Making money is simple. To make money, we need to know the numbers, and then make the right choices. The first set of numbers to know are profit margin per piece, pieces per hour, and overhead. The relationship between these three numbers determines the profit or loss on an individual sale.
Knowing the big picture
Profit margin per piece for the purpose of making money is defined as the difference between selling price and cost of the item being sold. A decorated shirt sold for $8 that costs $2 to buy has a profit per piece of $6. The costs of labor, overhead, ink, thread and such will be included later as part of overhead.
Pieces per hour is the number of garments decorated per hour. Let’s say you screen print 100 one-color shirts per hour. If you sell those shirts for $8 and they cost $2 each, then the gross profit—ie: profit before overhead—is $600 per hour. By contrast, if you print 50 four-color shirts per hour which you sell for $10 each, the gross profit is $400 per hour. To make money, we look at the profit per piece times the pieces per hour, then seek the orders that pay the most as often as possible.
Embroidery orders are evaluated the same way. More pieces per hour can be produced with lower stitch counts, which is why Nike, Ralph Lauren and Brooks Brothers embroider small images. The relationship of profit margin and pieces per hour will show more profit when stitch counts are low.
All costs other than the item being printed are considered overhead for purposes of management decision-making relative to making money. Ink, thread, chemicals, emulsion, screens and even equipment on a per-shirt cost basis amount to pennies. Those pennies might be 10 cents but, even at 20 cents, are minor compared to the selling price, profit margin and cost of the item printed. One of the keys to making money is to focus on and control the big numbers and not get distracted by small numbers that will not show up in the year-end profit number.
Knowing your customers’ expectations
Part of the decision regarding which numbers to control is based on where your effort will yield results. Careful shopping can reduce the cost of the item printed significantly more than the pennies spent on supplies such as ink. If you save $1 per quart of ink and print 350 shirts with the quart, you are saving $ .002 per shirt.
The reality is that all ink manufacturers are familiar with each other, each others’ products and each others’ prices. And they are competitive with each other. The same is true with stencil emulsion and many other supply items. However, one shirt supplier might offer free shipping while another does not. A supplier might have branches all over the country, and you can save a measurable expense by making sure you don’t pay shipping for a heavy product going across the country.
The opportunities to increase profit margins by carefully managing selling prices are much greater than spending a lot of time on consumable supply costs. Not all customers pay the same price for the same work. High-school age and younger kids might spend $16 or more for a shirt or cap, while their fathers who earn the money might spend closer to $12. Their grandparents on fixed incomes and who are less fashion conscious might spend only $6. A person’s financial resources definitely will affect what they are willing to pay. Where you live also affects price. T-shirt prices in New York City can be triple those of Southern California or Miami.
Selling prices are managed by finding out what people expect to pay. The simple way to find out is to ask, but not when quoting your prices. If I am planning to sell shirts with the names of all the high-school seniors on them, I will ask some students what they paid last year. Digging up information about what people expect to pay will produce more profit than pennies saved on supplies.
The shop will also get more orders by avoiding prices that are too high or too low. In either case, customers will flinch. By contrast, if the price meets the expectations of the customer, then price is not an issue. Delivery, colors, sizes, art and many other issues can command the attention of customers more than price.
Knowing your overhead
Overhead includes more than supply costs. There are so many costs involved in doing business. Payroll, rent, utilities, advertising, office supplies and taxes are just the beginning of the list. To keep this simple, add up all disbursements during the month excluding only the cost of items you actually embellish for resale. Divide the total of all these overhead items by the number of days worked during the month. That will probably be 20 or 21. Now you know your overhead per day.
Employees should keep time sheets showing how they spent their time. Time sheets are necessary not only for payroll but for costing. The cost of a job includes not only the printing, but also screen making, registering screens, clean up and so on. Time sheets for costing purposes need only be required from people generating revenue. A bookkeeper or secretary may be excluded. The total job hours for the day, divided into the overhead for the day, determines the overhead per hour.
The overhead per hour divided by the number of items decorated per hour results in overhead per piece. Overhead per piece plus purchase cost per piece is total cost. Total cost compared to selling price is profit or loss.
By keeping track of how time is spent and how many pieces were produced we now know which products produce a profit or loss, and which are more profitable than others. Low-profit items will require management attention.
Overhead per item printed in most businesses far exceeds supply costs and, therefore, deserves more attention. For example, an employee who is paid $10 per hour and prints 100 shirts has added 10 cents per shirt to the total cost. A less productive employee printing 50 shirts during the same time is costing 20 cents per shirt. So employee productivity becomes important. That means screens must be registered easily on the first attempt. Walking, bending, reaching and other movement should be minimized.
To make money the business needs to generate profit every month regardless of season and weather. Making a profit in the summer and losing the profit in the winter is unsatisfactory.
A simple approach to all this uses the 14-column paper popular with accountants. The first column will be a listing of all your types of customers. That could be contractor T-shirts, baseball teams, restaurants, specific local events, signs for politicians, back-to-school totes for pre-school, college freshmen and many more. The next 12 columns are January through December, and the last column is the total for that program over the 12 months.
Many of your orders are received at certain times of the year. The number of items to be printed can be entered for the month and program. The numbers will not be exactly what happens, and there will be orders not anticipated. However, periods of insufficient business will be immediately obvious. Some business can be targeted into any month of the year. With the information this sales plan provides, management can work up sales programs for the slow periods.
Making money is measured one hour at a time. If money is lost during the hour, corrective action must be taken to avoid a repetition. Making money also requires a steady flow of orders for every month of the year. Once an owner or manager knows the numbers, decision making is a lot easier and the business is a lot more profitable.