Gross Sales for a Small Shop
Business owners discuss reasonable sales projections for a start-up cabinet shop. February 17, 2006
I am trying to get an idea of what a typical one or two man shop is able to generate in monthly and/or annual sales. I am currently working on a startup business plan and am trying to project what my monthly revenue will be. I think I will be able to bill out about $35k +/- per month or $420k +/- annually. Does this seem relatively accurate or not? Any feedback from small shop owners would be appreciated. I would be building, finishing (subbed out) and installing residential cabinets.
(Business and Management Forum)
From contributor O:
I remember reading somewhere that between 100k and 125k per production employee per year is about average, some areas probably a little higher, some areas a little lower. This seems to be about right for my shop. That would be production employees, not office staff or sales.
From contributor K:
The amount your shop can bill out depends on your area, the amount of jobs it takes to meet that quota, etc. For instance, we can bid and build a $40,000 kitchen and maybe a few extra smaller projects in one month. In another month, we may get 2 - $8,000 entertainment centers. So it will depend on how much you can actually produce a month, your market, whether it be full-on woodworking or just cabinetry, etc. I do woodworking and pick and choose jobs. This way, if we have a slow time in kitchens, we may be steady at doors, moulding, etc. It saves money in advertising and the guys get to learn different building techniques instead of just building boxes, hence making them better woodworkers in the long run, because they can troubleshoot the more difficult builds.
From contributor B:
Again, it's all in the market. In my rural area, the market is for fast and cheap. The bulk of the people want it now and they want it cheap, but perfect. Other markets don't hound you on speed and pay a good price without fuss. But as said above, a good, safe bet is $100K-$125K per man per 1,000 sq ft. That is a good rule as a starting point, or a 1st step approach, but by no means should be the long-term goal.
It also stands to reason that if a 1-man shop can gross $125K and keep costs under control, it's likely for that shop to net what many 4-man shops do. I know of shop owners who gross near the half-million range with just a couple of shop hands, toppling that $100K/man guideline. But their total costs mean they're not exactly putting in a pool this year... I'd like to see a "net per man" chart from various regions and markets. Market, overhead, COGS, etc.
From contributor T:
I agree with the above regarding the utility of a net per man approach. These annual surveys about regional differences in cabinet prices aren't particularly useful without some index of the cost per living in each region. I could probably buy a house in Oklahoma on $10 an hour, but would have to commute from Nova Scotia if that's what they paid me in Seattle.
If you add to the metric "boxes built per worker," and throw into the equation what kind of equipment was used (panel saws, beam saws, or nested base mfg.), these surveys could actually be useful in advising a guy how to invest in woodworking equipment. (And when you get right down to it, that's the corporate agenda of this forum and every trade magazine out there.)
The simple statement of $125K per worker is meaningless without some comparison of how much equipment it took to get there and how much you could sell a box for and how much it cost to live where you built the box.
From contributor W:
Can’t help but agree. There are many measurements to consider. We look at the following and other performance indicators as well.
Boxes per labor hour.
$ labor per box.
$ labor as a percentage of sales.
No one factor will be comparable from shop to shop, but tracking your own performance against last year or last month will tell you if you're improving or going backwards.
From contributor L:
I think $420/yr for a 2-man operation is quite hopeful, especially for a start-up. Once established, you may do that by buying in doors, fronts, drawers, subbing out installs, etc. Your percentage of gross for materials will be high and your sales per man high. Keeping a constant flow of profitable work is the big trick. If you set a $ goal, you may be tempted to buy work - bad idea! I've known several people that had small shops and always bragged about how much they were selling, just before they went bankrupt. Write your business plan carefully. Having 9 good months out of the year probably means break-even if you’re lucky. Have enough capital available to operate without personal income for at least 6 months.
From contributor H:
35K per month for a 1 man shop is unrealistic. For a 2 man shop, highly unlikely. For a 3 man shop…? Perhaps, given the right market. What you're capable of billing each month is less important than how much of that you get to keep. Banks and investors are not interested in your gross receipts. They want see how you will be able to pay them back. That comes from the gross profit. You would be more likely to hit the mark if your target were lower. What's the point of having a plan if it needs to be revised once, twice, etc.?
From contributor G:
Your numbers are very unrealistic, in my opinion. Over 8 grand a week! One or two guys? Every week! Not in woodworking. Go back to the drawing board. These are critical numbers in your business plan, and they are way off.
