Charging Enough to Stay in Business
From contributor S:
If you are allowing your materials to equal 50% of the total job, you are working way too cheap! Assuming you work alone as I do, your materials and overhead (rent, insurance etc) should not exceed 25-30%. Remember you need to make wages and a profit; otherwise go to work for someone else and let them pay your health insurance!
From contributor C:
You need to raise your prices. Stop letting fear of rejection ruin you financially. What do you do when you want something that is more than what you want to pay or expect to pay? You either walk or cough up the money. You are going to make mistakes, we all do. If you don't learn from them that is an even bigger mistake.
My rule of thumb is always 20-30% material and the balance labor/profit. Before I learned that I would look at magazine ads and really wonder why I could not afford the slider in the adds.
Sometimes this work can really seem overwhelming, and in the thick of working like crazy we may have these huge plans or lapses in judgment, but in reality this is a very easy business and I always have to remind myself of that. We have the knowledge to build what the client wants, know how long it is going to take, and its cost (materials, labor, rent, ins, etc.) all wrapped into a bid.
From contributor P:
When you work for too little, word gets around and every other cheap job finds its way to your shop - both by word of mouth and the fact that your competitors are higher and drive the cheap jobs to you. Pretty soon, you look up and all the world has is jobs that are way too cheap.
Just because they want your work doesn't mean you have to do it. Find your real costs, and learn your craft so you can make real money. There is no shame in charging a fair price and making a living wage. If you can't do that, for whatever reason, then go to work for someone else to learn the craft.
If you stand pat, do consider your website. A flood of pictures of stuff in the works does not attract customers. If you want to illustrate a woodworking blog, that is fine. But don't expect it to sell your work. For that you need professional, well lit, completed installs.
From contributor B:
You said "I guess that what bothers me is working for 2-3 weeks for free and being late on rent is killing me. It seems too happen all the time and it is not good." Your statement is a symptom of a much bigger problem. Whatever you are charging for your time and materials isn't enough to sustain a business. You are not thinking as a business person, and, unless you change how you charge for your time and expertise, you'll be out of business before long. It might happen with your next big job, or it might happen drip by drip over the next few jobs, but whether your closing is fast or agonizingly slow, it will happen. You have before you a choice to continue what you are doing as a hobbyist or to change how you do what you do for cold, hard business reasons. Either way, the choice is your’s alone to make.
If you want to operate a business, you need to invest in yourself and learn how to price your work. There are lots of resources for you to do exactly that, including classes at your local school district and/or community college, SCORE consulting and seminars at trade shows to name a few. Every business, in order to maintain and grow, must meet its costs of operation and strive to earn a profit. Your earnings are not the same thing as profit. Profit is over and above your operational costs plus your salary/wages. Without profit, where do the costs of mistakes come from? Where does the money for new tools and equipment and vehicles and all the other things come from?
The odds are, not only are you not charging enough for you to make a decent living, but you are probably not billing a client for every single hour you are spending in design and engineering, trips to suppliers to select and haul materials back to the job or shop, time spend revising you plans with either your clients or building department officials and a host of other time eaters. In other words, you probably don't have a handle on how long a job really takes from the first step through getting paid.
In addition, I'd be willing to bet you probably don't have a handle on exactly how much it costs you to open your doors for business. You might know rent, utilities, insurance, vehicle expenses and maybe a few other things, but you probably have not taken the time to add everything together to determine how much it averages per month. Those items that continue whether or not you have a job are your overhead, and you can calculate how much it costs you per hour just to be open for business. In very basic terms, your overhead plus your salary is the start of what you should be your shop rate. You need to apply the shop rate to every single billable hour you spend in business. If you don't, you are taking money out of your pocket for the privilege of being in business. By the way, profit is over and above shop rate.
If you are sincere about building and running a business, I'd encourage you to get yourself to Las Vegas for AWFS, not so much to see the exhibits, but to sit in on as many of the seminars as you possibly can. You'll learn more there from others in the business in a few days than you'd be likely to learn anywhere else in months or years. Secondly, I'd encourage you to join the Cabinetmakers Association just for the access to another group of experts that are willing to share how to better run your business.
