Output Volume Per Employee
When you look at those numbers in larger companies, production employees actually produce much more, because the average of 100k includes non-production employees also. So a company with 10 employees might only have 7 production people, a salesman, a secretary, etc.
These are rough numbers, but my payroll is 25% of sales, materials 25-30%, overhead and other operating evils are another 25%, which leaves about a 25% profit rate. From this, I pay my salary and buy new toys at auctions.
Spend a day in your shop building and you will find out very quickly who is producing and who is not. If your employees are not hitting the 100k mark, you should ask yourself the following questions:
1. Is there a problem with my pricing?
I was a materials distributor sales rep for about 15 years, calling on all the cabinet and millwork shops in my region before starting my own shop about 8 years ago. It's funny, but it seemed to be true then and still is. $100k+ per man. Inflation and all hasn't seemed to affect this, so I guess the industry is keeping pace.
I've seen these numbers, too, but wondered about them. It seems like a better number would be value added, not gross sales. If I was buying components and assembling VS, making all the parts for the finished product, there would be a big difference. I do better when I buy in the higher labor parts than make them. Same with higher dollar materials. We use a markup on materials to cover our ordering, handling, damage risks, etc. Our pricing/cost accounting isn't good enough to let me know if using the same % for all materials (cheap or high dollar) is reasonable.
What everyone is saying here seems to make very good sense. Then I get a Custom Wood Business or a Cabinetmaker rag in the mail and they profile a shop that has 6 employees and is grossing 350k. What in the heck is going on there?
Yes, there are varying degrees of profitability within the scope discussed, but there should be a vast difference in the bottom line of any shop doing $100k/man and any shop doing only $50k/man. I know that when I saw a shop with the 100k sales, they seemed to be doing okay. If they weren't, they always had trouble paying their bills, etc.
I, too, read the articles mentioned in the post above, and that's the first thing I look for in the fine print. A big shop can look very healthy from the street, but when you dig around a bit, you find the real story is in the numbers. I'm sure that my business looks very prosperous at a glance, but I'm just getting by, in reality. There can be a few exceptions when the product is extremely labor heavy and material light.
Where I am, there are numerous people who produce over 200k annually and they are the ones who are just getting by. It seems as though they have to work extra to cover those who aren't. This causes great tension.
I think 100k is about right as an industry standard, but you have to look at the variables. If they are doing 100k per man and using expensive union labor, that's not so good, but if they're using $8.00 per hour labor, that's really good.
Do they include all employees or just production employees? If the shop is automated, then a lot of the work is in the office and installation. If they have big machinery payments and are doing 100k per man, maybe not so good. If they are in the high rent district, maybe rent is 10% instead of 5%. How do they deal with sales tax that can be an 8% swing right off the bottom line?
Outsourcing a lot would make a big difference. Or a lot of expensive material. Is their marketing so good that they are able to get more for their work? In this case, 100k would be terrible. Do they have enough guys to cover the busy times, and then are they able to keep the guys busy when they are slow? I have heard guys say they are getting 300k per man and others are getting 50k per man. It is hard for me to imagine making any money at 50k per man. It is interesting to analyze the top 100 growth companies in the Wood and Wood Products magazine by dividing gross sales by the number of employees.
The 100k/man figure falls apart if you look at it very closely. It does not take into account different ratios of material to labor cost, and differential pricing power of niche production as opposed to commodity production. Since this number has been bandied about for years, it also doesn't take into account inflation in costs. A much more viable rule of thumb is that gross margins should be more than 50%, i.e. your cost of goods sold (direct labor and cost of materials) should be less than half of revenue. It's very difficult to be profitable without beating this benchmark, as I know too well!
The $100k is not an absolute, nor accurate for every product, market, shop, etc. I think it's just a very rough benchmark that gives you a guide as to how you measure against other shops or industry standards. (If you lose a bid to another shop you hear isn't hitting close to that, then you won't lose many or for very long.) I never heard it talked about until this thread, but it was my observation through years of supplying wood shops. I have been wondering about the inflationary affect, but I think that as your costs have risen, so has the value of the product sold. So, what is now $100k used to be $60k with lower labor rates, material costs, overhead, etc. Someone here said that the percentages of these items as a percentage of sales is the important thing. That is certainly true in the measurement of current percentage vs. past periods. If these remain a fairly constant percentage, then everything is going up proportionately. Then it really doesn't matter about the $100k. But it will still be there, or pretty close, no more accurate than it ever was.
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