Percentages, Management and Profitability
Management for a Textile Cleaning company is no different than it is for any other business, yet is very complex if one is to make a huge success of the business. During college accounting or other methods of learning accounting, there is a basic concept of Money In and Money Out. This gives a good accounting usually for banking and tax purposes only but does not produce the interpretations for running a profitable drycleaning plant.
One of the consistently overlooked parts of running a textile cleaning plant is the understanding of the numbers that are generated through the accounting program that is being used to control the business and watch over its financial health. There have been only a few concerted efforts to make sense of the numbers that can be generated and what the percentage of expenditures should be for a given gross sales for the various revenue producing or expense producing areas of the business. For instance, there can be a tremendous amount of valuable data produced by your tailored accounting system, and if it can be interpreted, can yield valuable information on the business.
The information that can be gleaned from a proper accounting program can guide and direct your business but only if one has the discipline to maintain a budget and knows how to make corrections in sales and spending. For instance, if year to date information shows an increase in payroll with no increase in sales, or even a decline in sales, then this could indicate that employees are not working to capacity due to too many hours being worked for the amount of volume the business has. It could also be due to increased expenditures that have been dictated by state laws regarding employee’s compensation or benefits. If this is a temporary increase in payroll percentage due to vacations, for instance, then there is no correction needed but if it is due to decreased sales and the same payroll figures then this could indicate the hours need to be reduced and efficiency increased to compensate for the reduced sales. When this is done the payroll figures can be reduced to maintain the target ratio between income and payroll.
Naturally this should also be a red flag that more volume is needed in order to continue a profitable operation. When this is done the payroll figures can be reduced to maintain the target ratio between income and payroll.
Management is the overall care of the business taking into consideration past, present and future sales, expenses and planning for profitably and continuing the business either for income or a potential sale of the business as a failing business is difficult to sell, while a profitable business has already proved its value.
Proper accounting to accurately account for Income and Expenses
The figures below are from a full service drycleaners that does onsite cleaning and laundry. The owners are involved with another highly profitable textile cleaning business and owns the building where it is located and has other spaces that he rents to other businesses. I have been involved with this cleaner for about twenty years and have constantly been amazed at the quality of the operation and management.
The total volume for the eight months is $410,825.52.
Drycleaning Income 70.4%
Leather contracted out .3
Total Wages and related taxes 43.1
Rent, CAM & Property Taxes 10.1
Janitor and Garbage .2
Natural Gas 4.3
Water & Sewer .8
Drycleaning Supplies 3.6
Office Supplies .4
Parts & Repairs 1.4
Leather and Laundry contract cost .7
Alteration contract cost 1.4
Dues & Subscriptions .1
Taxes & Licenses 1.0
Bank and Bank card charges 1.9
Operating Expenses 73.0%
Operating Profit 27%
Total $ Profit $113,796.52 (Eight Months)
It needs to be pointed out that the figures are several months old and there has been an increase in bank service charges and utilities. These have been taken care of by slight price increases therefore the bottom profit figure is still correct.
Total General and Administrative expenses are a total of 4.6% which are not in the above figures as they also cover the Coin Laundry and other accounting and legal costs. When these are deducted from the eight month gross profit it is reduced to $108,560.88.
A few notes about the business would start with the employees, some of whom are second and third generation of original employees. They work as a team knowing that they have stability with their employment and the owners are glad to send them to training and educational sessions as the owners know that a knowledgeable employee is a great asset to any business. The owners are personable to both customers and employees and are eager to have consultants come in and work with the employees and make suggestions on how to improve the business. They will work with only one consultant for many years once they have proved their worth and can adapt to their management style and philosophy realizing there is no silver bullet to business and answers do not come easily or cheap.
The budget is strictly adhered to and planned months and even years in advance in order to know where the business is going and how it is going to get there. Fortunately a cash reserve has been built-up over the years and this allows the business to take advantage of deals that come up occasionally such as when hanger prices were escalating. The business bought $40,000.00 worth of hangers and to replace them now would cost over $80.000.00. When depreciation accounts are allowed to accumulate money and investments of profits are wisely made this can be the difference between having the cash available to take advantage of rising costs and replacement of equipment when deals are to be had. Four banks are provided with complete financial information a minimum of twice per year in order to keep all options open and get reduced rates on loans and lines of credit in order to take advantage of deals that pop-up unexpectedly.
