Profitability Or Lack Thereof [embroidery]

You look up at the wall clock through bleary eyes. It’s almost midnight and you still have a long way to go. Though you’ve been hard at it since early morning, the pile of shirts has scarcely been dented. And right behind it are several more boxes of hats, jackets, and aprons. You pinch yourself hard, hoping to awaken from this nightmare, only to find out it’s no dream - it’s reality. There is no end in sight to your workload, which would seem to be a positive thing, except in your case it’s not. Because in spite of all the hard work, you just don’t seem to be making any money. What was it your parents used to say, “Hard work leads to success”? Yeah right! You’re working yourself half to death and success, at least financial success, is nowhere in sight.

Does this sound like your life? Lots of work, but no money? Believe me, you’re not the only one in the same boat. Hard work only guarantees one thing: that you will be tired at the end of the day. Smart work is what leads to success. The old adage, work smarter, not harder, is very true. Unfortunately, I have seen many Embroidery Shops that are super busy, yet not making a lot of money. (I can relate to this fact since I went through it myself.) A large sales volume does not guarantee profits. When business is booming, it’s easy to convince yourself that you’re making money, but the bottom line lies in the net sales, not the gross sales. You need to know how much it costs to produce every order, then ensure you are making more money on each piece than it costs to produce. This sounds like a simple concept, yet the average Embroiderer has no idea what it costs to produce anything. It’s sad to say, but most shops base their prices strictly on the competition. By doing this you are assuming the following things: · The competition has carefully calculated realistic pricing based upon their cost of operation. · The competition has the same overhead as you. · The competition is smarter than you. Do you really want to base your future on these assumptions?

So where do you start on the quest for profitability? The first step is to determine where you spend your money. Make a list of all of your business expenses over the course of a year. Things like rent, loan payments, utilities, embroidery supplies, insurance, advertising, wages, etc. Every penny counts, so be thorough. I also suggest adding in your paycheck. You are in business to make money and this is the most important expense of all – paying yourself. When you’re finished, total all of the expenses together to come up with a yearly amount. This is not 100% percent accurate, since some of the expenses are fixed and some are variable. But you have to start somewhere, and this is the place. You can always fine tune the expenses as you go.

Once you have come up with your total annual (estimated) expenses, it’s time to break down these numbers into units of time. Decide how many weeks you plan to work per year. Most people go with 48. Divide the yearly costs by 48, to find out what your overhead is per week. Now let’s determine an hourly cost. This can be tricky. It might seem logical to divide the weekly overhead by 40 (or however many hours per week you think is appropriate), but we need to identify weekly hours of production. After all, if your machine isn’t sewing, you aren’t making money. Try to determine how many hours your machine(s) is running per week. Don’t worry about how many minutes per hour just yet - only the total number of hours. Once you have this information, then divide the weekly overhead by the number of hours to come up with a basic hourly overhead figure. If that number is $30.00, then you know that you will have to produce $30.00 (net) worth of orders every hour, 40 hours per week, 48 weeks per year. If you do this, and none of your expenses change over the course of the year, then (in theory) you will be able to pay all of your bills and your salary.

Of course, we all know that things change. Thus it’s important that you create a spreadsheet to track this information and update it frequently. Overhead will fluctuate! Sales will fluctuate! You must be flexible and willing to change your data as needed.

Okay, let’s go a little bit further with our cost analysis. Since most Embroiderers like to charge by stitch count, let’s figure out the cost for that as well. Let’s start by determining how many stitches per hour you can generate. The first question is, how many minutes of sewing do you achieve in a typical hour? Don’t even think about 60 minutes. Don’t assume 45 minutes either. The real number is more like 35 minutes in a single head shop. (Some of the multi-head shops approach 45 minutes since they are more production oriented.) Assuming a single head machine is running 800 stitches per minute (average, not max) for 35 minutes, it yields 28,000 stitches produced in one hour. (As an alternative, you can track stitches sewn by checking your machine’s stitch counter every hour.) If we now divide the hourly overhead figure of $30.00 by 28,000 stitches, the result is $0.00107 per stitch. Wow, what a great number to work with! To make things easier to understand, we multiply this number by 1000, which yields $1.07 per 1000 stitches.

Now you have a basic cost, not price, for producing stitches. Using this number as a breakeven point, you can begin to build a price sheet. By the way, you can lower this number by increasing your hourly production. For example, if you were sewing 50 minutes per hour, your stitch output would increase to 40,000 stitches per hour, with no increase in overhead. The final result would be a stitching cost of $0.75 per 1000 stitches.

This is an important concept to understand. Increasing your production rate can decrease the cost of producing each piece. Thus, you really can offer discounts to larger volume orders. However, at some point, you will reach a maximum output for your machine, at which point no additional pieces per order will make the job any more efficient. If you understand the calculations presented and do some work on your own, you will see where the saturation point is for your machine.

The examples above are focused totally on stitch count pricing, and don’t take into account any profits generated on the sale of merchandise. Garment markup is a discussion in itself. But on a general note, garment markups should not always be based upon a flat percentage system. Instead, it should be done based on the perception of merchandise value by the customer.