From contributor K:
As others have said, you are robbing Peter to pay Paul. The simple fact is that you will continue this cycle and to feel this frustration and operate under stress, until you change. You need to understand what a customer is and that they are an individual or company that needs your product/service at the price you need them to pay.
If they cannot afford what you need them to pay, they are not part of your customer base and although you may take on a customer who is only focused on price every once in a while, it must be the exception to the rule, and when you do take on one these customers, you will have to sacrifice somewhere to make it work (work more hours in a shorter period, etc.). Hopefully you will begin to see that the only one that benefits from you continually taking this type of work benefits everyone else, and not you, the owner. Understanding this at the core level will make the difference between you making decisions to be in control or being in debt and constantly under financial stress, leading to poorer decisions.
Remember, there will always be someone out there cheaper than you, but the converse of this is that there will also always be someone more expensive. Everyone here has been where you are now at one point or another (more are there more often than they like to admit).
You have to decide if you actually truly want to be in business for yourself. I am not talking about just the romantic side we all want, but the nuts and bolts side of things to make the romantic side happen. Once you have made this decision (and it is not as simple as reading this post and saying "yeah, I want to be in business for myself", but requires really taking inventory of who you are as a person and what your goals and needs are).
There is nothing wrong with making $25-$40K/year as an employee vs. being able to say you are a "business owner", and in actual fact making very little, which is what I suspect you are doing if you can't pay the rent.
First, you need to have a sit-down with your landlord now, not when the rent is actually due. Your landlord relies on your income to run his business just like you rely on income for yours, and they usually get anxious when the rent is due (especially during tough times), so approaching him/her prior to this will yield a more open mind and allow him/her to plan themselves. Give him/her the courtesy of letting them know that you will be having trouble making the rent on time in the short-term, but that you expect that it will indeed be short-term. You understand that there will be late fees involved, and that you will honor them, but you wanted to give them the courtesy of not being surprised come the first of the month. If you've been at the landlord’s location for any length of time, he/she will most likely continue to work with you. Maybe even offer to give him a partial payment with the late fees if you can afford it.
One thing I would caution you on is trying to ride this problem out on the back of your tradelines. It is the same as transferring one credit card balance to another. It only prolongs the problem, and whether or not you stay at your current location, if the landlord doesn't work with you, you need your tradelines intact. By pushing things out 30-60 days, you are in fact only prolonging and making worse the original problem.
One of the biggest problems you have when robbing Peter to pay Paul cycle is how to get out of it, as it usually stops or delays a project from getting finished by not having the materials to do it. This usually leads to an upset customer, who is now looking for a "discount", which makes an already underfunded project worse.
You must increase your prices! Now I know this sounds contrary, especially during tough financial times when you are looking for any money possible. Remember what I said about there is always someone cheaper and always someone more expensive than you? That means that there are people willing to pay more than the cheapest, and more than you are currently charging. That means that there is money being left on the table across the pricing spectrum.
You must increase your prices! Start this on the very next bid. One of the things that will help this is having a pricing sheet that you use in front of your customer when pricing a job. This demonstrates you know your costs and what a project entails, and the way you sell against cheaper prices is by telling the customer the reality. There is a pitfall to cheaper prices. Tell then straight-up there will always be someone cheaper than you and more expensive than you. You find yourself in the middle of this pricing spectrum because you charge what is fair for both of us. You get an excellent product and I get to feed my family and grow my business and then ask them "does that sound fair?" (How can you actually argue with that).
Here is the secret people 80% of the time buy the middle price so if you position yourself in the middle instead of the lowest price, you increase your chances of closing the sale. Try this, and track it, and you will find your closing ratio actually going up!
Profit is a good thing! I know that in today's political climate, "profit" is a dirty word. Do not buy into this line of thinking! You are in business not only to make a living, but a great living.You are a professional, be compensated as such! It sounds like at this point, you are not even making a living. You should have money left over after paying all your expenses, which includes your salary.
To break the Peter/Paul cycle, from this point on, when you sign a contract, you must purchase 100% of the materials as your first order of business. Anything left over will be operating capital. To do this, you must know your costs for a project exactly. By purchasing the materials upfront, you eliminate one of the biggest problems to getting a project done when in the Peter/Paul cycle, having the money to finish the project.
