National Clothesline

Many of the people in the drycleaning industry get up in the morning, go to their place of business, work their tails off, ring up sales, pay bills and then go home.

They don’t have time to think about the costs of operation. They are focused on how much money they can take home after they meet their expenses.

A drycleaner I knew used a cigar box for his register. All the money he took in went into the cigar box. When a bill was paid the cash came out of the cigar box. At the end of the week, whatever was left in the cigar box was taken home.

My father was a cigar-box drycleaner when he bought his first plant. Most small business people are. I remember asking dad what various costs of operation were and he could not answer. He could press with the best finishers; he could clean and spot better than anyone I knew. In fact, he taught cleaning and spotting in the evenings at a local trade school. Nobody taught him about business. Dad was so focused on paying off his plant and feeding the family he did not have time to think about operating costs.

A number of years ago the IRS visited my place of business. The first thing the IRS agent did was interview my sales staff. He asked the sales employees, “Who handles the cash?”

Fortunately, I had set up a system where the counter sales staff was making the deposits. To say the least, the IRS agent was very disappointed. He eventually found something to ding the business on, but not skimming.

What will you do if the IRS knocks on your door? Will you go into a crisis mode? John F. Kennedy said, “When written in Chinese the word crisis is written with two characters. One represents danger, and the other represents opportunity. ”

Do you worry about the danger of not declaring all your income? When I served on the Small Business Advisory Committee for the State of California, the state employees asked, “How can we eliminate the underground economy?” The committee broke into laughter.

Let’s look at the second symbol which represents opportunity. What opportunity is presented if you eliminate cash that is undeclared? Can you consider making a change in your method of doing business? How about the opportunity of creating a company with one set of books? If you want to sell your business it certainly would be a lot easier.

Talk to your CPA and inquire what expenses can be run through the company. You initially might earn less than you did previously, but you will not have to worry about an investigation as to how you can afford those big mortgage payments, while earning only $50,000 per year. You will not have to worry about the IRS agent asking a counter sales person how cash sales are rung up.

Another opportunity is that you might have to start thinking like a business person. Working smarter instead of working harder will be the first step. Sitting down for one hour each week and actually thinking about running your business might provide interesting and profitable results.

Thinking as a business person presents other unique opportunities. It actually means you might start measuring your operating costs. Instead of simply putting enough money to cover expenses into the bank (instead of the cigar box) you are putting all the money in the bank and learning what those expenses are really costing you.

What do you start measuring? Even if you only have two or three employees, you know that your biggest cost is labor.

Taking that cost as a starting point, many things have to be considered by the small business operator. Can you afford to guarantee the employee 40 hours? I used to guarantee the finishers 40 hours and tell them if they got through early they could go home. It was a wonderful incentive, the work got out on time (most days early) and the employee knew he or she had a regular check that could be counted on.

When business was on the growth side of the curve, there were no problems. Problems only occur when the growth slows or stops and then goes downhill. Now the presser really doesn ’t have 40 hours worth of work. The number of items being handled is decreasing and, instead of finishing one hour early every day, the work is completed two or three hours early.

Do you change your pay structure from a 40-hour guarantee to an hourly basis? Will your finisher stay with you if you do? What will the cost be to replace Bill or Mary who has been a loyal employee for the last three years?

The state of California stopped me from guaranteeing 40 hours. They said it was fine as long as the person did not work over 40.

If that presser went over 40 hours, you had to go back over the year’s previous pay periods, determine how many hours were actually worked, and divide them into the total guarantee. The time and one half would be based on that pay rate.

In other words, if you were guaranteeing a presser $400 per week ($10 per hr x 40) and he averaged 35 hours per week, his hourly rate would be $11.42. Instead of $15 per hour, the overtime would cost $17.13 per hour.

I know about cleaners who never pay overtime. They simply pay cash for straight time when the number of hours worked go over 40. They are not really business people in the true sense of the word. Yes, they are saving money, but in the long term is it worth the risk? How is there a risk?

This is a story about a company that paid that way and the ramifications of what followed.

An employee was chewed out for some poor quality and subsequently quit. With some good legal advice, he went to the appropriate state and federal government agencies.

All of the employee’s back pay, state taxes and federal taxes had to be paid by the drycleaner.

The drycleaner was then audited by the IRS. Need I say more?

Where do you start measuring your labor costs? For small operations it is easy. Weekly sales of $3,000 and a weekly payroll of $1,000 show a payroll percentage of 33 percent. Wow, that is simple. Your target is hit because 33 percent is a great number to shoot for.

Speaking of 33 percent, there is a wonderful company called the 99 Cents Store. The premise of that company is the retail price of every item is 99 cents.

What the public is not aware of is the company will not pay a vendor more than 33 cents for any item they put on their shelves. They are sold items for 33 cents because they pay immediately for all purchases. A manufacturer will change the logo or label of their product and must get rid of the old stock. Now you know where that old stock goes and why you can buy it at such a low price.

Keeping it simple for our industry — total labor 33 percent, all other costs 33 percent, and you get to take home the other 33 percent. Anyone hitting those numbers is a happy camper or drycleaner in this instance.

Now we can get back to reality and measuring labor costs because anyone taking home 33 percent is in the minority.

As your company grows, how you measure labor changes. To start with, you can easily count the number of garments each finisher is turning out per hour. You determine the quality level and the production goal for your finishers.

I have visited plants where this number is 35 pieces per hour and other plants where the number is 10 pieces per hour. The difference is what the company charges at the counter.

The company pressing 35 pieces per hour (average for all finishers) charges $4 per item.

The company producing 10 pieces per hour charges $14 per item. In both cases each finisher is turning out $140 per hour in sales.

Next month we will continue on this path and have a more in-depth look at measuring labor costs.