Message Thread:
Profit Margin Rant
1/29/16
I'm starting to get hooked on a show on Hulu, called "the Profit". It's about a venture capitalist who parades around "saving" mediocre businesses. Often times it's a retail type business such as a restaurant or retail store, other times its a small manufacturer.
What's struck me the most about the show isn't the people drama, but rather the numbers. It seems in retail businesses, the standard profit margin is 50%, they've even coined it with the term "keystone". I'm sure most all of you know, but 50% margin = 100% markup. So, they take something that costs them $100, and sell it for $200.
I'd be very curious to see what a typical manufacturer's margin is in other industries. From what I've seen in the wood industry, 30% gross margin seems to be exceptional. On top of that, most custom cabinetmakers have blurred the line; somewhere between retailer and manufacturer. They have all the expenses of dealing with the customer, yet all the expenses of being a manufacturer. Seems we should be making what the retailer makes, plus what an efficient manufacturer makes....provided we are indeed efficient.
what am i missing?
1/29/16 #2: Profit Margin Rant ...
The fact that you should have become a retailer.
Mostly retailers need the higher margins because they need to keep a full store. If you go into a store and what you want isn't there you might not return.
In our business it's expected that we will have a small wait, because supply stores no longer warehouse. They order minimum amounts and then when you call it's likely they don't have what you need and will order it. So they don't have the overhead that a retail outlet will have. I don't know, but the tax liability of having so much stuff in stock can also come in play. Not sure how it works elsewhere, but they tax excess inventory here. So keeping your inventory low is a tax advantage.
1/29/16 #3: Profit Margin Rant ...
the showroom I once worked in had a markup of 95% on one cabinet line and 85 on the other. Myself, I manage to sell at around 60% without a showroom.
1/30/16 #4: Profit Margin Rant ...
FFT, I watch The Profit regularly and have notice that the keystone margins most often appear in retail products that have small shelf life and lots of waste, cosmetics, clothing, etc. If it doesn't sell in a short time, it is worthless. With cabinet manufacturing we build to order. Yes, there is waste but we can control that to a large degree.
1/30/16 #5: Profit Margin Rant ...
Remember that the markup is NOT all profit. They have to cover their rent, employees, utilities, interest on inventory, shipping costs, etc. from that markup.
Then they have to have the right product at the right time. If not, they reduce the price and sell it at cost of what they paid for it. They don't recover the carrying costs. They also have to compete against the internet and big box stores.
Ever wonder why if the margins are so great that stores go out of business all the time? If the margins are so good, why are they on the show if it was so easy?
The show is correct in that it is ALL about the numbers. Not to take the humanity out of our businesses but if you don't make the numbers, you can't take care of the human side. I have been guilty of not always following the numbers and it has hurt. It pains me to say this but I am taking the advice of a certain person here to have a set of gauges that are reviewed weekly to determine how the shop is doing. Then a larger set to review monthly progress. To force myself to do this, I have posted the charts in the shop so everybody can see them and this is also where we have our daily meetings. We discuss the numbers every Monday and sometimes other days if the conversation flows over.
Yes, it is all about the numbers.
1/31/16 #6: Profit Margin Rant ...
Website: subercustomshutters.com
Has anyone on Woodweb thought what it would be like to have Marcus come to your business? My wife and I enjoy the show, and realize many of the fixes he suggest, are some of the same ones we have implemented over the years. We also take note of the ones we should be working on. I especially hate it when he starts in on a business owner about useless items. Jan rolls her eyes at me and points out some things in our shop that need to go. Usually true too. Maybe he'll visit a cabinet shop in a new episode.
2/1/16 #7: Profit Margin Rant ...
Mitch,
Marcus did become a partner in a furniture company in Miami. That show gave me some ideas. For example, running the ROI numbers on equipment upgrade to save labor time was an eye opener to the company owner. But, remember, he is not a consultant that just gives you ideas and plans. He becomes a partner in your business. He shares in the ownership, the decision making, and the profits for as long as he remains a partner.
Before you make that call, or send that email to the show, think about a few things first. Do you want a partner? Do you want to grow large? Maybe even become part of a national brand? That seems to be part of his motivation. Does that match with your goals in life? Or, would you like to change your goals and embrace new ones? Only you can answer for yourself, of course.
Also, keep in mind that not all of the partnerships work out. Some do quite well. Some do fail.
