A list of goals for 2011: eat healthier, spend more time with family and friends, grow my business and make more money—all fair goals that most of us share. I don’t plan on telling you to eat your veggies, but investing in your business and furthermore, looking at how to calculate return on investment (ROI) without getting lost in the math is within my domain. In my experience with selling apparel decorating equipment, I find that many people avoid this part because of its painstaking nature. However, it is not necessary to be a math whiz or hire an accountant to at least set some goals to achieve and get idea of how new equipment investment will pay off.
Small business owners often have to rely on their decision-making abilities in order to meet the demands of customers and to attain personal goals. Just because a team of financial advisers may be out of your realm doesn’t mean you cannot make an educated decision on your equipment investments.
Choosing your equipment
You may not be 100 percent sure of what equipment to add next. The idea of an additional embroidery machine may be battling with adding a direct to garment printer. I find myself having this conversation with people almost daily. The solution is typically found in three questions; asked and answered below.
Question one: Which decorated apparel will generate more sales?
If you have embroidery equipment and can barely keep up with orders, the answer is simple: get more heads! If seeing success in one area and dancing the line on maximum production capabilities, additional heads will allow you to achieve the growth where it is needed.
On the contrary, if you are losing sales because you offer no solutions for T-shirt printing, it is time to add that new product line. I realize these solutions sound quite elementary, but in the spirit of Occam’s razor—the simplest explanation is most likely the correct one. A simple Internet search will show that many experts agree not to over think solutions, nor add unnecessary variables. Making it too complex will result in spinning your wheels, getting frustrated and, in the end, doing nothing. Do something instead.
Question two: What void does your business need to fill?
As mentioned above, what are customers asking for? What aren’t you doing that could differentiate from your competition? You do not have to offer everything under the sun, but if you are noticing a void, fill it.
Question three: Which is going to generate the best profits, long term?
While strategies such as adding a heat press is going to require a minimal investment today, contemplate whether it is a long term solution. The answer may well be that it is, but the point is not to allow initial cost to be the only decision-making factor. A heat press costs less than a vinyl cutter, which is less than a direct-to-substrate printer; but which is best for your business goals? This is when calculating a fair ROI can help you gain confidence in your decision.
The true cost of equipment
While the best solution to a financial dilemma is to hire a professional—we are all familiar with the phrases “consult your tax advisor” or “confer with your accountant”—it is likewise a good idea to spend a few minutes with a pencil and paper to get your head in the right place.
Pencil in hand; the first step is determining the true cost of purchasing this equipment. Ask the following questions:
• What is the price of the equipment (including cost of ownership)?
• Is shipping included?
• Is an additional software purchase necessary?
• What are the additional accessories required to get started?
• What is the cost per piece during production?
Working out the numbers
Here is a simple calculation to determine how much profit you can earn per piece sold:
(Retail/market value—how much you can sell “it” for) - (machine consumables) - (garment cost) = profit per piece
Let’s use the example of a direct-to-garment printer purchased to decorate white Ts:
$15 (retail value in my market) - $0.35 (ink cost) - $1.50 (shirt cost) = $13.15 profit
If I had employees to pay, I would factor in the cost of my labor:
(Employee hourly wage) ÷ (pieces per hour) = cost of labor per piece
My employee can make 20 pieces per hour with this machine, and I pay them $10 per hour:
$10 per hour ÷ 20 pieces = $0.50 per piece in labor
The new profit per piece would be:
$15 (retail value in my market) - $0.35 (ink cost) - $1.50 (shirt cost) - $0.50 labor = $12.65 profit
How many pieces will attain ROI?
At this point, we know how much profit can be earned per piece with the investment in a D2 printer. The next step is to determine how many pieces will have to be sold to gain that return on investment.
Again, we can stick to a simple calculation:
Total cost of initial investment ÷ profit per piece = # of garments until full ROI
For the above example, if $17,000 was invested in a direct-to-substrate printer:
$17,000 (equipment) ÷ $12.65 (profit) = 1344 pieces until full ROI
At this point, you can start rule out if the investment is reasonable or not. Does your business have the ability to sell the amount of product needed to gain return?
Maximum profit capability
You will want to know the profitability of any potential investment, running full- steam ahead. When you are completely ramped up, what is the profit potential of this machine? Is it worth the investment? This is where the math gets longer, but still not intimidating:
(Pieces equipment can produce per hour) ∗ (hours of operation per day) = pieces per day
(Pieces per day) ∗ (profit per piece) = profit per day
Continuing our example of a D2 machine printing white Ts:
20 (pieces per hour) ∗ 6 (hours a day) = 120 (pieces per day)
120 (pieces per day) ∗ $12.65 (profit per piece, as calculated above) = $1,518 profit per day
Right now, you should be excited! You can see the potential of this investment and if you aren’t, you might not be investing in the right equipment. Still, unless you are very lucky, you are not going to come out of the gate full-steam ahead. Yet, with planning, marketing, customer service and organization, you absolutely can meet and exceed your goals, provided they are realistic. Set fair, obtainable goals and you should absolutely achieve success.
Calculating the profitability of a piece of equipment is not a challenge. I do realize that this is a novice way of estimating your profits. A CPA could factor in every dime of your business cost, down to the cost of each paperclip. And maybe, once you’ve done this simple math and know some number ranges, you’ll want to sit down with one.
A business decision simply comes down to it makes financial sense. No, you didn’t factor in the cost of the ink flowing from your pen; yet you will get the point of whether or not you are headed in the right direction. These estimations can make you feel comfortable that your business is making an educated decision on new equipment investments to help reach your 2011 goals. Equipment that will grow your business will make more money and allow more time to spend with friends and family; now how about those vegetables?