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Interesting conversation with employee3/8
I am entering my 5th year of operating my business after 25 yrs. managing big woodwork companies. I would characterize my business as struggling. I own the building and most of the equipment and lease a second building. We do both commercial and residential arch. woodwork, cabinets and furniture. Last 2 years we did just north of $500,000 in revenue with avg. 5 employees in shop and me in office. First year was a disaster that really crippled my capital base. (Too anxious to get work for new company. Took work at market in depressed market. Way too cheap!) We have been in recovery mode ever since with revenue rising each year and improving results. Last 2 years have shown (very) modest net profit - but - I have been drawing only modest compensation. Lowest paid man in shop makes more than me. Gross margins on projects before S,G & A are consistently hitting 35-40% and more, which seems on target. Particularly since I am always told that my prices are among the highest in the area. The downfall is that every year we hit a period where sales fall off the cliff. Last year we had 2 large projects cancelled after award and 2 delayed 6 months. Killed a very good year. Seems like that added 20-30% in revenue would translate into my missing paychecks.
Employee retention is a major issue for any company that does not have its head in the sand. It costs money to locate and train an employee. The old saying "it's hard to find good help" is true but it is even harder to keep them. $10 to start is to low in my area as that is just barely above fast food and less that warehouse entry that has more future. Not many of the younger set look to get into woodworking due to the lower wages, to tell the truth I wish I had known what I know now as I would have made a different choice. You pose a damn tough question.
Working backwards, a productive custom architectural shop with 5 people in the shop should be doing about 140,000 per man per year in sales, or more.
Figger 1500 billable hours a year, at $70.00 per hour x 5 = $525,000. Add in the materials at their selling price, about 1/4 of the total - $175,000/yr, and you have the capacity for $700,000 per year, easily.
If you are only selling $500,000 per year, you have too much labor, no matter what you pay them. It appears that they are not as productive as need be, or you are way underbidding, or both.
Yes, our capacity is underutilized. Hence the holes in the schedule. A failure in sales and sometimes bad fortune as last year. No doubt on me. And rather than lay off, I keep my employees which does indeed result in a too high percentage of labor cost. This is why I am moderately hopeful this can be turned around to a good living. But really, that isn't the question is it?
So if I were in your shoes, I would pick a niche of work to focus in, then work hard at marketing and selling it. Success will follow, and the employee situation will work itself out.
The classic problem. I remember one owner told me that he didn't schedule enough work in the last month of the year which cost him all of the profit for the year. His profit was more than your gross.
If you have a break even month your profit is 1/12 less for the year than it would have been otherwise. If you loose money in a month that money comes right off of your bottom line for the year.
The key to profitability is control the key to control is prediction. The key is to get good at prediction. This means scheduling is important, prediction of hours is important, marketing is important.
In other words sales is the most important job you have. If you are trying to do both that and pushing work out the door that may be your problem?
If the question is "are you paying your employees too much?" then the simple answer is yes.
Or more accurately, you are paying people to be unproductive. Or, you need to lay off to suit the exact current work flow. If this is true, then I guarantee that when there is work, they drag feet and make it last to alleviate any layoffs. Human nature.
Yes, one answer is more sales to fill the schedule and keep all hands busy, but if there is no work, you certainly cannot afford to keep them on.
This is a good post. I will ask you this question. 'If the schedule was full would you show good profit?' If yes, then a good full schedule is the solution to your problem. If no, then you are not making your hourly shop rate. If your answer is 'no' then you have a compounded problem of not enough work on the shop floor, and on top of that you are not making your shop rate on the work you do have. A good full schedule with big jobs in the pipeline, and small jobs to fill the gaps, I think, is what I would try to achieve first, then go after your shop rate by pushing the guys to stay on schedule. $100k per man is not enough gross sales.
RE - full schedule
In the construction business (my type of business), the rule of thumb is to allow for one day of rain a week. When I make my schedules, I base them on 4 day weeks, leaving Friday open. You'd be surprised how well that plays out in the long run.
Granted, cabinet business is different, but the point I'm trying to make is that IMO, it's foolish to think that you can have a full schedule work out in reality ... s**t happens. Way better to leave a cushion.
In this poster's case, a month "hole" in the schedule ..... profit should meet minimum standards if you only work 11 months. That leaves a cushion for the s**t that happens. Note I wrote "minimum" ..... you shouldn't be able to be able to buy that boat if you miss a month's work, but that shouldn't put you under either.
You may have too many things you are responsible for and not devoting enough time to sales. I would lay off one person in the shop and hire a sales person. When sales pick up bring back the laid off employee or hire a new one.
It might sound like a flippant response but if my production was pretty full I would raise prices.
As for paying too much for labor, are those finishers top notch and do their results make the job, like most good finishers should?
BTW, do you have a good handle on your job costs and how do you arrive at pricing?
I would be keeping my eye on the inflation rate on supplies, services, etc, whereas our prices tend to be fixed.