No doubt the sudden rise in work from home has led to a severe drop in demand for dry cleaning services, which has led to many dry cleaning shops crashing or flooding onto the market for sale. There are a lot of desperate sellers out there looking to get out, and there are a lot of dry cleaners desperate for additional income and additional work to get their plants above break even costs. Given the current turmoil in the market, there is a lot of danger out there, and there are also opportunities.
If someone approaches you with an offer to take on more work, or someone approaches you with an opportunity to ‘take over’ another location that may be failing, how do you separate the dangerous opportunities from the good ones? Well, you first need to know your own numbers.
How much does it cost you to produce a piece of dry cleaning? A simple question, but one that has many answers. Shockingly, many dry cleaning business owners don’t know this number.
Let me ask you this, if someone approached you with what appears to be a great opportunity to add hundreds of pieces per week to your incoming workflow with potential to add thousands of dollars monthly to your cash flow, how would you know if this would be a profitable opportunity? NOT knowing your cost per piece could cause you to misread the opportunity, and could cost you your entire business.
Frankly, it’s VERY easy to take on extra work in this business, and end up losing money. If it cost you $8.00 to produce a pair of pants, and you sell those serviced pants at $7.00, every pair of pants that comes in costs you $1.00 in losses. If you take on a new account, or take over another location, and you bring in 1,000 more pairs of pants, you just amplified your loss, and likely sped up your business demise.
Granted, costs in this industry are not directly in relation to each piece that comes in like it is in the manufacturing industry. We cleaners can find some cost efficiencies in our variable costs, and adding extra pieces can water down such costs as rent, some utilities, and labor. An increased of pieces and their revenue can be spread out due to maximizing efficiencies of running full loads, getting maximum production out of staff during their work shifts, etc. But you MUST know what your COST OF GOODs SOLD or COST PER PIECE number is in order to even begin any assessment.
This is not rocket science, and can be very simple. The method I’m about to impart to you is very simplified so any dry cleaner can calculate their cost per piece number, roughly. I say roughly because this method will get you close. It’s not in anyway perfect, or accurate to the hundredths of a cent, but it’s a ball park number that will get you close enough to determining your cost per piece, and yes, this number just might surprise you.
First off, you need to collect some very basic information.
Go pull last year’s corporate income tax return, or last year’s records from your accountant, and find the TOTAL EXPENSES your business paid out last fiscal year. You pay corporate taxes on profits generated, so your completed corporate tax form should show your total expenses your business paid out. Or, your accountant must have reported your business’ total annual expenses in his report you used to calculate and fill out your corporate tax return. If not, call your accountant and ask him to pull your records and tell you, how much in total expenses did you spend last year. Write that number down.
Now, go to your point-of-sale system and run this very simple report: NUMBER OF INCOMING PIECES for LAST CALENDAR YEAR. All pieces! Why all pieces? Well, we are using total expenses, so we should include all pieces. It costs you something to process a pair of socks, a comforter, a set of drapes, each shirt, each suit, each pair of pants, every piece. Write that number down.
Now, comes the most difficult part of this exercise, doing the math. It’s not a very complex formula, and here it is: TOTAL EXPENSES PAID OUT LAST YEAR divided by TOTAL NUMBER OF PIECES PROCESSED equals your COST PER PIECE!
If you had expenses of $350,000 and you had 52,000 pieces (1,000 pieces per week), that works out to paying $6.73 to produce each piece.
Now, it may not sound like this number makes sense because it’s hard to visualize processing a pair of socks costing you $6.73, or paying out 6.73 to produce one dress shirt. Certainly, some items will cost you far less, and some will cost you far more, but all in all, every garment that comes in will cost you something. Now, at least you know what YOUR cost per piece is.
So, let’s look at some of the opportunities that might be coming your way these days.
A new wholesale route guy walks in, annoyed with his current cleaner’s complete lack of quality. He wants to switch to your service for his clients. He wants you to do all the work of marking orders, cleaning, pressings, and reassembling orders, all he wants to do is drop off bags, and pick up completed orders and load up his truck. The new wholesale route guy is selling pants at 10.00 a pair, and 20.00 per suit. His current volume of work is 1,000 pieces of dry cleaning per week, give or take. The new wholesale route guy is offering you a fifty-fifty deal of HIS retail price to produce his work, or $5.00 per piece. Is this a good deal?
Well, 1,000 pieces from this potential new wholesale route is $5,000 a week in gross revenue. WOW, that’s $260,000 in new additional sales! What a fantastic opportunity! Or, is it?
Take a look at your Cost to produce a piece. If the rough numbers I used in my example above are close to yours, your cost to produce each piece is $6.73. Every piece this new wholesale route driver brings you will COST you $1.73 in losses. Those losses need to be covered from somewhere, most likely from YOUR profits, or worse, YOUR SALES!
Yes, on paper, it appears that taking on this wholesale route work is going to COST YOU MONEY. $6.73 cost per piece minus $5.00 revenue from the new wholesale route, shows a deficit of $1.73 per piece. See how knowing your costs brings a great deal of clarity to analyzing an opportunity.
But, if you are any type of experienced business person, you know that you might be able to bring certain efficiencies into play. If you ARE doing 350,000 a year in gross sales, and one route account can bring in another $260,000 in sales, your gross sales almost double. Will your expenses double? Well, one of the best things about this business is: costs do not rise in lockstep with sales, meaning costs become variable as sale increase. Your costs may increase by a percentage. What percentage? Well, much depends on your ability to manage production, how hard your drive your staff, your production per operator hour (PPOH or Pieces Produced per Operator Hour). Maybe your number is twenty percent, maybe its 40 percent, maybe its 90 percent.
Again, we have to do some math. This time we will take in some variable expenses into account, and the increased pieces and revenue from the potential new wholesale route account. If your expenses are 350,000 to produce 52,000 pieces, and you experience a 50 percent increase in total plant expenses to process an additional 52,000 pieces, how does this change our Cost Per Piece?
($350,000 times 50%) is $175,000. Your annual expenses will now be $525,000 to process 104,000 pieces.
Using the same formula with updated expenses: Expenses divided by annual pieces = Cost per piece
$525,000 divided by 104,000 pieces = $5.04 cost to produce a piece.
Now that’s close. Taking on the new wholesale route will cost you approximately 4 cents per piece.
Is it worth it? It’s almost break even. It’s definitely borderline. The real question is, can you squeeze more efficiencies out of your production to make this profitable? Well, that’s entirely up to you, your accounting skills, and certainly, your management skills.
In the Chinese language, the symbol for CRISES is comprised of two characters. One character represents danger. The second character represents the point of change. These days, CRISES certainly applies, and, as opportunities present themselves, you certainly have danger in every opportunity, but you also face great points of change. I hope this article helps you evaluate and differentiate good opportunities from bad.
