By: Mike Nesbit
Planning and budgeting are the keys to success, that is true for any business. It doesn’t matter whether or not you are a small, one storefront operation or a million-dollar, multi-store company.
The Plan
Before you can begin developing your plan, you first must know where you are going. Otherwise, you may develop a great plan and be disappointed in the results because you did not achieve what you expected.
Your plan should be:
- Strategic and Measurable. It makes no sense having an element of the plan that cannot be assessed. If you can’t measure it how will you know if it is being achieved?
- Communicated with everyone in your organization.You cannot hope to succeed by doing it all yourself. How can others help you achieve your goals if they have no idea what you are trying to achieve? You need your staff to understand the plan and, if possible, have key staff members help develop the plan. It is a lot easier to work toward something if you understand it and believe in it. You need your staff to buy into and believe in the plan as well.
- Reviewed with your organization routinely. Your staff needs to know the results on a regular basis. If you are asking them to help you achieve something, they need feedback. How are they doing? Where are they falling short? Where are they excelling? The more feedback the better. It will also give you a greater understanding of where your business is so there are no surprises.
- It is much easier to get your staff to reach the goals if there is a reward. The incentives do not have to be extravagant but they should be fair. If you are giving your staff bonuses, then your company should be improving financially. If you are giving out incentives and not improving financially, then your incentive program needs to be re-evaluated.
Plan Development
Your plan and budget should be developed prior to the beginning of each new fiscal year. It should include the following standards established for your organization:
- Quality Standards
- Efficiency Standards (including pressing and tagging speed)
- Customer Service Standards
- Wage and Salary Standards
- Overtime Standards
There is no right or wrong answer when determining standards. It depends on the level of work you want to present to your customers.
For example:
You can produce far more shirts if you will accept less than superior quality. Or, your counter staff can wait on far more customers if they do not engage with them.
In these examples you can clearly see how your standards effect and drive your budgeting. The most important part is whatever standards you develop, you need to consistently produce them at that level.
Think of the McDonald’s (low end) or Morton’s (high end) restaurant chains; there are two very different standards, but you know exactly how your hamburger or steak is going to taste, whether you are in San Francisco, California, or Topeka, Kansas.
Budgeting to Support Your Plan
Start by determining your acceptable annual return. Then figure your projected sales and finally, estimated expenses; the largest of which is labor.
Sales Budget– Develop a weekly sales plan based on historical sales information. Historical sales are a good place to start and should be a good barometer of future sales as long as there have not been significant changes. Significant changes such as local market changes or changes to your competition will impact sales either negatively or positively depending on the change. Factor this into your sales budget. There should be a separate sales plan for every location and/or route.
There are several ways you can try to increase sales to achieve the annual return you desire:
- Review demographics to determine the potential for any expansion.
- Can you increase sales with new products or services?
- Implement a marketing plan.
- Determine if, when, and how much to increase prices.
- Develop an incentive plan for sales.
Once you have developed a sales plan, communicate the plan to the management team. The plan should include all 52 weeks of the year.
Monitor the sales and piece counts and focus on underperforming aspects quickly. Develop special procedures for new customers and a plan for customers at risk. If you have a customer retention program, make sure it is being implemented properly.
Expense Budget– All your costs need to have a detailed budget, backed by supporting rationale. These expenses would include:
- Rent
- Supplies
- Utilities
- Transportation
- Marketing
- Customer service/claims
- Repair and Maintenance
- Insurance
- Labor
Labor Budget– This significant expense demands special attention when determining your budget. Consider the following key performance indicators to determine a more accurate labor expense:
- Efficiency Standards. This number is represented by the POH (pieces produced per operator hour).
- Average Wage per Hour.
- Revenue per Piece. An average number should be calculated for all pieces coming in. There should also be additional breakouts of just the drycleaning pieces and just the laundry pieces.
- Bonus Payments.
Your labor costs should include any benefit support costs such as medical benefit contribution, payroll taxes, vacation or sick days, and training programs. These costs could contribute up to 30% of direct labor costs.
When creating a budget for labor, you need to include the following categories (if appropriate to your operation) and determine what those category costs are as a percentage of total sales:
- Dryclean Labor (% of drycleaning sales paid toward drycleaning labor)
- Laundry Labor (% of laundry sales paid toward laundry labor )
- Alternation Labor (% of alteration sales paid toward alteration labor)
- Counter Labor (% of total sales paid toward counter labor)
- Route Labor (% of route sales paid toward route labor)
- Household/Other Labor (% of the household and other item sales paid toward the labor)
- All salaried and office personnel (% of total sales paid toward salaried and office personnel)
Formulas
Revenue per piece—How much money, on average, does each piece cleaned generate? To calculate the average revenue per piece, divide the total revenue by the number of pieces cleaned. It is important to use data from the same time period. This means, if you are using revenue figures collected over a full year, you must use the number of pieces cleaned over the same year for accurate calculations. Or, if you are using revenue figures for just one week, the number of pieces cleaned must be from the same week.
This formula can be used to calculate information for the entire operation or for specific departments such as laundry or drycleaning.
Cost Per Piece—How much does it cost to produce each piece? To calculate the average cost per piece, divide the total expense amount by the number of pieces cleaned. Again, it is important to use data from the same time period.
This formula can be used to calculate information for the entire operation or for specific departments such as laundry or drycleaning.
Payroll Percentage—The payroll percentage will tell what percentage of your revenue is going towards wages. As with most calculations, the payroll percentage can also be broken out by individual departments. To calculate the payroll percentage of a department, divide the revenue generated for the week in that department by the wages paid for the same week in that department.
Three components ultimately affect the payroll percentage:
- Speed of production
- Cost of labor
- Revenue Per Piece
POH/Pieces per operator hour—Pieces per operator hour is not the same as the number of pieces produced per hour. POH considers the number of pieces produced per hour and divides that figure by the number of people required to produce the pieces. For instance, a single shirt presser may press 54 shirts per hour (pieces per hour) but you may also have two additional people such as the touch up person and the person that washes the shirts contributing to the process for a total of three people required to produce those 54 shirts.
How Often Do You Review the Numbers?
Sales should be reviewed weekly along with revenue per piece and total pieces. Examine your labor costs every other week. Each of the parameters—efficiency, quality, overtime, wages—that make up your labor cost should be evaluated.
Financials should be evaluated monthly and plan every six months so adjustments can be made if necessary.
Mike Nesbit is President/CEO of EDIT TX LLC DBA Tide Dry Cleaners and currently serves as Chair of DLI’s Board of Directors. He is also past president of MW Cleaners, a Men’s Wearhouse/Joseph A. Bank Company, past president of the Southwest Drycleaners Association, and a founding member of Tuchman Training Systems management group. He can be reached at mnesbit@tdc-edittx.com.