Per-Hour Shop Costs -- and Small Business Overview
This article was written by Danny Proulx and reprinted with permission from his website, www.cabinetmaking.com.
Determining Loaded Per Hour Shop Costs
When your accountant finalizes your business year you'll have a dollar cost for your operation. The costs include rent, heat, light, payroll, etc, but not building material cost.
When you have a loaded cost per hour for your shop you can price any project by estimating the time it will take to complete, adding the material cost, and finally adding a bottom line profit to each job.
With "repeatable" projects such as kitchen cabinet work, you can easily establish a per foot cost, based on your loaded cost calculations. That per foot cost figure will allow you to quickly quote on projects.
Here's how to calculate loaded hourly costs...
Total hours available to bill 50 weeks @ 30hrs ... 1500 hours
Per hour loaded shop cost = ($ 71, 000 / 1500) ... $47.00 per hour
Job Costing (to complete a project)
Add Project Materials
Add Profit Percentage
Per foot costing on products that remain constant such as kitchen cabinets can be calculated.
Per foot example for 36" wide upper frameless kitchen cabinet with
Materials 2/3 sheet plus hardware ... 50.00
Profit @ 15% of time and material = 28.00
Cost = $219.00
Retail Per foot cost = 219.00 / 3 feet = $73.00 per foot
Materials 2/3 sheet plus hardware ... 120.00
Profit @ 15% of time and material = 40.00
Cost = $301.00
Per foot cost = 301.00 / 3 feet = $100.00 per foot
Plus you must establish a price for items such as
Small Business Overview
I think many will agree that business planning is a time consuming and sometimes aggravating exercise. But, it’s the most important task you’ll ever undertake. Creating a thorough, well researched, accurate document before opening the shop will lessen the chances of failure.
The Value of a Plan
And, here is the first place that some new business people make a serious mistake. Belief in an idea is sometimes so strong that we often overlook, or choose not to believe, the obvious negative aspects of well documented research.
The completed business plan, at this point, becomes a fact finding document. It should lead you to a question. Is the idea still valid after all the cold hard facts have been gathered? If you have doubts, get out at this point or approach the original idea from a safer angle. Second, it provides direction - a road map to where the business is headed and a well defined course to follow. And third, it’s a necessary document, which provides information to financial institutions that are going to invest in the business.
Creating the Plan
The business plan is normally divided into five major segments. They include information on the new business company profile, market and industry information, marketing strategies, operational plans, and the financial projections.
However, one very important part of the plan is a summary of all the parts. Termed the “executive summary”, this one page report is placed at the front of plan. It highlights all the important data with regards to the new business management, services offered, target markets, promotion, and financial matters. This page acts as a sales person for the entire proposal. It can play an important role in attracting someone’s interest. If well written, this summary will help secure proper financing. The goal is to secure adequate capital to support the business until it reaches a point where it will generate enough money to support itself.
Each of the sections following the executive summary page serves a specific purpose. The company profile chapter details the form of business such as sole proprietorship or partnership, past history, proposed start date, the location, classification, and the advisors (normally accountants and lawyers). Market and industry analysis should include information on industry trends, your product, who the target market will be, research data, and a brief analysis of the competition. The marketing strategy lays out all the details of pricing strategy, how the product or services will be promoted, and the distribution plans. Segment four describes the business suppliers, manufacturing plans, operating regulations, and the human resources that are available.
The final section is devoted to the financial aspects of the new business. This last area is often where many fail to address all the issues because of the expertise required. The result is a poor financial forecast, not based on reality, which often leads to disaster when an unexpected expense occurs.
Remember, most bankers have very little technical knowledge. Their skill sets are deeply rooted in facts and figures. They will not look at the quality of your woodworking as much as the accuracy of your financial forecasts. Their decision will be based on the cost of business and sales projections. So be prepared, because they are trying to determine if these figures are realistic.