You will have peace of mind knowing that you do not have to worry about finding the money to finish the project. Just actually working to get the project done which is in your total control is nice. You can work as much extra time as you want. Instead of working 12 hour days though, which makes you less productive you are better off working M-F, 7 A.M. – 5 P.M. This will allow you some time to unwind, and still spend time with your family until you crash so they don't feel neglected, and Saturday from 7 A.M – 3 P.M. and then go spend some time with your family and re-charge your battery. Try to get in bed no later than 10 P.M. as an adult body needs 7 1/2 hours of sleep to be effective.
Once you have purchased all the materials, any money left over is your operating capital. Now, get to work! Focus on getting that project done! Once you have completed the project and collected your money - immediately open a separate account (with no online access so it is not easily pilfered, preferably at another bank in the same town), which will now become your emergency account. In this account, consistently deposit a minimum of $200 or 5% of the net profit, whichever is greater into this account, and do not touch it. Ideally, you will want to increase this to 10% of the net profit as a consistent deposit item. In one year’s time, assuming one project a month, you will have an account with a minimum of $2400 in it as emergency funds. Obviously, the more put in the greater the reward. Once this is done, and you have paid yourself, and your employees, it is now time to take care of the electric, phone, etc.
You must understand and your costs! You need to make your monthly bills consistent across the board. Your electric company, phone company, insurance company (i.e.- any bill you receive monthly), etc. you need to contact them and get them to give you a budget plan. The goal here is to get your costs to a manageable level and at the same time decrease them as much as possible. It is much easier to manage an expected cost vs. an inconsistent cost.
So, for example, if your cell bill fluctuates all over the place, and is over $100/month, you need to do one of two things, get a plan that allows you unlimited calling or get rid of the cell phone, and get a land line which is less expensive, and can also be used for faxes. Businesses existed before cell phones and you can check your voice mail from anywhere. If you decide to keep your cell phone, you do not need to have a business line. You can use a personal cell number, which usually costs less. The goal here is to get your monthly expenses to be the same each month. Every company you can get the same payment with each month, the better.
So, if your bills shake out like this (of course your numbers will be different).
Employee #1 ($12/hour with 10 hours overtime, no health benefits) - $2838. Your salary - plug in what you want to get paid, let's just use $3500
So with one employee after your material costs, you will need to cover between $8-$9K per month to keep the doors open. This does not include your company making a profit. This just covers your basic costs, so you need to do a complete accounting of your expenses. Are you starting to get the feel of why you need to charge more and why you need to know your costs? Once you have an annual/monthly amount of your expenses, you can now develop your shop rate. So, in the above example you would take: $8138 x 12 months divided by 2080 hours (40 hours week) which equals $46.75 hour.
This is the minimum per hour charge you will need to cover a project after materials are covered 100% and does not include a profit for your company. This is an example to get you thinking more detailed on how to begin to understand how to manage your expenses and put the control into your hands. Of course these numbers will change based on your actual expenses. A spreadsheet will help to make this clear.
It will become clear how many sales per month you need to make (your sales quota), and whether or not you can make this goal. If you cannot see yourself being able to do this, you really need to take a gut check on whether or not you are ready to be in business for yourself, and whether or not you would serve yourself and your family better by working for someone else until you are ready. It does not serve you or your family well by being the nicest, cheapest, most-stressed out underpaid cabinetmaker.
As a good rule of thumb, whatever your shop rate turns out to be, you should multiply it by 1.25 to get a shop rate which allows some flexibility. On the financial side of things, your goal for you and your family is to extract as much money from your business as possible, but, you absolutely must include your minimum salary in your expenses. You can always pay yourself a monthly bonus at the end of the month, quarter or year. If you are meeting your targets, you deserve the bonus. By getting control over the financial aspect of your business (you don't mention the artistic side of your business being a problem), you will serve everyone better. You, your family, your employees, your customers, your suppliers, your landlord, etc. can see why this is so crucial to your success.
Once you've made the decision to remain a business owner then you can ask more questions about the details. Best of luck.
