Keys to Profitability for a Small Shop

      A ton of advice from experienced business owners about marketing, money management, planning, and other business fundamentals. December 1, 2010

I continue to have a pretty tough time making a living from a small custom shop. I'm starting to doubt it's possible without some sort of other income (the wife's for example). Does the profit come from efficiency, specialization, marketing, technology, or all of the above? Can a small shop make a living or do you need to be 5-8 guy shop with a CNC, commercial work, etc.? I seem to be able to make money for a while, then I hit a slow patch or bad client and it takes months to recover. An electrician charges $75/hr and has a van and hand tools. I charge $60/hr and have a shop mortgage, lots of equipment, etc.

Forum Responses
(Business and Management Forum)
From contributor M:
What succeeds for a one-man shop is having a lot of your work out there in people's homes advertising for you. It takes a long time to build that up. A referral from a former customer 100 times better advertising than any ad you could take out because cabinets are not a product with uniform standards and the maker counts for everything. It's not like buying a Chevy where you get the same car no matter who you buy it from. The best thing for a single guy starting out is to work out of his garage where he has no overhead. At least then you can underbid your competition until you have a customer base. Then look for a shop with the least overhead you can find.

From contributor K:
Contributor M is on the right track recommending staying small for a one-man shop. But it sounds like you have a shop mortgage, so you need to approach it differently. Most small shops work backwards in the pricing. They take whatever they can get, and go through many levels of feast and famine and robbing Peter to pay Paul. What you need to do is to figure out the income you need to make first and include it as part of your expenses determining your shop rate.

You need to annualize all of your expenses (i.e. - shop mortgage, RE taxes, electric, phone, vehicle, insurances, etc. - make sure the list is complete) and be sure to include your pay, health insurance, etc. Divide this number by 2080 hours (40 hours x 52 weeks), and this will give you your actual shop rate.

Your shop rate does not include materials or subs. On top of this is the company profit, which you determine. A company profit will allow for variables such as growth, machinery purchases, mistakes, etc. all of which will come in one form or another. If you don't account for a company profit, guess where it comes from when they do present themselves? That's right, out of your pay! So this is important! Once you have your shop rate, you know what you need to make each month to feed your family, and keep the lights on. This is the minimum.

Now, if you continually find yourself behind, your shop rate cannot remain static (i.e. - doesn't change), as you have a minumum you need to make each month aside from materials, subs, and company profit. You will have to adjust your shop rate higher to adjust for this, which is why whatever your shop rate is determined to be, you are advised to multiply it by a factor of 1.25, so a $60/hour shop rate would be $75/hour. Now, as a small shop, you abslutely need to separate your work finances from your personal finances.

For your business, if you don't have Quickbooks to do this, I would recommend that you have three bank checking accounts - Main Business Checking, Materials/Subs, Payroll and one savings for company profit. Do not treat these accounts as one account and borrow from Peter to pay Paul. Use them for the expressed purposes.

When you get a deposit check, separate the 100% of the materials money into the Materials/Subs account. Most guys who get into money trouble, do so because they don't have enough materials money to finish the job because they used the materials money for something other than its intended use.

From contributor M:
Small shops can turn out a job a lot faster than a big shop. Notice I said "a job" not "produce cabinets". Overhead - keep it low. Do not become over infatuated with machines such as computers. Use an industry specific package. Ecabinets is free, and super powerful.

Standardize - even a one man super custom shop can standardize most of their products. A box is a box. Think. Spend time thinking about your business. Make a real business plan (2000+ words and spread sheets). Spend time thinking about your production.

Production sharing - there are a lot of shops with CNC machines willing to process your jobs. It is a gold mine.

Marketing - track down the builders and architects in your area. Donít take every job, and donít overload yourself. If you are too busy to manage your work load raise your prices.

From contributor C:
This is about money. Deliver a quality product and provide excellent service - remember to charge for it. I would like to second the separate checking accounts. And, my two cents is the operating capital account is at bank X and the payroll/taxes and company profit is at another. The check books are kept off premise. Period. Learn to do without and get jobs really moving with what you have on hand and not a 20 min trip to a supplier. Buy only the materials you can process between truck deliveries, do not and I mean do not sit on tens of thousands of dollars in inventory that you cannot process between deliveries.

