Profitability analysis

      Forum participants provide their ideas on the reasons for low profits earned by a particular shop. November 13, 2000

Q.
Confused! I have been in business 14 years, with a 4 man shop and by now a very good client base. We have been leasing space in a good location for the last 9 years, and have now taken the last 900 sq. ft. left in the building, bringing us to a total of 4500 sq. ft.

This has put me at $2600.00 per month including all utilities, except phone. I have excellent credit both personal and business, but there's a problem. When I go for a loan, the application is rejected because I do not show enough personal income ($24,000 in 1999). I have invested deeply into my business, and would like to build my own shop. Last year we did $300,000 +, but it is always the same story, not enough personal income.

Forum Responses
How is it that the shop gross's $300,000+ and net profit is $24,000?

labor 150
salary 24
rent 32
other 40
-----------
total 246

Then materials must be 60. I just finished my business plan today and 300 gives my personal pocket book over 100. If you are building cabinets then I would shed some employees and give a big boost to the rest. If it's furniture then I might look at cabinets. I can understand a love for the work, but is it worth it? Might look at http://www.true32.com. If you own your home outright then you might look at a mortgage on it to generate some capital to wave at a banker and prove the seriousness of your intentions. Beware.



Business plans are fine. Heck, for most poeple they even work!

Ever hear of something called "cash"? If you're pocketing 100K net from 300K, good for you. But I have a shop like Jerry's and I'm only netting around the same.

Now consider this. I am set up as a sole proprietorship. Meaning all income is considered personal income. Next, all expenses are considered personal expenses. My mortgage, insurance, taxes, utilities, etc are all paid out of my business. What's left over is my net profit. Now my bills total around 65K per year not counting employee wages and material.

So add 65+25=90 before the taxman. On 300K I guess we're close.

Seeing how most businesses fail in the first 5 years I'd say Jerry is doing just fine. He just needs to be presented to the banker in the correct way. Some bankers fail to realize that many, many poeple still use that annoying green paper stuff you can't keep track of.



You might look at an "S corp". I had problems till beginning to play with the numbers on the Quickbooks program. I'm watching my expenses closely now. I find out how many dollars in sales are needed to generate enough scratch to pay for whatever it is that I need to buy. Find lots of clues when it is so easy to print out a P&L. Made me weed out the deadwood and sharpen the pencil. This is what my banker looks at to. He said that usually they like to see payments total no more than 40% of net income. They are kind of like lawyers but sometimes we need them. We just have know the parameters. There is a reason most new businesses fail in 5 years.


Like you said "we just have to know what the parameters are." Trouble is most bankers won't tell you what they are beforehand. But a good accountant will.

25 years ago when I was working in the shop I now own, the bank I was dealing with loved me. I got a check every week and never missed a payment. When I bought the place 17 years ago without their help, and was now self employed, boy did their attitude change! That's when I really woke up about banks and bankers. In my mid-sized town we only have 4 other banks, but they were all eager to get me.

I chose the one that was most "small buisness friendly", and I'm still with them. They see what goes in and what goes out and loans are not a problem. I guess I'm from the old school and things are getting done a little differently today. I don't micro manage but do keep an eye on everything.



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