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How to account for Fixed Costs

10/7/20       
Nick Cook Member

Website: http://kootenaicabinets.com

Hello,

I want to break my monthly fixed costs into an hourly rate. I want to understand this equation-If I simply have the doors open and do not produce anything, and have no employees, what is the hourly rate I need to cover to break even and cover fixed costs?
I'm not sure if I take the total fixed costs divided by the average number of days in a month or the average days that the doors are open?

Thanks

10/8/20       #2: How to account for Fixed Costs ...
David R Sochar Member

No employees and you want to work full time, then divide your fixed costs by 160 - 4 weeks at 40 hours each.

One employee in the shop, plus you in the shop 3/4 of the time = 160 + 120 = 280hrs to divide into your fixed costs.

This is your production ideal, with a full load of work. While it would be nice to be able to add in for the time the wind is blowing thru the shop, It would make your hourly rate unrealistic.

10/8/20       #3: How to account for Fixed Costs ...
Matt Krig

Website: http://www.northlandwoodworks.com

Nick, check out the Cabinet Makers Association (CMA). They just did a 2 or 3 part webinar (which is usually a class at IWF) on this that includes the excel spreadsheets that you fill out to keep a dashboard of your business costs and overhead calculator. Many have taken this seminar every year, just to sharpen up on the business side of things. Members can play back the recordings of the sessions for free. Business questions, sourcing and problem solving for your business. pretty much the EASY button for a cabinet company. There are regular discussions almost daily on running a cabinet business. It's a ridiculously small investment that can really change the performance of a cabinet business if you get into it and ask the questions you need answered.
If you have any questions, feel free to contact me, I volunteered on their board for a few years and I'm continually impressed with the value of they provide to shops like us.

https://www.cabinetmakers.org/

10/8/20       #4: How to account for Fixed Costs ...
TonyF

Nick Cook:

I would sort of do what David said, but take your fixed expenses out over a year, and then divide by 2080 (52 weeks times 40 hours). This way you don't short yourself a month (40 hours times 4 weeks times 12 months equals 1920 hours).

This, and not allowing for ALL of your fixed costs, (it is easy to overlook the details) is where shops will sometimes short themselves in determining their shop rate. Taking it out over a year also takes into account seasonal variations in fixed expenses, allows expenses that don't show themselves in a chosen month to be taken into account, and evens those out for a truer representation of your actual expenses to be considered as a component of your hourly rate.

Hope this helps.
TonyF

10/8/20       #5: How to account for Fixed Costs ...
Nick Cook Member

Website: http://kootenaicabinets.com

Hello Gentlemen,

These are very helpful, thank you. Is it common to cover those fixed expenses in an hourly shop rate. So in other words know your true costs for employees, and add to that an hourly breakdown to account for the fixed costs. If this is correct, I then could build a cabinet that takes 2 hours (hypothetically), my materials and expenses, plus my labor plus my fixed hourly, for the two hours, whala, I now have a price to charge a customer. And in this scenario I would break even. No profit. And I should have included in the fixed costs a budget for machinery repair and replacement, etc.

10/8/20       #6: How to account for Fixed Costs ...
TonyF

Nick Cook:

This is a way to figure the expense of keeping your doors open, and as I put forth, a COMPONENT of your hourly shop rate. Loan payments, advertising, software licensure, machinery and vehicle depreciation, building/machinery/vehicle maintenance, small tool purchases, etc., all add into the shop rate. Add in the cost of tracking all of these expenses as well. And, yes, profit, because you are not taking a business risk for the well-being of your customers.

All of this is before you add in the human employee element, including yourself, and all of its expenses. Because just "keeping the doors open" should include paying yourself, because someone has to be there to do the work, should you get any.

And all of this is before you have job-specific expenses to account for. And there is more to the job-specific cost of building the project than just the elapsed building time. So in your hypothetical of the 2 hour cabinet (really???), the customer contact costs, drafting costs, layout time, material acquisition costs, etc., are all job specific, and the money to pay for this has to come from somewhere, either out of your customers pocket or out of yours.

The more of the costs that comes out of your customers pocket, the less that comes out of yours.

TonyF

10/9/20       #7: How to account for Fixed Costs ...
Oggie Member

I've seen questions, answers and threads like these before, and I always wondered in what kind of markets things works that way.

Where I am, things work in exactly the opposite direction, i.e. there is some reasonable range of prices one is able to sell his cabinets for 99% of the market and than you have to work it out backwards what adjustments and improvements you have to make in your way of work so that you can make it profitable.
The remaining 1% covers all those special cases, like when you're building something no one else does or can, so you can charge whatever you want, provided that there is someone who desperately wants it, or if you are one in a million genius salesman.

If you're calculating your prices from "how much money somebody has to give me so that it makes me happy" it'll only work if you accidentally land near or bellow that sweet spot, which is almost impossible, since you're not focused on the manufacturing process itself, which is the only thing that can make it happen, but on the end result, which is nothing more than just a hope.

10/10/20       #8: How to account for Fixed Costs ...
D Brown

Nick, I have been mostly a one man shop for close to 40 years and there are times when we are not producing in the shop, we may be answering the phone or sourcing materials or looking at or bidding on a job we may not get, so a percentage of our time in my case about 10 hours a week is charged to my overhead in order to truly realize your costs to operate. good luck

10/10/20       #9: How to account for Fixed Costs ...
TonyF

Oggie:

My input was more of a shop rate reality check, rather than some utopian accumulation of incurred expenses that are taken on without thought and passed on to the customer in some kind of fantasy reimbursment scheme.

Yes, one has to be efficient and competitive to survive in the marketplace. One might try to find a profitable niche, rather than compete for lower grade work, which in a cutthroat environment is not much better than a race to the bottom.

Not every operation has the same expenses, and as such shop rates vary, much as some operations are more efficient than others, and require fewer hours to complete a given project.

My point, and I do have one, is that whatever ones expenses are, one needs to be aware that they are expenses, and that they need to be accounted for. The ongoing expenses occur whether one has work or not, or whether or not a profit is made on the work one does have, and that these expenses will need to be paid by someone. Again, either you or your customer is paying for these expenses.

The question was about the cost of keeping the doors open, which means knowing what your expenses are, and not about marketplace competitiveness or manufacturing efficiency. If one doesn't know ones expenses and account for them, it is possible to have both marketplace competetiveness and manufacturing efficiency and still be unprofitable.

TonyF

10/12/20       #10: How to account for Fixed Costs ...
Nick Cook Member

Website: http://kootenaicabinets.com

Guys,

Thank you for all your answers. It did help. I see truth in all the approaches to the answers. It is definitely important to know the reality of the numbers and how to account for where the money is going. How can good decisions be made without a realistic understanding? Thanks again for taking the time to answer my question.


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