National Clothesline

n April 1999, I wrote an article for this publication, “What Some Experts Don’t Know” (see my website: www.bizbuilderonline.com). This article explains the importance of calculating labor costs as a percentage of sales and instructs you in how to calculate your own labor costs as a percentage of sales. It does not explain the immense impact your pricing has on determining how much you can pay your employees and how much you can add to your bottom line.

Review: Your financial success hinges on your ability to establish realistic production and quality standards. To do this you must know:

• How much you pay each employee per hour.

• Your average price per piece for drycleaning and shirts.

• The number of pieces processed per hour by each employee at every operation.

Note: My objective here is to show every owner what it takes to:

• Pay your employees more.

• Provide them with benefits.

• Make more money per piece for the company (translation – increase profits!).

Start with the basics. Your drycleaner/spotter should process 75 quality pieces per hour. Multiply your average drycleaning price times 75.

Example: Average price for DC piece equals $3.50.

(75 x 3.50 = $262.50).

Your DC/spotter should be producing $262.50 worth of retail sales every hour. If you pay your drycleaner $10 per hour, the cost as a percentage of sales is 10 divided by 262.50 or 3.8%. This is what your cost as a percentage of sales should be. To calculate your actual cost, divide your drycleaner’s earnings for last week by drycleaning sales.

Example: If your drycleaner was paid $400 last week and DC sales were $6,570, your drycleaner cost you 400 divided by 6570 or 6.1% of sales.

To analyze this example another way, take the $6,570 in DC sales and divide it by your average price per DC piece or $3.50 in this case: 6570 divided by 3.50 = 1,877 DC pieces. Because your drycleaner/spotter should process 75 pieces per hour, divide 1,800 pieces by 75 and you get 25 hours (1877 divided by 75 = 25).

Now you know that your drycleaner/spotter was productive for 25 hours and non-productive for 15 hours. Therefore, you paid your drycleaner/spotter for 15 hours more than you should have. You are now confronted with a management dilemma. This person is a good employee who has been with you for five or six years and he/she needs a full week’s pay, not a 25 hour work week. Furthermore, you’re going to need this person when you get busy. What’s a manager to do? The bottom line is that it’s your money.

You can 1) reduce this employee’s hours and risk them looking for another job; 2) you can continue to over pay them or; 3) you can require them to be productive in another area.

If the person is as good an employee as you think, he or she will be more than happy to be productive by pressing or doing maintenance work. An employee who is not willing to work in another area, is a prima donna. Prima donnas are not good employees.

Let’s examine the drycleaning/finishing department.

At most plants the drycleaning finishers are pressing, on average, 19 to 21 garments per hour per presser. Our labor cost goal for pressers is 8% of drycleaning sales. With average productivity of 20 pieces per hour per presser and an average price of $3.50 per dryclean piece, how much can we afford to pay these people?

Example: 20 pieces times $3.50 = $70 times 8% (.08) = $5.60 per hour.

What happens when we bring these pressers up to where they’re pressing 30 quality drycleaned pieces per hour?

30 pieces times $3.50 = $105 times 8% (.08) = $8.40 per hour.

By increasing productivity to 30 quality pieces per hour per presser, they will be generating $105 per hour in retail sales. At this level of productivity you can afford to pay them up to $8.40 per hour (105 x 8% = $8.40). Please refer to chart Hourly Rate of Pay Based on Pieces Per Hour.

What about pricing? How much effect will a 25-cent increase in your average price per drycleaning piece have on your ability to pay your employees and on your bottom line?

Example: 30 pieces per hour times $3.75 = $112.50.

112.50 times 8% (.08) = $9.

A $.25 increase in prices will afford you the opportunity to increase your employees’ hourly wage by $.60 per hour.

More important is the fact that it will increase the company’s margin from $96.60 per hour per presser to $103.50 per hour per presser. Please refer to chart Hourly Rate of Pay Based on Price Per Piece.

The reality of the drycleaning business is that you can only process one piece at a time. Your financial success is based on “pieces per hour” and your “price per piece.” The End.

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.