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Manage the R > E Flow

Howard Scott |

One simple principle: inflow must be greater than outflow

PEMBROKE, Mass. — Running a dry cleaning business is not rocket science. It is a matter of adopting and living by one simple principle: the inflow must be greater than the outflow.

Simplified, it’s R > E, in which R equals revenue (inflow) and E equals expenses (outflow). But then the rule gets a bit complicated. It doesn’t apply to end-of-year results, it applies to every day you open your doors. For most, that means 270 to 360 days a year. Every day you’re open for business, the inflow must be greater than the outflow.

If it isn’t hard, why then do so many dry cleaners either limp along without much success or fold up? The answers vary:

  • The owner bases his operation on what he needs to draw on, which is a function of what he needs to live on, and that might be at variance with the R > E rule.
  • Management doesn’t keep track of the numbers.
  • Management deceives itself that the rule is being met when it isn’t.
  • The owner really don’t know the business expenses (the “nut”).

There is much disagreement between partners or between management and staff that the revenue-greater-than-expense rule is too hard to enforce because all energies are spent on managing people. Finally, management bases its estimates on future figures, not current figures.

I don’t know how many operators still use the word “nut.” In my time as an active businessman, nut meant all fixed and variable costs that totaled the amount of weekly expenses. Nut includes owner pay, management salaries, occupancy costs, processing costs, materials cost, utilities, administrative expense, marketing expense, and interest cost. So, controlling your nut flow means that you must make sure that your inflow (revenue) is greater than your outflow (expenses). Day after day after day.

How do you do that? First, you should be able to rattle off your costs, individually, in categories, by functions, by departments. You should know exactly how much you spent on labor last week, for example.

What was your occupancy last month? By occupancy, I mean every component that includes rent, electricity and heat (as distinguished from processing utilities cost), insurance allotment, cleaning services, escalation portion—anything that adds to the cost of facilities. So, maybe your rent is $3,000 a month but your occupancy is $3,900 or $4,200 a month.

Know the cost of processing—in each phase of your operation: marking, cleaning, pressing, inspection, assembly.

What is your breakdown of direct costs vs. indirect costs? Direct costs comprise the service provided; indirect costs consist of all ancillary costs.

How much is your utilities cost—power, water, etc.—related to processing? What is the up-front cost of your counter operation? If you have drop stores, how much does it cost to run each one?

What are your total marketing costs—for advertising, promotions, mailings, consulting services, listings—that can be divided into monthly sums? What percentage of your operation is labor—40%, 45%, 50%? How much do your administrative expenses—bookkeeping, insurance, office, administrative, miscellaneous, bank charges, cleaning services, etc.—run? Are they more than 15% of your total?

What are your controllable costs and your non-controllable costs? That is, what costs can you reduce in the short run vs. the costs that can’t really be altered?

Another way of saying this: what are your fixed and variable costs? Labor is a variable cost, for instance. If your business dropped to 50% of volume, you could let some staffers go so that your labor costs would align with revenue. If you had to, you could do this at the end of a week, by saying to a few staffers, “I’m sorry. I can’t keep you on any longer.” This is certainly not a pleasant decision, but when it’s either work for a few staffers or survival of the business, there’s no question when it has to be done.

You should know all these costs like the back of your hand. The figures should be so ingrained that you don’t even have to think to recall them. They should be imprinted in your brain.

From these figures, come up with a daily, weekly, and monthly nut. Align the nut with revenue. If revenue is less than expenses on Tuesday and Wednesday, that means there is a net outflow. Even if revenue from Monday, Thursday, Friday and Saturday is above the nut, you still have a problem with Tuesday and Wednesday. It is unacceptable to lose money on those two days.

Increase inflow by rearranging the volume flow, going after extra commercial business, promoting Tuesday/Wednesday specials, or increasing the home delivery volume. You might have to pay out more money in the short run to promote this, but the results should be in by the next week and volume should be above your nut on Tuesday and Wednesday. You should be back to R > E.

If nothing works out and revenue does not increase, then you have no choice but to lower your nut on Tuesdays and Wednesdays. Send some staffers home at 1 p.m. on those days. Instead of working 40 hours a week, they might work only 34 but will still have a job. More importantly, you’ve realigned your Tuesdays and Wednesdays to be profitable. Or, stop processing at 2 p.m. and save on utilities. Or, cut out something in your budget so that those two days’ profitability is assured. As a last resort, reduce your take so that the R > E result is produced.

In other words, don’t rest, stop maneuvering, or stop moving the variables until you achieve success. If your July and August numbers do not reflect the R > E equation, reduce your summer hours, lengthen your washing cycle, maintain production only until noon, discontinue same-day service during the summer, or close one drop store that does small summertime volume.

In this way, you will eventually reach the R > E result all the time. Don’t rest on your laurels, for things will change. And then you will have to tinker all over again. It is a management activity that demands continual focus and vigilance. The golden standard of profitability must be met and maintained.

When you pursue this assiduously, your bottom line at the end of the year will favorably surprise you. You’ll have made more money than you thought you would.

That’s the power of R > E thinking.

About the author

Howard Scott

H&R Block

Industry Writer, Drycleaning Consultant, and H&R Block Tax Preparer

Howard Scott is a longtime industry writer and drycleaning consultant, and an H&R Block tax preparer specializing in small businesses. He welcomes questions and comments, and can be reached by writing Howard Scott, Dancing Hill, Pembroke, MA 02359.

Comments

Ever changing time:

Don't we all wish the industry was like it was some 25 years ago, but we all must make the necessary changes to make it in todays market. The playing field was fairly level then, were as today with federal, state, and local government requirements have a large impact on our overall operation.
I do agree whole heartily with your article and know if you aren't on top of every cost involved in your operation you are surely on a slippery slope. I only wanted to add, so many are hesitant to increase their price for services thinking they will price them selves out of business, and they really are sliding down the slope.
Our industry is one of skill, knowledge and professionalism (although there are many operators that don't share that feeling) which has always taken pride in the products we produce.
I hope many old timers read your article and take heed for today we must operate to the new rule, not as we did for all those bygone years.
Ron Shumate Decatur, Georgia

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