From contributor D:
I am in the process of starting my business and getting all of my figures together and I came up with total sales between $124,000.00 and $154,000.00 per year to cover my salary, overhead, and profit. This seems to be more realistic to me.
From contributor N:
I agree with the other posters. We are in our 2nd year of business as a 3-man shop, and we are experiencing gross revenue in the range of $100-$120K per employee. But as the other posters say, the gross is not important, the net is. Our projections were, I felt at the time, conservative; and still it is tough to meet them.
I would like to underscore contributor L's comments: Write your business plan carefully. Do your financials, and then go over them again, critically. And then go over them again. And this one: Have enough capital. We did not have enough capital, but we have been able to raise it when needed. This has been critical to our survival.
I couldn't disagree more that a plan is pointless. You need a plan precisely because you will need to change it. You need a road map, and you need to know where you've been, and where you want to go. An unchangeable plan, now that may be pointless. Our plan has been an invaluable tool for charting our company's progress.
A great book I read recently is 'Growing a Business' by Paul Hawken. He elucidates very clearly what a business plan should be and how it should work, why you should have one, and why it should change periodically. For that reason and others I would recommend it highly.
From contributor E:
AWI conducts an annual survey and publishes its Cost of Doing Business Survey (CODBS). I don't recall if it itemizes a "net/employee" ratio, but it does an excellent job of cross referencing the most profitable shops, by volume and location, with the others and looking at debt, equity, and itemized expenses as a percentage of gross. One can easily calculate the net/employee ratio with all of the information provided. It is highly informative and can serve as a useful benchmark for many companies. I remember one AWI member once remarking that the CODBS and the AWI Cost Book are worth the price of membership (in AWI) alone. I don't know if this is true (my company is a member), but I do recall having finished reading the CODBS for the first time and thinking it was worth a $1,000.00.
From the original questioner:
Thanks for the input! When I sat down with my CPA to run some numbers, I figured I could do about 35K/mo., seeing that I could do a couple of kitchens per month at about 15k to 20k each. Not that I am only going to do kitchens, but also other cabinet work (entertainment centers, baths, etc.).
I will outsource doors, drawers and finishing. Most everything else I will do in house. I am based in the San Francisco Bay area, so getting that for a custom kitchen is generally in line with the customers I deal with. When we ran these numbers and factored in the overhead and such, it looked pretty good, but maybe I need to lower my expectations on how much I can produce each month.
What are most of you finding on average is your percentage of material costs per job?
From contributor A:
In California, the retail prices are basically double what they are in most of the country, with the exception of Long Island or Nantucket.
In what time frame are you and your CPA expecting these numbers to come to fruition (1st, 2nd, 3rd year)? I would figure, if you are the leader or by yourself, you should base your calculations on 1500 billable hours per year versus the typical 2000 hours (50 weeks x 40 hours). If you have as skilled a partner as yourself who will be able to bill the full 2000 hours, that gives you 3500 billable hours per year.
From what I've heard, the shops in Cali bill at least $100 per hr to cover living expenses and insane overhead (San Fran). If all goes perfectly for the year, that gives you $350k labor/overhead. As a rough (someone will scream) number of a project, 1/3 material + 2/3 everything else (labor/overhead etc.). That would give you $175k in material or $525k in gross revenue.
I'm based in Southeastern CT. We have an excellent market for high end small shops like mine. I bill out at $50/hr and am busy 95% of the time. I average $10k gross per month working 45 hours per week. But I'm in my 5th year and paid off my tools years ago. Cost of living here is manageable.
If I had a clone of myself and he could bill fulltime while I do all paperwork, I think we could clear maybe $25k per month with outsourcing, getting 50% of our bids at good pricing. That's a total of $285k gross per year. However, I suspect my 45hr week would turn into a 55hr week.
I've made a lot of assumptions here, but you need to realize in the real world you will not have consistent, well-paying jobs in your first year and you will end up putting in at least 80 hours a year doing shop remodeling/setting up new tools, etc.
In summation, your numbers are possible in San Fran after your 5th year working harder than you ever thought possible. But I hope for your sake you do not have your shop or house anywhere within 25 miles of the Cali coastline.
From contributor M:
I started a new shop on January 1 of this year. I own my building and all of my equipment is paid for. I build custom cabinets, radius mouldings, custom furniture, etc. I am in a fairly high end market in a resort community in Georgia. I hit the ground running, as I have worked as a finish carpenter in this area for 20 years. So I have a client base already in place. I looked at my numbers this morning to try and give you a realistic idea of what to expect in your first year. At this point in October, my gross sales are 99000.00. So I'd say I'm on track for about 120000.00 or so. I'm pleased with these numbers for my first year.
