When it pays for itself

Two distinct calculations, and the second is the one that catches soap makers out.

Two different break-evens

How many bars until the equipment and setup are paid off.

And how much cash is permanently tied up in stock once you are running, which never comes back while you keep trading.

The first is an amount you recover. The second is an amount you fund.

Break-even on the setup

Fixed setup cost divided by the contribution per bar, where contribution is price less materials, packaging and any per-bar cost.

Worked: $900 of scale, blender, molds, cutter, goggles and shelving, against a $7.00 bar costing $1.55 in materials and packaging, is a contribution of $5.45, so 166 bars.

Note what is excluded: labor. Include labor as a cost and the answer is a real profit break-even, which is a larger and more honest number.

Add insurance, label setup and market fees to the fixed side if they were one-off or annual.

The working capital number

Weekly sellable bars times six, times cost per bar, is the cash standing on your cure racks at any moment.

Worked: 24 bars a week at $1.55 is $223 permanently in stock at steady state, and that is only the materials.

Count the labor in it and the same rack holds far more: 24 bars a week at a $5 labor cost is another $720 of your own time sitting unsold.

Every increase in output raises this figure first and the revenue six weeks later, which is the specific way soap businesses run out of cash while growing.

What moves it

Batch size, which is the largest lever because it divides the same labor across more bars.

Packaging cost, which is a per-bar cost and therefore compounds.

Price, which makers often set too low because they omitted labor.

And the cure, which cannot be moved at all, and is why the working capital line is structural rather than a phase.

References