The Dealer's Cost of Doing Business

by Paul HOLLENBECK

(The follozaing article is from a speech deliiered. by Mr. Hollenbech to the nr.ost recent conztention of the Oklahom,a Lumbermen's Association, Oklahoma City, last Fall. Becanse of its length and importanc,e to aJI retail building rnaterials dealers, the speech is being printed, over three consecutive issues of Tns CeLrroRNrA LuMssn MencueNt, of u,hich this i,s Part 3. IlIr. Hollenbeck is the head, of the Lumb er S erztic e C ompany, B urbank, C alif ornia. )

(Continued from the May 15 and, Iune 1 Isswes)

This principal, applied to your pricing problems, rvill allow you to do a much better job, but there is still one important factor left out. That is the factor of cost of doing business for various kinds of sales. This need not be taken into consideration unless you are in a highly competitive situation. It is somewhat difficult, but can be done by any manager or owner who wishes to take the time. Your cost of doing business for various categories of sales can be determined by you from your profit and loss statement and by budgeting costs and sales in these various categories. There is a tendency for lumbermen to think that they cannot do this kind of work, that they would have to hire a CPA or an expert accountant. I do not believe that they are qualified to do the job for you because judgment is involved. Only you, as the manager of your business, can accurately estimate the volume of business that you can do during the coming year in a certain category of bnsiness in a certain Drice bracket.

I have had many requests to do this kind of work for dealers for a fee, but in most cases have refused because I believe that this is a managemental function and involves the true answer as to how we can increase our net profits.

After you have prepared a budget of your coming year's sales and cost of doing business, you will have an indication as to whether or not there is a profit in the coming year. If you are honest in your approach, in most cases the profit will be unsatisfactory. This is the point where you consider whether or not it is better to increase your sales and decrease your cost of business, or to decrease sales and increase cost of doing business, or to decrease sales and try to keep cost of doing business where it is.

The manipulation of these figures is extremely revealing and will help you decide how you should run your company on a more realistic basis than any other thing you can do. In attempts to solve this problem, f have not failed to find some kind of an answer, at least on paper, that was satisfactory.

Recently I had an occasion to assist a friend of mine who owns and operates a yard that is doing around $100,000 per month volume. He hasn't made any money for three years. His prices are already quite low and he felt that what he needed in order to make money was a greater volume, but that he could not afford to decrease his price any further than he already had. We spent approximately one day going over his figures and budgeting his operation for the coming year.

We broke it into three types of operations : tract sales, individual contractor sales, and do-it-yourself business. We ended up u'ith a budget that, in theory, could make

PAUI HOLIENBECK AT SAN DIEGO, Colifornia, lcst month conducled o lwo-doy mondgement clinic for the Son Diego Lumbermen's Associqtion. Mr. Hollenbeck, on thc righr ct the righr wirh John Sullivon of Weslern Lumber Compony, president of the SD[A, held his clinic ot the House of Hospitqliry, Eolboo Pork, ond sll who ottended felt the conference exlremely beneficiol, Hollenbeck, the presi&nt of Lumber Service Compony, Burbonk, Colif., is :hown stcnding in left photo, below, with o number of the Son Diego lumbermen who were in rhe lVloy ll ond f2 closses. Those ottanding rhe clinic included Robcrt Suiton ond Dcle fifieringlon, Airline lumber Co.; O. J. Evenron ond Clif E. Robeils, Americon Products, Inc,; illeorl Bqker ond Wolt Johnson, Boker Hordwood Lumber Co.; Gordon Frost, Frosl Hordwood lumber Co.; Robert Mqxwell qnd John Collins, Notionol Lumber Co.; H. G. lorrick, Jr. qnd Al Childs, Solonq lumber & Builders Supply Co.; Jcmes Sullivqn ond Robert Sullivon, Sullivqn Hqrdwood Lumber Co., ond John Sullivan, Howqrd Wellmon, M. E. Edmiston ond Perry Acuft, Weslern lumber Go. Some of the problems Mr. Hollenbeck discu:sed were "Whot is the reol cost of doing business?" "How lo control cosls," "Whqi is the best pricing iyrtem for rhe individuql compony?" "Should the mcrk-up vary?" ond "Whqt is the best wcy lo price do-it-yourself stock?"

N/o on the total investment. We had increased sales considerably in the form of large tract sales.

The difficulty with the whole program when we got through was that he didn't have enough money to operate the business. Any time that you increase your sales, it wil take more money to operate. No budgetory statement is complete until you analyze the amount of money it takes to run that business. The easiest way to go broke in the retail lurnber busin€ss is to take on sales that you ic,an,t afford to handle.

T,he logical way to separate your business into categories is as follows: first take the category that represents the larger portion of your volume; design and prepare a profit and loss statement for that portion of your business, applying to it the fixed assets necessary to run that kind of a business. Don't be confused by the assets that you have, apply only those assets that apply to that portion of your business. Apply the overhead that applies to that portion of the business. Find out how much inventory you will need to run it, what your accounts receivable will be, and add up your total assets.

If you want to make 20o/o of those assets, that figure is your net profit figure for a year. Divide your total sales into that total net profit figure and you will then know your average necessary gross profit in order to make the 20o/o.

Do the same things to each of your other types of operations and then add the whole thing together into one statement. This will then tell you how much money it will take to run your business, what the average gross profit in each category should be, what kind of inventory should be carried for each of the categories, and how much personnel you ought to have.

When you get all through rvith these figures, if they don't add up from the standpoint of giving you prices that you think will be competitive, then start all over. Keep working with them until you get an answer that makes sense. A complete answer.

If you can't get an answer on paper using this method, then the chances are you can't operate your business and make a profit.

Now, I made the statement that no analysis or budgetory effort would be worthwhile unless you ended up with prices. If it is true that the cost can run all the way from 8 to 35% for various kinds of business, then it must also be true that our selling prices are going to vary tremendously for those different kinds of businesses.

Our difficulty lies in the fact that we do not know enough about our operations to have confidence in a price that we have guessed at. ff u'e can arrive at a price that we are sure is correct, that affords us a fair return to our investment, then we are in the position of putting a price on a job and meaning it.

When we can learn how to price merchandise on a basis that affords a reasonable profit for a specific type of sale, then we can have confidence in that figure and we will not be willing to cut it because someone said. that someo,ne else is selling for less money.

(Continued on Page 47)