It’s worth investing a couple of hours with an accountant to verify your data. And more importantly, to prepare you for the financial questions the bankers are sure to ask. Don’t hesitate to spend extra money at this point for some very valuable information.
Another exercise that I often do to lessen the chance of failure, is to ask the accountant to review the entire plan. Would they be prepared to invest in the new business, based on the information provided?
At times, I’ve been a little annoyed by some of the questions and comments from the accountants. However, they are looking at the situation from a dollars and cents point of view. It’s a cold, hard, third party review of the plan, one based in reality, and it has prevented mistakes by forcing another look at the information.
Using the Plan
All to often, the business plan is used strictly to arrange start-up capital from the bank. If successful, some consider that the document has served its intended purpose. I know of small business owners who haven’t referenced their original plan since opening the shop. It’s no wonder they often experience difficulties.
One small wood shop business owner had a plan created by business students at the local university. It proved to be an excellent decision because he got a very well researched and documented plan at a reasonable cost. The bank approved the business plan and loaned him the money he needed to open his shop. A year later he was in trouble. Because I had been aware of the marketing recommendations in the original plan, I asked if the proposals had been unrealistic. He replied that he didn’t know, as he hadn’t followed any of the suggestions. It was an unfortunate situation because he had been given all the information to market his new business and chose to ignore the plan. Would it have made a difference had he chosen to follow the business plan? I believe so, but he was so deep in debt that recovery was impossible.
The Bottom Line
The business plan forecast includes sales and costs for three years into the future. It’s normally a requirement with most lending institutions. Now, after two or three months in business you have the advantage of projecting real data. Use the forecasted percentage increases with the actual figures to determine the year-end position. If there are potential problems, take corrective action now.
Existing Business Applications
The financial road to success is tough and seemingly always uphill. Each day is filled with challenges and the need to make decisions based on which course to follow. Many appear to be minor, and not important enough to affect the overall well being of the business. But, like our trailers and trucks loaded with supplies, it’s a total weight of all the small pieces that eventually damages the springs.
Bidding on Projects
Each job has associated costs. A portion of fixed and operating expenses as well as the cost of labor- including your time that must be applied. Reviews should be completed quarterly, with an accountant if your skills are not adequate in this area, so you can easily assign pro-rated amounts when calculating your quotes.
The accountant can provide fixed and operating working figures to use when determining project quotations. For example, based on the last yearly statement, a shop carries a weekly cost of $1,000, which includes rent, heat, light, telephone, taxes, and hydro, called fixed costs. Operating costs, such as fuel, vehicle maintenance, repairs, etc. average about $500 per week. Labor, on a weekly basis, amounts to $1500. In this example we know the shop carries a $3,000 weekly expense to operate. This figure is probably a little high for some shops but there are other costs such as equipment depreciation and administrative expenses I haven’t mentioned that are also included.
A project billed at $7,000, with material costs at $3,300, would earn $3,700 gross profit. If this were the only project in the shop for the week, our net profit would be $700 dollars before our friends at the tax department take their share. That’s a ten percent before taxes net profit, which isn’t bad these days.
This example is very rough and the figures may be a little out of line for your shop, but it illustrates the need to apply real costs to each project. Assigned operating and fixed costs can be calculated and revised quarterly or half yearly depending on how often the expenses vary. Failure to be realistic when calculating the project expenses means certain trouble.
Losing the Job
In this type of situation it’s better to let the “low ball” competitor have the job- if they really do exist. By accepting the work at a $300 loss you’re not only losing money, it helps the competition because it can put your business in jeopardy. I realize this is a very difficult issue to deal with, as it’s sometimes better to lose $300 instead of $3,000, if you had no other work. But, be aware of all the operating costs so you can at least break even when a situation like this occurs.