But let me tell you, I am working my a.. off! Long hours, six days every week, and many times I go in on Sunday if I need to get to get a coat of finish on something. The demands for your time are great. Managing the business, buying materials, building the projects, finishing, delivery, install, maintenance on equipment, listening to salesmen who always seem to come in at the wrong time... and on and on. There are only so many hours in a day that you can work and as a one man shop, you have to wear every hat. I'm 52 and working harder than I've ever worked, but I love it. I have to agree with most of the posts on this thread that your projected sales figures are way off for a one man operation.
From contributor L:
I think contributor M is right on for what to expect. The other thing of note: don't expect to hire someone and have them be as dedicated to your small business contributor M is.
From contributor F:
While I think it is helpful to know gross sales figures, and gross production per employee, what really should be talked about is profit. If contributor M can gross 120K in a year, that sounds good - but what are his expenses, like rent, cost of goods, and insurance?
If average production per employee is 100-125K, how does that translate into what you can put in your pocket? One shop can gross 300K and make 20k profit, while another can do 250K but keep 75K. Isn't that what's important?
Since we refinish/restore architectural woodwork, and don't make anything, my biggest expense is labor; 100k per employee can be very profitable since I'm not buying lumber stock, and don't have machinery to write off. What kind of profit percentage are other shops earning?
From contributor I:
At the end of the year when I look at all my expenses and revenue, I shoot for 12% return as a minimum. I try to get closer to 20%. If I don't earn 12% on an investment (which the shop is), it's time to sell it and find something else to do and put the money in the bank.
From contributor L:
We make store fixtures and I've seen the industry wide profit level reported as 5%. I shoot for 14% and am happy if after the dust settles, I end up with half of that. A lot will depend on what a 2-man shop considers "profit" vs. your pay, often not two separate things. There will be weeks (months) when you don't have any income to pay yourself.
From the original questioner:
On my income statement, projections for the first year I show I would end up with 18% net profit after taxes. Of course, this is based on revenues of 420k/yr, which based on all previous posts, is way out of line. So I will have to rethink my numbers. When you are all talking about "profit," is this after you pay yourself? With my 18%, I have to pull wages out of that.
From contributor Y:
By reading on this and other forums, I can see that many people separate their own wages from profit. I personally think that this is incorrect (and the tax authorities tend to agree with me). It's all about net profit. Your whole business is based on what's left over when you've paid all the costs relating to the specific jobs, and then all the overhead costs such as shop rent, advertising, etc. In other words, all the costs that would be there anyway. How you split those profits (if there are any) is up to you.
From contributor I:
Business profit is after all bills are paid, including the owner's salary. But you have to be realistic in what you pay yourself. Some shops count the owner's pay as part of overhead because lots of the time, you are doing things that result in no direct profit for the shop. Some count it as payroll.
Also remember, if you set your pay at a fixed amount, there will be times when the business can't make your payroll without hurting the business. I'm two people in the shop. I'm an employee that deserves a paycheck that is appropriate for my contributions. But I'm also the owner that is trying to maximize my ROI. Sometimes it is hard to switch between roles, but you have to make everything work and make money.
From contributor J:
I think an owner should set a realistic salary for the contributions he/she makes to the business, whether it's production, marketing, administrative, sales or whatever. Pay yourself what you would pay someone else to do those duties. Then, as an owner who's made the commitment of time and resources to growing the business, you are entitled to a business (investment) profit, which, if you're a sub-chapter S corp, will reflect itself in your K-1 distribution. Remember that K-1's are not subject to payroll taxes, but they are subject to income taxes.
A good gauge for the health of a business is whether it is producing profit - beyond salary. If you can get it there, you're doing real good. If not, you should at least "own" a (hopefully) good job.
From contributor L:
I really think we should keep our personal finances and business separate. That means paying yourself a reasonable wage. What’s left after all else is paid is profit. I also think you should be either an LLC or S-chapter. Both offer some but not complete protection and K-1 income doesn't pay as much taxes. Cost to set up a corp. is $300 +- and a little $ every year. You also have some more records to keep. A CPA that deals in small business is also well worth their few hundred $/yr. The state Department of Revenue audited my business a couple of years ago and the CPA was worth his weight in gold.