From contributor G:
To contributor K: I don't disagree with anything you say, but if a person is unable to get his selling price up, has reduced his price to the point that the material costs alone are 50%, and he cannot meet the rent perhaps we should consider the possibility that the business is already effectively bankrupt and what is needed is an exit plan for closing up shop. As contributor B put it "whatever you are charging for your time and materials isn't enough to sustain a business."
From contributor K:
To contributor G: agreed - that is why I am saying, that you are indeed leaving money on the table. You need to figure how to get that money, but if you have no idea what you actually need, you are not going to have a comfort level in asking, and you will continue to "give it away". Once his decision is made that he wants to be in business, the great thing about our business is you can be one job from going under or you can be one job from starting up. From this point forward changes need to be made. The balls is in his court as to how he wants to proceed
From the original questioner:
I wish I could type faster but oh well. I thank everybody for all the help. Good thing my landlord likes me and is patient. My problem is that I go so long without doing a kitchen and the $250 or $1000 thing here and there just doesn’t cut the mustard so I need about 1.25 - 1.5 kitchens a month.
My bills are $2000 a month for rent and utilities. My dad and I are the only workers. We get sporadic kitchens and we don’t make money which hurts. Two things kill us - lack of equipment and consecutive kitchens.
If we had the kitchens we would have the equipment. When we have kitchens we get something new to speed us up but sacrifice money for ourselves because we have to catch up on rent too.
Ii always get enough money down to get materials and have some left for mstakes but the reason I asked the subject question was the customer told me what he had to spend and then gave me a picture. The picture was of course way more money than he had but the kitchen would only take two weeks to build doing long hours and I would have profited $5000. That would be ok I guess. What I did was gave him a price for what it would be to duplicate his picture and then we worked on materials. We went from cherry to maple and from shaker style drawer fronts to flat fronts and from maple panels to maple MDF bead. Profit from this will be $7500 but will take three weeks because it’s painted and also enough in the down payment to pay rent.
On the issue of knowing what my shop rate is I don’t think it is doable because of the lack of equipment and I know how much more production per hour we could accomplish.
From contributor L:
I totally agree with contributor K. After looking over your website it gives the wrong impression to potential customers. It screams lack of experience. The part about we "will" be entering the commercial "millwork(s)" market doesn't help. The lack of finished project photos is a problem as is the lack of any idea of your manufacturing capabilities. Between your website and your post you come off sounding like an undercapitalized, likely to go broke before the end of "my" project startup.
Did you write a business plan with cash flow analysis before you jumped in? If not, best do it right away! I don't know how your local economy is doing but it is a tough time to start a business in most locations. That being the case, you need to have a very good handle on your costs. Also remember to never "buy work" as that is a sure way to go broke. If you are trying to price below the local area competition it won't work. They most likely have better systems in place and have worked through all the startup costs, have their equipment paid for and some money in reserve. You probably don't have that. That means to survive you have to sell on something other than price.
Point is you have to find a compelling reason for her to purchase from you. There are lots of shops that sell through designers. They add on a significant markup and people pay their price. Point is price is not the only or best driver of sales. Confident presentation, reading the customer (what is it that turns their crank?) giving them options that allows them to drive the price up and therefore not blame you. Just don't give them too many options, confusion can kill the sale. Make sure they understand the options they show an interest in, which will make it more likely that you will manage to up-sell them. You should probably stay clear of commercial work of any scale, that's another game and not one you should get into without reserve cash. You won't get up-front money, payment will be slow, at least 60 days out, and retainage will take eons. Not to mention how GS's love to take advantage of the inexperienced subs.
From contributor K:
What it comes down to is if you are not willing to understand your costs, you will simply continue along the frustrating path you are on now of robbing Peter to pay Paul. If you don't correct it, it just will not happen. I took the time to type the response I did because we've been there and done that. If it is just you and your father, all the more reason for you to get a handle on this now before taking on any employees who are not family. I took a look at your website, and it looks like you are a new start-up. You will either learn this crucial lesson early now or you will go on frustrating yourself, eventually closing shop. You still need to know what you need to bring in. This starts with setting what you and your father individually want to make. The quickest way to burn-out and de-motivate yourself is to deal with all the headaches that come with owning a business while struggling to pay yourself because you are "hoping" for business.
