In July of 2006, my brother bought an ice cream shop in Martinsville, Indiana. Not just any ice cream shop... it is The Inside Scoop in Martinsville! The last five years provided John, his wife Stacey, and me with a lot of learning experiences. And now, as we look toward the next five years, the risk of owning a small business is ready to pay dividends.
The year 2006 was the last of a ten year steady minimum wage of $5.15/hour. In 2007, the rate would begin a three year incline to its current level of $7.25/hour. Most of The Scoop's workers are students earning minimum wage. Because of these minimum wage increases, the first three years of ownership saw an 11% to 14% increase in most of their employees' paychecks. Personnel costs as a percentage of income went from 30% to 35%. During the second and third years, scheduling cut-backs were made to attempt to keep personnel costs at 30%. The wage issue had a tag team partner. In 2007, the price of milk took a steep step up. Turns out ice cream shops use a lot of milk. This caused cost of goods as a percentage of income to go from 35% to 45% in the first year. The reaction to this for The Scoop was to lower inventory and to shop around for lower cost suppliers. These two issues were combined with normal maintenance and business development costs. A few pieces of equipment were replaced, a few new machines were brought in to offer new menu items, a water line broke, the store was painted, the parking lot was paved, etc.
In looking back over the first five years, the most impressive thing to me that John did was get the facilities up to a high standard, and then keep them there despite the cash flow issues. It is easy to let things go. Everyone knows a leaky pipe doesn't get better with time, it just keeps getting worse. Despite that knowledge, most of us tend to let the leak go until we have to do something. Since the beginning, The Scoop has fixed all actual and figurative leaks when they start. The facilities are in their best shape in years. The machines are newer, and extremely well maintained. And the parking lot is the smoothest and cleanest in town. This has been the reason a few attempted competitors did not succeed, and over the past three years, The Scoop has broken even financially. This is not a small feat in this economy.
The Scoop has its normal decision to make at this time of year - when to close down for the season. Most years, this has been a fight between John, Stacey and me. But this year is different. No major repairs were needed this year, and personnel costs and costs of goods sold as a percentage of income were close to the budgeted 65%. That makes staying open throughout October a viable option. The decision to stay open hinges on one thing, the ability to cover your variable costs. Fixed costs are going to be paid no matter what, so they should not factor into the decision. With 35 cents of every dollar of income going to costs of goods sold, The Scoop has 65 cents of every dollar to pay for labor, utilities and other miscellaneous costs. Based on the past five years, these costs should be approximately $4,300. A quick break-even calculation shows that The Scoop needs to have $6,500 in sales to cover expenses. They have met this number every year so far. So, this year, the decision is easy. If you are in Martinsville in October, be sure to stop by and get your pumpkin flavored ice cream.
So why is the future so bright? I mentioned the facilities before. They really are in great shape, which is a huge advantage over The Scoop pre-John and Stacey. A system for managing labor and inventory is also in place. It will always need tweaking, but the first thing for any small business to do is get systems in place. And the most important reason...we, as a society, are finally beginning to react appropriately to our economy. I won't say the economy is on its way up, only time will tell. But we are all beginning to realize that we drive the economy, and until we start moving forward, the economy won't. This is allowing us to begin budgeting again, so we are able to pay down debt while taking time to enjoy ourselves. 2011 saw a bit of this, and it should only increase in 2012. For The Scoop, pitfalls still exist. Good employees will come and go. Vendor price wars will always occur. These things will always have a major impact on the bottom line. However, as long as John and Stacey keep the facilities up to a high standard, and consistently pay down debt, the future will remain bright.
My goal for this month is to get all the accounting records updated. This includes reconciling the bank accounts, filing all the payroll tax forms, revisiting the income tax estimate, and updating the budget vs. actual worksheet. This will put us in a great position to start planning for next year and beyond.
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