3 Numbers Every Studio Owner Must Know
Bordeaux & Bordeaux CPAs is a Supplier Member of CCSA (Contemporary Ceramic Studios Association) which is a organization representing paint your own pottery studios (PYOP) and ceramic arts businesses. Donna Bordeaux, CPA provided the webinar to CCSA association members as a benefit of their membership in the organization. Their CPA firm specializes in growing PYOP studios with industry specific key performance indicators by helping them grow their studios and minimize the impact of taxes.
Today’s topic is going to be the three numbers that every studio owner must know. We’ll talk about those numbers today in just a moment. I wanted to introduce myself and let you know what it is that we do here. I’m with Bordeaux and Bordeaux CPA and we are in Lake Wylie, South Carolina. Our team here consists of me, Donna. This is my husband Chad. He’s also a CPA here in our firm.
Nancy is our administrative assistant. She helps out with a lot of the bookkeeping ends and phones and questions, and she also happens to be my mom. Then, if you do hear a bark today, she’s out of my office at the moment, but if you’re ever talking to me and you hear a bark in the background, that’s Dixie. She’s our security force that’s here at the office.
I just wanted to give you a little introduction. Sometimes it’s helpful to know a little bit about who you’re talking with and we all like to match names and faces from Facebook as well. We are located in Lake Wylie, South Carolina. That is actually a suburb of Charlotte, North Carolina. We’re just over the border. This is our office building where we’re at.
As you can tell, we work remotely with clients all throughout the country. We use WebX just like this to work with a number of studio owners and other business owners all throughout the country, so nobody really even has to be in our backyard in order to be a client and receive the same excellent service.
All right, so let’s talk a little bit about the numbers. What is it that is so important that we need to talk about today? The first thing we want to catch are a few percentages. How do you know if your numbers are right or if you’re in line with where you should be or if you’re behind the times? Where do you start? What’s the priority of what you need to tackle first?
The first thing we talk about is the cost of goods sold. That is, how do we know if our pricing is right? The second thing we’ll talk about today will be your payroll, and last but definitely not least is net profit. What are you getting out of this deal? Okay? Let’s talk a little bit about what those numbers should be and what are some targets for you.
First off, cost of goods sold. Your cost of goods sold is the cost of your bisque, clay, canvas, or whatever products you sell. In our preliminary calculations, we do not include the cost of supplies or paint. If those are separated out, then we’ll be talking just about the cost of the product itself that you’re reselling.
How do you know if you’re in line? Your cost of goods sold number should be around 15%. If you’re out of alignment with that, there’s one of two things that can happen. First off, perhaps you’ve got too much in inventory, and that may have an effect. If you’re buying too much and your inventory calculations are not adjusted, those numbers can quickly get out of whack.
Also, and most commonly, what it means is your pricing is not where it should be. We are often talking about on the board, and I often am asked, “How do I know? What should my pricing be?” Here’s a quick example, and this is an example for an all-inclusive studio. Your cost, if an item costs you $2, you should be using a 7x multiplier. If you are, 2×7, the selling price should be about $14.
Now, sometimes smaller, lower-cost items will have a higher multiplier and higher cost items may have a slightly lower. When I say slightly lower, maybe down to 6-6.5x, not 4 or not 3 or anything like that. It’s crucial that your prices be lined up because what happens if this cost of goods sold line item is too high, guess what? Then something’s got to give, and that something is generally your profit. If you’re not making money, you’re not going to be in business long, so we need to make sure that your pricing is in line and your cost of goods sold number is within this lineup to make sure that you can sustain a business. Okay?
If you’re just in it for a hobby, which most of you are not, you may not care about this. If you want to be a profitable, ongoing business and grow your studio into one of your retirement assets, this is the highest place that you want to make sure is in line. The most crucial piece is your cost of goods sold. I also want to pause here for a moment. If anybody has questions about these items, I will try to answer some questions at the end or via email afterwards. You can use the chat box on our webinar to help you enter that information and I’ll be sure to get back with you on questions. If by chance I miss a question, I don’t answer you today, please email me. My email information is included in these slides.
Cost of goods sold, 15%. That’s a good focus point right there. All right? Next up, here’s another little more challenging item, and that is payroll. Your wages cost here are not including payroll taxes and not including your owner’s compensation. For outside help that you use in your studio, your labor budget should be no more than 20% of your sales. Now, I know that it’s hard to tell what your sales are and you need to be staffed to make sure you can handle the people walking through the door. Let’s go through a little example of how you might want to look at budgeting your labor.