We’ll always have those ”low ballers” that are willing to work for $5.00 an hour but like many successful shops that combat this situation, sell your clients on quality instead of trying to meet every price. On one of my recent quotes, I was the highest bidder on a kitchen project and won the job. After the clients signed the contract and told me the other quotes, I asked why they picked my company. “Simple”, they said, “We liked your presentation album, the quality of work, the fully detailed quote, and your advice on comparing quality”. So it really does work, you can bid properly, make a profit, and stay in business.
Spreading the Word
How do you know what method is giving you the best return? One general rule can be applied to prevent trouble. Try and set the advertising budget at the beginning of your business year and stick to it!
The challenge will be in applying that budget figure in the most effective ways. And, that can be a very difficult task. How do you know if the advertising dollars are working? Many successful business people ask clients how they learned about their business. In that way, they can track the amount spent on each method against the return. Poorly managed advertising programs have caused many businesses to fail.
Good Fiscal Management
One way to avoid problems is to register with the adult education section of a local college offering small business management night courses. Almost every successful business person I know has participated in some form of business course. On closer examination, you’ll discover that many talented woodworkers have lost their business because they lacked financial management knowledge or didn’t pay enough attention to this very critical area.
Managing Material Costs
Depending on the type of work, material costs can be as much as 40% of the project. In our example, material amounted to $3,300. By exercising a little care and reducing waste we may be able to reduce the expenditure by $100, that’s a little better than three percent of the material cost. Those savings would add directly to the net bottom line. Over the period of a year we could be realizing an additional $5,000 net profit, simply by managing material waste and purchasing. You could probably cover two months rent on your shop with that windfall.
I’ve visited many shops where I’ve seen open cans of contact cement drying up, sheet goods damaged by improper handling, hardware not stored properly, and general bad housekeeping practices. Just recently, I walked into one shop that had the receiving door wide open while everyone was at the coffee shop. I could have had a field day loading my truck! And, I’m sure they wouldn’t have noticed anything missing because of the mess. It won’t be a surprise to see that cabinet shop closed in the near future. The waste and mis-management was unbelievable!
Controlling material costs also means buying the product at the best available price. However, I don’t suggest you buy poor quality hardware or tools. That can cost more than any savings you’ve realized over the long haul. Shop around your area and check out the wholesale suppliers, buy in quantity when possible, and ask the supplier for quantity purchase levels. Buying one hundred loose pack drawer slide sets in place of ten individually packaged, can reduce your costs substantially.
Total Fiscal Management
Location, Location, Location
Location can play a decisive role in determining the success or failure of a new business. That role can be of a more or less serious nature depending on the type of products or services offered. There are options and considerations that should be analyzed. Is the business dependant on human “traffic flow”, and is maximum exposure to the public a necessity? How much space is needed? And, do you have a ready market in the area?
The Consumer Shop
The disadvantage is that shops located in a retail area with high traffic may have to limit production because of noise bylaws and the close proximity of other stores. As some of you have probably experienced first hand, the sounds of our table saws and routers can put a strain on relationships with other storeowners nearby.
One woodworking business, marketing goods built on speculation, located outside the city because of this very issue. They produced hardwood tables, chairs, and other fine furniture as stock items and developed a beautiful line of very high quality products. Business was good initially, due to the draw created by high profile, expensive advertising. However, they soon ran into trouble because the cost of the heavy advertising campaign needed to draw clients put a serious strain on the business. Recently, an additional retail outlet was opened in a very popular shopping center. And, according to the manager, the business is doing well once again because of the public exposure.
Targeted Market Shops
Consumer awareness for this type of custom cabinet shop is dependant on word of mouth, very targeted advertising, and some form of direct mail campaign. Money saved by locating in an industrial area can be used to fund advertising more effectively.
Local recognition is an important factor with any proposed location. For example, it’s not uncommon to see two or three good wood working shops in a rural area. These business owners are normally involved in minor league sports organizations, service clubs, and other local activities. It seems to be a desirable to location in our trade. But, if you do decide to set up shop in an area such as this, make sure your market studies include an analysis of population density versus the number of shops already in existence.