For example, in a retail shop, forget the 100% markup rule. Figure out what people are willing to pay. Just because you buy it cheap doesn’t mean you have to sell it cheap. (An important rule of retail.) And with retail markups, don’t feel guilty because you know what the item really costs. You’re in business to make money! Are you going to retail a $2.00 cap for $4.00? I think not. Most retail shops sell blank caps for $12.00 to $18.00 each. However, when you go to the bulk orders, these numbers come down quickly. Typical wholesale orders see about a 30% markup across the board. So let’s go back to the master pricing scheme. In the real world, when you are looking for a competitive pricing edge, you can shave off some of the merchandise cost and some of the stitching cost, in such a way that you can still make money. Remember that hourly cost figure of $30.00 that we came up with? Time to put it to use. Let’s say you have an order for 12 baseball caps, and you estimate that your machine can output four of those per hour. Divide the hourly cost by four and you will see that you need to charge $7.50 for each baseball cap, above the cost of the cap, to break even. But since the goal is always to do better than break even, you should add a little more in to the price. Don’t sell yourself short! Here we didn’t focus on the stitch count, or a particular markup - we focused on the hourly output versus the hourly cost. Everything discussed so far has been in general terms. As you investigate how the cost concepts apply to your business, you will (and should) get much more specific and precise. If you don’t know how to use spreadsheets, learn! They are an invaluable tool for ALL business owners. Okay, so now that you have a clue as to what it costs to run an order, the next step is to develop a strict set of pricing guidelines. Create a price list that ensures profit for you, while offering a fair price to the customer, and stick with it. If you have to go below the breakeven point, then you shouldn’t take the order because you will lose money. This is perhaps the hardest part to deal with. I constantly get beat-up in Seminars by Embroiderers who say that the competition is cheaper, so they are forced to sell at the same levels. Well, I’m here to tell you, the numbers don’t lie. If you try to sell it for less than it costs to produce, you won’t have to worry about the competition for too long because you’ll be out of business. This leads me to the next aspect of profitability: choosing the correct market to pursue. Some markets will support your price structure and some will not. If you can’t get your asking price in a given market, then you are in the wrong market. Basically, you have three choices: · Take the job at a loss. · Close down your shop. · Find a market that fits your business. Identify your strengths and weaknesses, then capitalize on the strong points. What do you have to offer, beside price, that the competition does not? A lot of the discount shops have long turn-around times. Maybe you can offer quick delivery. Many of the discount shops have poor quality work. Focus on having the best embroidery quality and letting your potential customers know that. If they don’t care about that, then maybe you don’t want them as a client. And be sure to refuse any job that you have doubts over. If you aren’t sure you can do it right, then don’t do it at all. The hardest thing to say is NO, but sometimes it’s the most important word in a Shop Owner’s vocabulary. Finding a good niche market is another piece of the profitability puzzle. Look for specialty markets that the other shops have either ignored, or never identified. Niche markets can be very lucrative. Typically they will take research and possibly a special approach, but the long-term results can be quite profitable. If you are the first and only shop serving this market, then you are in the position to control the price points significantly (but within reason). (See my series of articles on Niche Embroidery Markets in Stitches Magazine.)

You must realize that you are running a business that does Embroidery, rather than Embroidery as a business. It’s important that you focus on the embroidery aspects, but it’s critical that you stay on top of the business issues. Though profitability is affected most by your production costs, there are other avenues to explore as well. It’s so easy to be overwhelmed by costs such as rent, because you don’t easily see the resulting sales. A rent figure written on a contract is staring you in the face. There is no doubt as to the amount and the frequency. Sales, on the other hand, are a gray area based on faith and hope. Thus, we tend to cut every corner in an attempt to keep the costs down, because those are obvious. (Not a bad thing, as long as cost-cutting is done logically.)

For example, rather than take on that high rent retail location, it’s much cheaper and easier to stay in the garage, or move in to some obscure commercial site. Yes, you saved on the overhead, but you probably lost a large amount of potential sales due to lack of visibility for your business. If you need walk-in traffic, then you must be visible.

Analyze your location requirements and benefits without focusing solely on the price tag, initially. A good location might cost $3000.00 per month, but if it generates $6000.00 in net sales, by virtue of the location alone, then it could be considered a good investment, unless those same exact sales could have been realized in a cheaper location.

Running a profitable operation requires constant attention to costs versus benefits. Large investments in equipment, software, locations, training, etc. should not be avoided. Rather, these expenditures should be analyzed to determine their benefit to your bottom line. For example, if you are a single head shop running orders that average six dozen pieces, you are most likely losing money by not investing in a larger piece of equipment, such as a 4 head or 6 head machine. Don’t focus on the cost difference. Focus on the increased production capacity that the larger machine will create. Then compare the increased output to the increased costs. Chances are there will be a significant increase in profits for your business by investing in the larger machinery. Apply this concept to every aspect of your operation.

A constant assessment of overhead, production efficiencies, and market preferences is a must. That is what running a business is all about. Those that apply sound business principles to their Embroidery Shop are the ones that succeed. Those who ignore them, tend to fail. Work smarter, not harder! You must be aware of where your money comes from and how it’s spent. Profitability is no accident. It’s the result of careful planning and attention to detail.

By: James M. (Jimmy) Lamb
Published: July 2007