First off, if you use projections like looking at prior years for a specific week and what your revenue was in prior years, obviously sometimes those get adjusted and we all have finally figured out probably that we just can’t predict everything. You can look at prior years of information and try to use that for staffing in determining how busy your studio will be. You’ll also want to factor in things like moving dates for holidays, sometimes even weather. You can’t always predict that.
Take your expected revenue for the next week, multiply that times .2, or 20%. That will give you a labor budget. You can look at scheduling your employees based on the budget for the payroll. Here is a dollar amount example to help maybe make some better sense of this. If you project that your last year’s revenue or budget for revenue for the week is $5,000, you assume that you will do $5,000. Your labor budget, then, should be 20% of that, or $1,000. If you’re planning the schedule, perhaps your, just a very simplified example, if everybody was paid $10 an hour, that would mean that you could have 100 hours of staffing for all staff to meet your goal.
Or, if you want to use a scheduling matrix, here’s an example of where a manager, maybe some tiered rates where you have management, assistant manager, and part-time staff. If your manager makes $12 an hour, you could work them for 25 hours and $300. An assistant manager you could have on the schedule for 22 hours and maybe have two part-time staffers at $8 an hour that you could schedule for up to 40 hours. Those, all in total, total up to $1,000, which is what we’re budgeting.
Use that as an example to work backwards into what your labor schedule should look like based on what you expect your revenue to be. Try that out. See how it works. I know that not everything is foolproof, but we have to have some sort of guidelines for being able to try to move forward with keeping these targets in line rather than figuring out afterwards that they weren’t.
We also have some other methods of labor that can help keep these things in line that we work with our clients on, and that is an incentive pay schedule. With an incentive pay schedule, what would happen if, again these are very simplified answers, let’s say that everybody received 20% of the sales and that’s how you paid your employees. You took the revenue and then divided it up, obviously making sure that everybody get minimum wage, and that would give employees incentive to increase the revenue of your store. That would give them incentive to sell add-ons, to sell classes, to sell custom paintings. Maybe have somebody try another project or get them started with something else that they may enjoy. I have more details about the incentive pay structure if that’s something that you’re interested in. You can definitely check that out.
All right, our next piece. The best part, profit. How much profit should you expect to make in the studio in our industry? We work, like I said, with several studios and we help them target to make sure that their numbers are in alignment with their goals. Their goals are often, we’ll say always, to be profitable. Profit should be at about 15%.
Let’s back up a step. What is profit defined as here? The profit is the income less all of the business expenses. That is how we derive net income. After you pay the utility bill to keep the lights on. After you pay the rent. After you pay your labor for your staffing. Okay? Now, those two numbers can be broken up a little bit, depending on what structure your business is for tax purposes. If you’re structured as the sole proprietor or in a partnership, yes, your bottom line should come down to the net income. This does not include any draws that are taken out for the partners or the owner.
If you’re studio is structured as an S-Corporation, we generally see about 10% going to officer compensation and the remaining 5% coming out to net income at the bottom line. Again, this does not include draw. It does include officer compensation though. If you have questions about how you’re structured or which way is better for you, these are just some guidelines on where your profits should be, but we do a lot of consulting with our studio owners to make sure that they’re taking advantage of all the tax laws that they can and deciding which way to be structured for tax purposes and what works out better for their particular situation.
The next piece, what about all the other numbers that we didn’t talk about today? Obviously, we were hitting some high points today, trying to get a couple of things in line, but obviously there are a lot more things to be taking care of. We work with studio owners to help make sure that their accounting and bookkeeping systems are in place so that they have ready access to these numbers and that they can tell if they are in alignment or not.
We also do comparisons between all of the studios in the whole. Now obviously you’re not going to see names of other studios and what they’ve done, but if we say that one studio has a higher retail revenue per square foot, let’s look at another place and see what they’re doing, it sounds like it’s going right, and apply that to another studio that may be having trouble with that.
We also assist with tax preparation for both the business and the personal side, so we can help take care of those things as we come around to tax season. I’ve also talked to a number of people who said, “Eh, maybe my records from last year are lacking a little. What can I do to make that better so that I don’t have to run a year behind on my accounting?” They’re definitely things we assist with.
We also assist with payroll processing. That’s one definite area you want to get out of if you’re doing that yourself. It can be very costly if you miss a deadline or get one penalty. You could pay for payroll processing services for the whole year. That also tends to be very time-consuming.