New shops often take quite a while to get established in rural communities because they’re sometimes considered “outsiders”. Failure is not uncommon in this situation so be prepared for the long haul.
The Home Shop
This type of cabinet shop has many advantages but it requires more self-discipline. It’s possible to get involved in “home” issues and activities instead of paying attention to the sometimes less desirable issues of running a woodworking shop. In my case, I’ve located a shop behind the house and, for the most part, haven’t regretted the decision. However, there are times when shop work, like cleaning and organizing inventory, take a back seat to other more interesting events around the home. If my business was located in an industrial park, I wouldn’t have any distractions, and the cleaning would be done immediately. So, be aware of the good and bad issues with this type of situation before making a decision.
Being aware of the other businesses in the area is a key issue. The decision on where to locate should be based on the quality of services in that area. Are there businesses close by that will draw potential clients for your shop?
Additionally, the area should be easy to access. I know of one very high profile grocery store that opened a second location on a very busy street and closed in less than six months. They didn’t consider that this street, with thousands of cars passing the location daily, was also divided by a median. Many motorists didn’t bother, or were intimidated by the need to negotiate a U-turn at the next intersection to get back to the store. As well, the store was located on the side of the road that had traffic flow going into town during the morning rush hour. On the return drive home, the median was between the traffic and store. They attempted to have the city install a break in the median with a turning lane, but were unsuccessful.
If the owners had located the store on the other side of the road, with easy access for the commuters going home after work, it might have been a successful business. I was one of the many surprised people who didn’t see the potential for failure. It is sometimes that subtle, a seemingly minor issue of location, with a very unfortunate outcome.
Renting or Buying
Buying or renting the property is an issue worth considering. The money has to be paid out one way or another so it might be a worthwhile exercise to look at the potential value of purchasing the building. An accountant can analyze all the related issues of interest rates, taxes, and operating expenditures.
1. Is the area easily accessible and reasonably well known?
2. Are there other businesses in the area that will provide a draw to potential clients of your business?
3. Are the surrounding streets and buildings clean and well kept, making the area an inviting place?
4. Is the location close to the intended target market?
5. What is the potential for target market growth near the business?
6. Can the shop be expanded in the future?
7. If this is a rental property, are the owners concerned about building maintenance?
8. How much space is available?
9. Is public transportation available for your staff and clients?
There are many more questions, which are dependant on the proposed shop’s style of operation. But simply stated, the issue of location, is a very necessary consideration and in some cases, can have a tremendous impact on the health of your new business. As the grocery store owner discovered, missing small details can mean failure.
Setting Up Shop
A clean, well-organized woodworking shop, with a comfortable area for your customers, makes a positive sub-conscious statement about you and your work. Have you ever hired a contractor who arrived at the job site driving a muddy, beat-up old truck? You watch him as he gathers his tools that are scattered about in the back of the truck, load them into an old milk crate, and head into work. What were your first thoughts? Not very impressive, right?
Put yourself in the customer’s place as they enter your shop. First impressions whether conscious or sub-conscious can have a profound effect on the client. Would you sign a contract for a $10,000 kitchen with somebody who couldn’t find their pen under the mounds of paper work on the desk - let alone the table saw which you think may be under that pile of sawdust? You’d probably be looking for some excuse to leave as quickly as possible.
Woodworking shops tend to be noisy, dusty places. That’s the nature of the product we produce. But, clients come to our shops with a mental impression of their finished product, a beautiful entertainment center, dining room table, or a clean modern kitchen with all the features. That image can be shattered if they walk into a woodworking war zone.
Look around the area where you live. Visit some of the businesses that have closed. Often, there appears to be a lack of organization with customer service areas that look like they’re one step above the city dump. Would you do business with that shop? I’d have second thoughts about bringing my dog there, let alone writing them a check for services. Presenting your shop and product in a professional manner is extremely important. It can, and has, been the difference between success and failure in many cases.