About your website - you have a lot of in-process cabinet pictures, but it is just more effective to have "before" and "after" pictures. If you want to show "process" pictures, do so in a separate area entitled "what makes us different" or "details on the construction of your project". Right now, you have repetitive pictures. A couple of other suggestions - instead of “Father and Son”, which gives a limiting impression, try "Family Owned Business". Your website misses the main point of a website - why should I buy from you? You need to develop a top ten section, containing the top ten reasons why someone would buy from you as opposed to the competition. If you can't come up with ten reasons, or a top five, you really need to have a gut check. Your main page talks about "will do this or will do that". You need to personalize it to the customer.
The last sentence on the main page is confusing - "We look forward to making a set of plans or drawings come to life for you and your customer." Who are you marketing to - middleman or end-user? This is a muddled message. If you are serving both the residential and commercial market, ideally you should have a separate website for both, but alternately different sections of the website for both. Start off on your main page and just add two lines - "For Residential Projects, Click here" and for "Commercial Project, Click here". Have it take them to the appropriate part of the website with marketing geared for both. Who is doing your website?
Go back and re-read what I posted for you. If you follow-through, you will be in control being pro-active instead of re-active, which from what I've read is where you are now. You can do this and you can be successful, but only if you take the time to understand and plan for your expenses that are on top of your material costs. If all you are doing is making the cabinets and not installing them, you should be getting at least 75% upfront. FYI, the home centers get 100% upfront, and they are not even the manufacturer - something to think about. If you are fabricating and installing, you should have a separate agreement or installation, and your fabricating agreement should be paid in full prior to installation.
From the original questioner:
I have to take the commercial thing off my website and I will do that very soon.
From contributor L:
Lesson learned on color match. Always make a color sample board, have the customer sign it as approved and cut it in ½ - your part and his. If you are doing stained or clear finishes be sure to include the fact that no two boards finish exactly alike. Make a stepped sample for your own use, masking off part of the board for each successive step so you can see where you need to be at all times when doing the actual finish work. We keep finish samples in a dark cabinet and only bring them out when we are finishing so we can maintain color control. Finishing new work to match old is always chancy because color changes over time. Be sure the customer understands and have it in writing. As for getting paid and delivery setbacks by the customer, have that covered in your contract.
Payment is due at the contracted install date whether or not the customer is ready to take delivery. There is also a storage fee for every day he delays. These should be included in the "fine print" of every contract. It is normal practice in the case of commercial work to have these stipulated. Larger commercial jobs can drag out over many months so progress payments are billed including warehoused materials and finished goods awaiting delivery. PS - it doesn't mean you will get paid for the progress in a timely manner especially on government jobs.
From the original questioner:
Ii was told the other day by a business man that I should hire a male and a female sales person on commission/draw plan. Is this a good idea to keep the kitchens coming steady?
From contributor K:
You have to have a strong understanding and implementation of your business model before you try and get someone else to sell it for you. As of right now, it looks like you are targeting 1-2 kitchens a month, with getting 50% down for materials. There are two considerations you must take into account for.
1. Even if you were able to find someone willing to work for full commission, anyone worth their salt will not wait 3-6 weeks to get paid. Where is their commission (which would be anywhere from 8-13% of the gross) going to come from? To put this into perspective, if you have a $15,000 kitchen, the commission would be $1200-$1950. A full commission salesperson would have to sell 3-4 per month to make it worth their while (after all, you are not paying them any type of salary), and you are not ready to support that type of production.
2. If you are only getting 50% down, at the cheaper prices, how do you expect to be able to pay a full commission salesperson? You are not making money on what you are charging now, how do you expect to add a third mouth to the pie, when the pie doesn't support the basic needs of the two you currently have? You are also forgetting the added burden of employee management, miscommunication of capabilities, moral while waiting to get paid, etc.
Your first focus is to get a strong understanding of your expenses after materials. When you have been able to do this and consistently deliver projects within the timeframe you commit to, have a strong and clear presentation of your product/service developed, and are making money, it is then and only then should you even consider bringing on someone else to your company. This person is relying on you to get all the above right when they are presenting you to a potential customer. Remember, they would be selling your company, and if it is not up to snuff, a full commission salesperson will lose faith in the product he/she is selling very quickly.