I watch the show to see what concepts I can apply to my company. Also, it can be helpful to see how other business models operate. Surprisingly, or maybe not surprisingly, businesses in completely different product and/or service lines have many of the same issues that we have in woodworking: personnel, training, space issues, finances, vendor relations, marketing image, etc., etc.
His explanation of the numbers is enlightening. So often, no one wants to share numbers. So, many of us may not be setting good financial goals. Should we be at a 50% Gross Profit Margin? 30%? 75%? Then, what about Net Profit? What should that be? What goes into that calculation? It varies for type of business, but learning how Marcus calculates them is helpful just in itself.
I enjoy the show, but do not always agree with the way things are done. Not that they are necessarily wrong, but they are not what I want for my business. On the other hand, I can often take away a helpful idea or two. I often find myself rooting for the business owners' success. Well, most of them. :-)
I think it is a good show for both entertainment as well as being educational. My hat is off to Marcus for taking the time to participate in a show like this. He doesn't need to do it for the money. I believe his intentions are honorable and his willingness to share is appreciated.
2/1/16 #8: Profit Margin Rant ...
It's not gross profit margin that matters, it's net profit after all expenses are paid that separates the winners from the losers.
Most small shops don't charge enough to stay in business, primarily because they don't know all their costs and don't take the time to figure them out. So either they bump along the bottom until the money runs out or close after a long, painful death.
I've not seen the TV show you mentioned, but I doubt most small shops would be able to produce an accurate P&L or balance sheet on demand. Ignoring the numbers won't make them better or make them go away.
All you need to do is to view the annual pricing survey from Cabinetmaker Magazine (now FDMC) Link is below
FDMC Pricing Survey 2015
2/7/16 #9: Profit Margin Rant ...
I consider the term "gross profit" to be a total misnomer. It has little to do with "profit." When my kid was in school she had an class called business something or other. The teacher told them that businesses were ripping them off because they had a 50% profit. The difference between gross & net was never discussed. My next door neighbor was also a teacher. She also had the same view. I've had employees tell me that I'm getting a tax break because the government allows me to take depreciation off my tax liability. They call it a "write off" as if it is tax cheating. How can you graduate from school with such a lack of basic knowledge? Teacher's knowledge?
2/7/16 #10: Profit Margin Rant ...
Larry, kids today have trouble comprehending and retaining knowledge with all of the distractions. If my teachers in the 60's saw me looking out the window she would ask me a question or throw a pencil at me. But kids only know what they are taught. The biggest problem is lack of help. Be it the parents or the teachers. The teachers are not tested on the knowledge they teach and don't want the students tested either (outside of her class), it might let the cat out of the bag. Then, if that were done, the unions will protect the teachers jobs all the way. Tenure makes for a bad teaching environment. The parochial schools have excellent test scores and not a union in sight. The parents are also heavily involved.
2/7/16 #11: Profit Margin Rant ...
Hi guys. That was not about profit, just my own little rant. I have a strong opinion on this because I was a parent of parochial school kids and taught a CAD class over there. Thanks for listening.
2/8/16 #12: Profit Margin Rant ...
It's not gross profit margin that matters, it's net profit after all expenses are paid that separates the winners from the losers.
Most small shops don't charge enough to stay in business, primarily because they don't know all their costs and don't take the time to figure them out. So either they bump along the bottom until the money runs out or close after a long, painful death.
This is 75% of the cabinetshops in Northern California. Some of them have alternative sources of income (pot), most of them are just stupid, and charge less for their product than home depot and lowes....
2/9/16 #13: Profit Margin Rant ...
Positive cash flow, negative taxable income is the goal (positive EBITDA), the rest is policy.
3/9/16 #14: Profit Margin Rant ...
Website: vermonthardwoods.com
"Seems we should be making what the retailer makes, plus what an efficient manufacturer makes."
As already pointed out, unless you are making to Stock, you are not a Retailer. Do you have a showroom? Warehouse of ready to ship items? Salespeople waiting around for a customer to walk in and take up 3 hours of your time only to say "Well I'll need to have SO come in before we make a final decision"? If so, then yes.
We shoot for a 35% GP margin, and generally do a but better than that. However, realize that GP is a reflection of how efficient your Production (COGS) is, but it's only half the story. The other half is how efficient your Administration is. This is your overhead - property management, sales, front office, etc. It's a pretty simple equation - if COGS plus Overhead is Less than Sales, you make a profit. It it's more, you don't.
Look at both COGS and OH. Likely there is some low hanging fruit unless you've already been picking. Doesn't matter where it comes from - $ = $.
|