
“cost of sales” (COS). Your COS includes your
variable and semi variable costs. To simplify, we will refer to
these costs as our “direct costs.”
Calculating your break-even:
Total up all your direct costs which
include:
• Labor — without owners’
salary.
• Outside services — leather
cleaning, etc.
• Payroll taxes — FICA, SUTA,
and FUTA.
• Workers Comp Insurance
• Supplies — all.
• Utilities.
• Vehicle expenses.
• Claims.
Typically, your direct costs should run
between 55 percent and 63 percent of Total Sales.
Total up all of your overhead costs. These
include:
• Officers’ Salary
• Advertising
• Principal payments (replaces
depreciation)
• Insurance – General
• Office expenses
• Rent
• Professional fees
• Miscellaneous expenses
• Taxes — other, such as
permits; licenses; excise; etc.
• Interest expense
Typically, these expenses run about 30
percent of sales.
Step 1. Calculate
your Gross Margin (sales minus direct costs).
Step 2. Divide
your Gross Margin by sales. This is your gross margin percent.
Step 3. Divide
Total Overhead Costs (in dollars) by your Gross Margin Percent
(see Example #1).
In Example #1, the break-even point is
when sales reach $181,700. This means that the company will
generate 41 cents ($.41) profit on every dollar of sales over
the break-even point.
To check this; subtract the break even
point figure from Total Sales and multiply the answer by the
Gross Margin Percent (see Example #2).
 | ||
Using the information in Example #2 we can determine how much profit the company will generate as sales go up and down. This calculation will be accurate as long as there are no major changes in Direct or Overhead Costs.
To project profits based on a change in
sales volume:
• Subtract your break-even point from
projected sales. This will give you your “sales above
break even.”
• Multiply above answer by the Gross
Margin Percent (.41 — see Example #3).
For cleaners who are bouncing along the
break-even point or losing money, this break-even point formula
can help you identify the areas that need your attention.
Using the format in Example #1, insert
your financial information. Check your cost percentages to
those listed under “goals”. If your cost
percentages are higher than the goal — there is definite
room for improvement.
This break-even formula is also great as a
“What if?” formula. What if you want to open a new
drop store? For a new drop store the costs are all fixed;
• Rent
• Front counter labor
• Utilities
• Insurance
Add these costs. Next, you need to
annualize them. For example, the store will be open sixty (60)
hours a week and you will pay your CSRs $8.00 per hour. Weekly
payroll will be $8 times 60 hours or $480 per week. Multiply
this weekly figure times 52 weeks to annualize it. Next,
multiply your monthly rent times 12 months.
Once you have the total cost for operating
your drop store divide that figure by your gross margin
percent. In this case that figure is .41 (see Example #4).
Owners and managers must make routine
decisions every day. These decisions involve personnel issues,
customer issues and problem garments.
When it comes to making major decisions
you need to use all the tools at your disposal. This break-even
formula, along with these examples, will help get you started.
If you have any questions, don’t hesitate to contact me
by phone at (941) 408-8819 or email at alan@bizbuilder.com.
In the game of business the more you know
the better you can play the game.
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.