The plants the owners are involved in are attractive and well maintained and have a continuous upgrading and decoration which makes the customers realize they are dealing with competent and stable people. The quality of the work being returned to the customers is above reproach and the rare request for re-cleaning or pressing is done gladly. Claims are handled professionally and liberally if it is a legitimate claim.
Manipulating the Income and Expense figures is done with a full understanding of how a labor decrease can affect other aspects that may be more important than saving a few dollars on labor. For instance if labor hours are reduced after a certain point the employees can start slowing down to let the boss know it was a bad decision to cut their hours. If this doesn’t work the garments will be short cycled in cleaning, spots and stains will not be worked on and pressing will be turned into a steam only operation resulting in bad or non-existent creases and wrinkling of garments.
If the store is moved to another location in order to lower the rent there is the possibility that the store is on the wrong side of the street, in the wrong neighborhood for the service you are selling, or a host of other things to overcome.
If energy conservation methods are not employed then the utilities will be running at a higher percentage than a profitable operation allows. If claims are reduced below ½ of 1% then legitimate claims are not being paid and this will erode the customer base and they will take their business elsewhere. Reduce advertising and you can rely on fewer newer customers and even regular customers will feel that maybe they aren’t going to a business that will be around for a long time. Before any money is spent on advertising though there must be a well thought out marketing program in place and the marketing will direct the advertising dollar for the most benefit.
In order to gather the correct figures for a profitable operation it does not have to be a complicated set of formulas but the categories above will be sufficient. The accounting program can be set-up with the above chart of accounts and will yield sufficient information for controls and changes in expenses, or income. Transfer these figures to a spreadsheet with formulas to provide the percentages and you are on your way to gaining control of your business. If you are not well versed on spreadsheets then just remember to divide the big number into the small number to produce percentages, for example sales are $10,000 and rent is $1,500 the percentage of rent to income is 15% percent. If you can match the numbers above you should also produce the same percentage of profit. To increase profit you can either reduce expenses or increase sales. Expenses can be reduced in many ways but the safest is conservation and cutting out the inefficiencies of the business. Sales can be increased but it takes more today to increase because of the high unemployment rate throughout the country and new customers with disposable money for spending needs to be found.
In the past there have been lists of operating percentages published but these are averages of cleaners through the country and can vary widely, then when they are averaged can change drastically from reality. They also tend to be gathered from association members (who do not necessarily represent average drycleaners) who may or may not be operating wisely with a long term focus on their business, meaning they may be striving for the lowest possible costs in equipment, supplies and labor or not using the latest labor and energy saving equipment. If the percentages were gathered from only cleaners who have spent much time and money in developing systems and procedures to produce desired results the percentages would tend to be much more desirable to try to imitate.
In order to be a first class drycleaner employees must be maintained properly by education, training and competitive pay and good to excellent working conditions. The business must be maintained by constant cleaning, decorating, attractive lighting and upgrading. Equipment needs to be replaced on a regular basis in order to gain labor savings and better finishing, and preventative maintenance will pay for itself many times over by reducing downtime and maintaining quality and efficiency.
These are trying times but with attention paid to the business survival is not only possible but growth is easier now than in most any time in the past. There are many operators who will not make it out of these shrinking times and business in the future will be much different than what we have known in the past. For several years I have urged the readers to make a decision of whether or not they want to stay in the business; if so to begin running their businesses like businesses and be extremely aware of their customer service, quality, employee’s needs and business needs. On the horizon it appears that there will be fewer textile cleaners for the amount of cleanable garments available and those who are professional can make a very good living while providing a necessary service. For the next few years there will be some desirable locations that will be available and the owners will be eager to negotiate to fill their rental space. There are also some good locations coming available for sale and perhaps this would be a good time to consider becoming your own landlord.