Get a desk blotter, tear the pages off and post the pages on a wall, mark all days you want off in red. Mark all jobs scheduled for install another color and so on. Whatever you do, get it organized in a manner that is easy to follow. Keep it simple.

Profit will come from estimating properly, keeping expenses very low and always get you materials on the route truck, never and I mean never pay for freight unless absolutely necessary. Keep your eye on the clock and get some help.

Remember to charge for what is fair and extra there is no rule that anything is free and you should not feel obligated to give anything away - period. Charge for all extras. If you feel uncomfortable when you write the bill out on extras, just remember when you hire a plumber for a clogged drain on Thanksgiving.

Get help quickly. A good seasoned part timer could cut an entire job in hours and not bat an eye, where as perhaps you are thinking of the next job or whatever. You will see your cash flow almost double with good help. You have asked a great question and there is a lot of great help in this post. Remember it is going to take a while to develop a clientele list, but once you have it you will never look back.

From contributor Y:
Do not be afraid to charge what is fair. You deserve to make money on jobs. I have never understood one man shops. We are nine guys doing commercial and residential. Our first CNC arrived two weeks ago. With nine guys we can handle most jobs easily and service customers usually right away. We pride ourselves on still being a "cabinet shop" not a factory. Each guy still takes the job from start to install (we have a finisher). Hire two decent guys. They do not have to be top caliber but if you are good they will learn from you. There are usually many tasks they will be able to handle within the course of a project. Develop a system for them. You will have more time to quote and chase leads and in return have more work.

From contributor J:
I'm a one man shop and I think outsourcing is the beginning of the end for me. I think with the extra capacity I'm focused on larger jobs and bigger margins but the increase in outsourced costs is cutting into my profits and my ability to bid jobs competitively. I started outsourcing because it allowed me to offer products I couldn't produce myself and handle jobs I couldn't handle solo, and it's led me into a market that I don't think I can compete in using outsourcing. Since most small shops here seem to be very basic with low overhead but more capacity and efficiency than I can offer as I one man shop.

From contributor M:
Contributor J makes a great argument against outsourcing. It can kill your profits. You need to adjust the way you market, and engineer your product to match your business system. For example when I started outsourcing doors, I stopped finishing cabinets. There is no point in ordering pre-finished doors if I still have to spray the boxes. This meant I had to make huge changes in my product.

Instead of outsourcing drawer boxes I switched to drawer systems (Tandembox). As for outsourcing panel processing, that gets a little more complicated. I saw a guy who used a large panel processor but he spent too much time customizing the standard panel parts. If his layout had more than two or three odd balls I think he was wasting money on outsourcing because he still spent a day or so making the odd ball boxes.

If your product line is not compatible with a panel processor, then find a different one. I used a CNC shop. Because it was all CNC'd I could design anything under the sun and still have no panel work to do in my shop. It truly eliminated the panel processing. Even though the CNC fees were more than a traditional panel processor would charge, it was a net gain for me because I have a lot of complicated designs.

From contributor B:
One year ago I had the exact same thoughts as you did! I am in my fourth year of business and last year was definitely the hardest due to the economy and other factors. But what I realized was that after reading for hours and hours here at WOODWEB was that in order for me to get ahead in my business (one man custom shop) and still have a personal life, I needed to start out sourcing.

It was definitely hard at first and I was worried about my own screw up causing me to get the wrong size of doors or drawers or something else but like mentioned above just because you are a custom shop doesn't mean you don't have a standards in your own company. For instance, all my base cabs have top drawer fronts 7" tall and 2 lower drawers that are 10 5/8" tall. Widths are all 5/8" more than the opening. I then compare those sizes to my door list and usually I can catch things right away if something doesn't look right.

Getting back to my initial fears of out sourcing, I was also thinking that there was no possible way that I would I would make money by paying someone for something that I could make myself. The first kitchen I outsourced doors, drawer fronts and drawers on I finished in half the time, made more money than ever before and was able to be in the house spending time with my wife when normally I would be busting my butt in the shop.

One thing I will say about outsourcing - make sure you find a company you are comfortable with, trust and does the job as good or better than you can! It doesn't make much sense buying doors and paying good money if you spend one hour per door sanding out thickness sander scratches.

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