I am getting a feeling from what I am reading that you are not willing to put forth the effort needed to be in control of your business, rather than have it lead you in a stressful reactive mode. I truly hope I am wrong. P.S. - how is your corporation set-up? LLC, S-Corp, INC?
From the original questioner:
Neither yet but am told I need incorporated. I know it’s easy but I have not done it.
From contributor G:
Your contract was with "your good friend", if he sold the house either he pays you at closing or you don't release the lien. (The lien you put on when you heard the house was selling, to give notice to the public and lenders that there were unpaid bills.) (See an attorney!) Your good friend's testimony in court would establish the contract terms. Either the seller or the buyer pays. Why the heck should it be your problem!
A guy wants you to build a $50,000 dollar picture kitchen and has only half - not your problem. He either finds another $25,000 or he gets a $25,000 kitchen. If he makes changes to the design either you get more dollars or you say no. Again why is it your problem! Your business is being run like a charity.
Your site opens to a page that says "Sorry, but you are looking for something that isn't here" - why? Your internal search goes nowhere. You offer an archive that isn't there. Your contact page asks for "comments" or "your response" - why? What you want to know is what you can do for them, not what they think about your site! The name and email addresses have an '*' after each of them, which indicates they should look for some footnote that you don't have! You ask them for their website - why? If they don't have a website should they pass you up? Why do you want their website? (Is that something your site builder put in for his benefit?) You have a box to check if they want to be contacted by you by email. Since you did not ask for their address or telephone what is the choice? If they don't check there do you just not respond? You don't have a single finished project and you need to change "....imagination too run wild." It’s not “too". The word you want is “to”. We all make mistakes but judging from your postings you also need someone to write letters to customers for you. You have a great problem expressing yourself in correctly spelled and grammatically correct English.
I will bet you need accounting, legal and insurance assistance advise as well. When I take my woodworker's cap off and put my lawyer's coif on I help start small companies, so take my word for it. You need a lot of help. Hire someone or try SCORE for help. I wish you the best of luck and hope your efforts pan out.
Also, "neither yet but am told i need incorporated. i know it`s easy but have not done it." Maybe yes, maybe no, do you know why or how? Where are you going to find out? (The point is you need to know what needs doing and how to get it done.You need to get from where you are to that point fairly quickly now.)
From the original questioner:
So I took 2000 for rent and utilities plus 6000 for my dad and I and 2000 for the shop to grow which equals 10000.
400 hours a month /10000=$25 an hour for shop to run. So I have to net $10000 after materials. Is this correct?
From contributor K:
No you are way off. There are 2080 shop hours per year, based on a 40-hour work week. So, using your numbers (which are not complete)
2000 for rent and utilities
If your rent is $1000, at your level of production, you should be nowhere near another $1000 in utilities - what does this extra $1000 consist of?
You also did not include any insurance in there, or accountant costs (if you are waiting until the end of the year, you are asking for problems), and that $10,000 would be $120,000 annually divided by 2080 hours or just about $58/hour or $464/day. Add to this, you should calculate your shop rate at a factor of 1.25 to make that $58/hour into $73/hour or $584/day - far from $25/hour.
"So I have to net $10000 after materials." No, you have to have a gross profit of $10,000 after materials, your net is what is left over after materials and expenses (your expenses should include your salary) have been deducted. This is your company profit, and this is why it is critical to know your costs.
The fact that you are operating without any form of incorporation or at least a DBA concerns me. Is Mid Maine Custom Cabinets your DBA (Doing Business As) name? This also requires registering with your state. Contact your local SCORE representative to get you on track.
I don't want you to get the wrong impression, I do encourage you to own your own business, but I do not think you approaching this wisely, and are setting yourself up for a fall if you don't make a course correction.
From the original questioner:
I’m sorry when I said 400 hours that was me at 50 a week and my dad at 50 a week for a total of 400 a month. 400 hours divided by the 10,000 I need after materials is $25 an hour.
From contributor D:
The reason it is called a Shop Rate is because it entails all your expenses like yours and your dad's salary. Now you know why the industry standard is $100K per year in sales per man as a minimum. It is not just a made-up number.
From contributor F:
Do a search in the Knowledge Base for “Anthony Noel”. He has some fantastic articles.
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