A good example is the automobile dealership. We all know that a garage is an uninviting space, with grease, oil, and broken car parts. But, take a look at the reception center - clean, bright, music in the background, service managers with sparkling white coats, and free coffee for the clients. They know the value of comfortable surroundings.
When planning a woodworking shop, two very different spaces must be considered. First, the production area and secondly, the showroom or “customer service area”. Many clients don’t know, or care very little, about a beautiful table saw. They want to see examples of your cabinetwork in nice surroundings.
Dividing these two areas properly is a key issue. If possible, plans should account for the noise and dust factors between the two spaces. Walls that are well sealed and insulated with noise reducing insulation are often a requirement. The client area doesn’t necessarily have to be large, but it should be quiet, clean, and bright. If possible, the display should reflect a natural setting for the product.
The time required to build a quality cabinet is determined by its design and our ability. However, wasting time trying to find tools and shop supplies adds unnecessarily to that time, and results in a reduced profit. If you want to market your products at a competitive price, you must have an efficient shop.
How then, do we reduce the time required to complete administrative duties? Hiring someone to perform these functions is an obvious and simple solution. But, that may not be possible for many small shops. Another option is to use technology, particularly the computer, with software programs designed for the small and medium sized businesses.
Computers in the Woodworking Shop
Shop set-up plans, for the new or existing business, should address the issue of using computers. Software designed to quickly produce drawings for the shop as well as managing the administrative support services can greatly reduce non-productive hours.
Computer Aided Drawing
There is also another benefit gained with respect to CAD programs, which relates back to the discussion on presentation. Most customers are very impressed with the proposals generated by these software programs. The three-dimensional feature included in many CAD programs is an excellent and very effective sales tool.
Talk to other business owners about accounting software to determine which program best suit your needs. Some software companies have a trial version available and many dealers have demonstration programs at their store. In my opinion, accounting software is an invaluable tool. It has reduced our shop’s administrative tasks to hours instead of days.
Shop Set-up for the Future
Consider all the functions necessary in producing your product. Detail the movements on a diagram before setting up any equipment. Follow the raw materials through the shop including the procedures required at each piece of equipment. Does it make sense? Are you moving material unnecessarily in the workshop, wasting time and effort? Remember, lost time and wasted materials reduce the net profit.
Equally important are the administrative processes associated with the business. These non-productive functions must be reduced. By using computer technology we improve efficiency, and in most cases, have a more up-to-date picture of the business finances.
Why do some businesses fail? Often it’s a simple matter of not putting into practice all the well-designed theory in the business plan. If it looks good on paper, and it can be practically applied in real terms, the business should produce the desired results.
Advertising and Marketing
We briefly discussed advertising but in this section I want to dig a little deeper into this very complex subject. First, it may be worthwhile to define the major forms of advertising available to the woodworking shop and look at some of the pitfalls.
Advertising promotions can be classified as targeted or direct, general, and soft. These are very broad definitions, but most of the advertising for a cabinet shop can be categorized under those headings. That’s the where and what part of the equation, now we have to decide how much money is needed.
How do you know whom to target? That’s a key question and not easily answered. First, it’s necessary to define who the most likely end user would be for your services. One successful campaign was started by a local business specializing in period furniture, specifically “country style” tables, chairs, and deacon’s benches. They reasoned that those most interested would be readers of a magazine that catered to the country lifestyle. A mailing list was purchased from this magazine and a brochure was sent to readers who lived within a fifty-mile radius. It turned out to be a very successful promotion for the woodworking shop.
There are however, many failed campaigns for each one that is successful. It can be expensive given the cost of printing, envelopes, and postage - often in the range of forty to fifty cents a letter. To increase your odds of success, research the intended market.