Point-of-sale systems is another question that always seems to come up. We’re actually finalizing a whitepaper on all of the different point-of-sale systems with some pros and cons about each one to be used by the CCSA membership so that you don’t have to go at that question alone and start over with a new question on the board every time it comes up.
We also work with studios who are preparing to open, maybe a prospective owner, or studios who are preparing to sell to make sure that they can get the highest valuation for their studio and make it as profitable when they sell as well.
If there are any services of those that we can help with, we would be glad to speak with you. There is no charge to determine how we can work with you and if there’s something that we can do to help you. I’d love to be a resource to all of you in that regard.
What’s the next step? Again, as I said, we consult with studios and try to help owners make sure that they’re running at their optimum efficiency. If you’ve not been out to our website yet, we have a number of items on our blog already. We’re growing that consistently so it can help you, about promotions, about payroll, more about what we talked about today. About loyalty programs. How to find good help, and increasing your average ticket.
Also, if you were at the last convention, we had our book there, The 10 Most Expensive Tax Mistakes That Cost Studio Owners Thousands. If you’ve not received that, we have complimentary copies for all members of CCSA. All you need to do is sign up through our website and we’ll get that out to you in the mail quickly.
I do have a couple of questions that have come in that I wanted to try to answer for you. If you have any questions about the materials that we’ve talked about, please enter those in the chat box and we’ll talk about them.
Derrick asked about contractors and independent contractors. How do those fit in with payroll? Well, yes, those should be considered in your labor numbers. I urge you to go cautiously on the independent contractor route. There are some very strict guidelines that define whether you have somebody who is an employee versus an independent contractor. The only cases where I see independent contractors truly being used in studios would be someone who supplies their own tools, maybe teaches a class at your studio, and is not being scheduled by you nor being controlled by you.
There’s some control factors that determine that, so be very careful that you do have a true independent contractor situation, but that number should also be included in payroll. I specifically mentioned payroll because most folks working in studios should be classified as employees. Not to say there aren’t exceptions, but I’d be happy to talk with you about any specifics that you may have that you need to verify.
One other thing I’ll mention that often comes up is rent. Rent is a situation where we help for a certain percentage as well. However, you kind of tie it in with rent and rent should be looked at more as a perspective question. When you’re signing a lease, you need to make sure that the rent can be sustained with the revenues that you’re going to be projecting.
Don’t forget, if it’s too high, if you feel like that once you’re in it, there are opportunities to renegotiate even if your lease is not up yet. Make sure that your rent decisions are solid ones and that there aren’t some things you could do to make them be more in line with your revenue if you have that case coming up.
I will be sending out the slides from today’s show to everybody, but you will notice in the slides there are some clickable links that you can follow through to our website as well. Those will go out at the follow-up and the webinar is being recorded so you should be able to see the recording and share that or rewatch it and review it after the webinar is complete.
I have one other question coming in. I think this goes back to the contractor. Veronica says, “I have several people that are interested in creating canvas painting designs but will not be teaching or working in any other part of the studio. Is that considered contracting services if I pay for those designs?”
Yes, that can be contracting as long as they are doing that work on their own terms, using their own supplies, and most likely they’d be contractors. However, I would not include that in the payroll number that I mentioned earlier. I would include that as more of a marketing expense to develop designs that you can sell. Specifically the payroll part that we’re talking about at the 20% is related to working directly inside the studio, okay? Even if you hire somebody who’s doing outside marketing, going out on corporate appointments to book meetings and sessions at your studio for team-building and loyalty programs. Those kinds of things could be considered labor because they directly relate to the revenue coming in the door.
I’ll give it just one last minute if anybody has any other questions and we will probably wrap up a few minutes early. I urge you, if you would like to set up a session, just to chat, just to talk, to see if there’s something we can do to help you, do pop up to our website and send me an email, or you can use the email here on the screen, email@example.com. I’d be happy to set that up for you and show you what we can do.
Also, with tax season upon us now, make sure that your information … It’s a good time of year to review what you’re doing, make sure your information is in good form and available for you and protected so that if you’re audited, you can go back and get that information to prove your case. Okay? I would be happy to help you with those.
It looks like our questions have come to an end. If you think of any other questions that come up throughout the day or any other time, feel free to let me know. I love working with CCSA and I really enjoy working with its members. Also, I look forward to seeing all of you in person again at the convention in August in St. Louis. I’ll be teaching a few more classes there. Get back to your busy day. Go check out your financials and see how your numbers match up and work on those challenges today. Thank you very much. Have a great day.