Thursday, August 20, 2015

Julies Yoga Studio

In our previous post “The always Small Business” we highlighted an example of two separate business owners Chris & Julie. Chris and Julie we’re both following their passions, but they had some differences personally. Today we will talk more about the business challenges Julie faces with the expansion of “Julie’s Yoga Studio”.   

Julie started her own yoga studio, and was starting to do well enough to consider opening up a second location.  She knew her basic costs for equipment, and operating a new location based off her experience opening the first location.  She also knew there would be a need to hire a manager to help run both locations as she split time between each one. Last year Julie had revenues of $375,000, and net income of $56,250.  That’s a pretty good return for the year as the yoga studio had an overall profit margin of 15%. There are plenty of Fortune 500 companies out there striving for a percentage like that. Also the $56k is what Julie takes as her salary for the whole year to live on.

Lets see how Julie is going to handle the costs and revenue projections for the new location.  Julie did research online and found that it appears a good manager will cost her $40,000/yr to help run both locations.  With the new location she chose there will also be a yearly rent of $19,200.  She received estimates for renovations and painting costing $15,000.  Also new equipment and furniture will be purchased for a total of $9,000. Julie's Yoga Studio charges members for class packages and unlimited memberships.  Her current average monthly revenue per customer is $175. She also think the studio should do about $200,000 in revenue the first year. We now have some of the important basic monthly items we’ll need for our estimates below.

Estimated Costs 2nd location - Julie’s Yoga Studio
Manager - $40,000
Rent - $19,200
Renovation -   $15,000
Equipment - $9,000

Total - $83,200

Of this amount some will need to be paid upfront, and the rest throughout the year. How many customers will Julie’s Yoga Studio need to cover this amount? If you guessed 475 you’d be correct(83,200/175=475). However the studio might need a different number than 475 to actually make money. Julie’s Yoga Studio needs to calculate her break-even from fixed and variable costs in order to calculate things properly. Let’s take a look at her current studio

Julie’s Yoga Studio Current Year Results

Sales - $375,000
Fixed Costs - $105,0000 = 28%Sales
Variable - $213,750 = 57%Sales
Profit = $56,250 =15%Sales

We can see that Julie’s Yoga Studio has fixed costs of 28%. If Julie expects the new location to have $200,000 in sales for the first year we can estimate that she’ll have $56k(includes rent) in fixed costs. But she now has a manager being paid salary which she did not have before so we must include this in her numbers with a new fixed cost total of $96,000.  Let’s also assume the new studio has the same variable cost percentage of 57% of sales for $114,000/yr. Under this scenario Julie's Yoga Studio will break even after $223,255(96k/(86k/200k)) in sales. How many customers will Julie need now? The second studio will need 1,275 customers at an average of $175/mth to break even.  Sounds intimidating, but the current studio has approximately 2,142 monthly paying customers.

Now all of this talk about variable, fixed costs, projections, percentages, and profit margins can sound daunting to many. Hey we all can’t be in love with accounting and finance. Otherwise we wouldn’t have awesome yoga studios to stretch and relax in.  Not everyone is trained in this type of analysis, and certainly not Julie. Her hard work paid off and she became successful. She knows in order to bring her business to the next level she’ll need more than just hard work.   The numbers above are just examples, and of course there could be plenty of other variables affecting profitability. Maybe the second location will have a higher realized average revenue per customer, or maybe costs will come out lower.  Knowing different scenarios in advance can help you make better decisions later.

We still have a few other items to figure out. How will Julie handle paying for the new studio, and what effect this will have on her personal finances?  We’ll see in later blog posts how Julie can make it from “Downward Dog” to “Warrior”.

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