This form of advertising is a necessary part of business. The trade name must be recognized to establish a comfort level for those purchasing your services. Ideally, when customers are shopping around and come across the name, they’ll think, “yes, I’ve heard of that business”.
If you have unlimited funds, mass media campaigns will raise the business profile very quickly. That however, isn’t reality, as we all know. Managing a general advertising budget properly, means finding media publications that will maximize exposure at a reasonable cost. That old saying of “getting the best bang for your buck” is very appropriate in this case.
It always seems to be a race against the clock with advertising. And, the returns, in the form of workload increases, must be constantly monitored. One question is common to all businesses. How much money can we afford to spend and will the workload increase, in a reasonable time period, to justify the expenditure? Unfortunately, without expenditure control and planning, some businesses lose the race.
Choosing the Medium
After the budget has been set, decide which product or service you want to feature. If your business is offering a wide range of goods and services, choose one that will appeal to a large group of clients. Make the ad as simple and direct as possible so the reader isn’t required to absorb a lot of material. Expand the range of interest for that product, if possible. For example, in my business, I often advertise cabinets for the kitchen, the laundry room, the storage area, and the workshop. They are basically the same type of cabinet, but I may interest someone who wouldn’t normally consider laundry room cabinets being made by a kitchen cabinetmaker.
If the business is new and a well-defined potential market can be identified, direct mail advertising can create a demand very quickly. If the shop is located in a small town or village, large display ads in local papers will often generate work. Ads in these “village” or “local area” newspapers are very reasonably priced and the results can be easily monitored.
Problems occur when spending gets out of control. For those of us currently in business, it’s normal to receive two or three calls a week from people who want our advertising dollars. And, while the majority of these proposals can be effective, we must stick by our budgetary plan.
I’ve known businesses that have experienced serious financial difficulty because they’ve bought into every new advertising proposal that came their way. By doing so, they made two basic errors in small business management. First, not setting a budget, and second, investing in an advertising program without taking a hard look at the effectiveness of the promotional medium.
Determining the Budget
In the section on financing, we discussed assigning expenditures to determine the shop’s monthly operational costs. Advertising is part of those costs. And, it’s necessary to be as accurate as possible when determining these costs, so enlisting the help of an accountant can be a wise investment.
Now, after all the calculations have been analyzed, you’ve set an advertising budget expense of $5000 per year. It’s critical, for the financial well-being of the business that you stay within this amount. The creative challenge will be to use that money in the most effective method possible. And, as we all know, it’s not an easy task. There are many tempting advertising promotions that arise during the year.
Establishing a Workforce
Many kitchen cabinetmakers operate their business as a one-person shop. And, most of the time it’s possible to manage in that style. However, there are times when two or more people are required. Cutting the large sheets of board, transporting cabinets to the job site, and installing kitchen cabinets often requires two people. On those occasions, employing someone on a temporary basis works well, providing you have access to a couple of “part timers” that can help on short notice.
I operate my business in this fashion. Fortunately, I have access to four people who are available when I need them. My “workforce” is made up of a retired person and two shift workers. All are more than happy to make a few extra dollars while learning about kitchen cabinetmaking. I do however, need to be aware of my staff’s schedule so that I can plan shop and installation tasks when they’re available. And, for the most part, there is very little inconvenience.
Another method of managing your staffing needs includes employing part time staff. You may want to hire someone for ten to twenty hours per week until the business reaches a point where full time employees are required.
Part time staffing can be a problem if you haven’t got access to a large workforce. However, inquire at the local trade schools and colleges, as many students do not have a full calendar of classes. Most can work as much as three to four hours each day. Additionally, there are many workers who work part time for other businesses and would be happy to work for you on the same basis. Again, scheduling your workflow to accommodate these people is sometimes necessary but often very easily accomplished.
If your business gets to the point where full time staff is required, certain procedures, labor practice regulations, and accounting functions must be addressed. But, for the most part, the added “paper work” associated with a good full time employee is a minor issue in a successful business.
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