Materials, Labor, Overhead And Profit

Cabinetmakers discuss typical cost ratios. April 10, 2005

Question
I have a small shop and have several questions about the financials. I hope some of you feel comfortable talking numbers, because I would like to see where I fit in the average shop.

I have 2700ft2, just me and a temporary helper, so maybe 1 1/2 men year round. I build and install kitchen cabinets, mostly middle to upper end custom stuff. We finish everything we sell. Some small commercial jobs. Some new construction, some kitchen remodels.

My overhead is running about 23.5% of sales. My advertising budget is about 3%. Material is about 44% of sales. This seems very high. Where should this be? With 2700ft2, is there a sales figure that this shop will top out at? Is there a sales figure per man that is average?

Does anyone have any idea how many men can work in this space? Is there a sales figure average per ft2 for a cabinet shop? Any input would be very helpful.

Forum Responses
From contributor A:
One number that just jumps off the screen is the 44% material of sales. One manufacturing statistic to keep in the back of your mind is as follows: across all industries of manufacturing on a typical product (i.e. basic kitchen cabinet), 2/3 labor, 1/3 material. On a custom complicated product (i.e. high-end inset beaded face frame kitchen cabinet), this ratio becomes 3/4 labor, 1/4 material. You can find these numbers in any decent business/manufacturing text. As I mentioned before, this applies to all industries… from building submarines to building Home Depot knockoff cabinets. You will be amazed if you pay attention to these numbers as you bid projects.

From contributor B:
Maybe I am just slow this morning, but your post makes no sense to me. 2/3 of what? 1/3 of what? If you are talking about 2/3 and 1/3 of sales, where does overhead and profit fit into the picture? 2/3 and 1/3 equals 3/3, nothing left for the other two.

If you are talking about cost of goods sold, the ratios don't sound right to me, and certainly don't apply to all manufacturing. I think you are going to have to prime my brain to get it going this morning.

From contributor P:
We make custom furniture. Material costs run 15 to 20% of sales. Which could probably be reduced if we made kitchen cabinets - I imagine that there is less wasted material.

From contributor G:
Typically, the actual costs of our *job specific* materials (including hardware, finishing materials, etc.) run about 30% of gross sales. That does not include overhead or profit.

We do both residential and commercial work, pre-finished. When we do custom furniture, it tends to be lower, as a percentage, in actual material costs because the work is usually more labor intensive.

From contributor R:
I have been paying close attention to my financial numbers and I have been between 39% and 42% for material for custom cabinets. I just can't seem to get my prices higher to lower this percentage. My neck of the woods has depressed prices compared to some of the prices I have seen for similar work. My overhead is only 13.5%, but my payroll is 34% (including my salary). This leaves 10% for debt reduction and new equipment.

From the original questioner:
Thanks for the feedback so far. Contributor R, your numbers are a big help.

Contributor B, are you from True32? I bought your book last week. I would like to have some input from you, if you would.

I went back to my estimate spreadsheet, added some new formulas and it looks like I am estimating at 40% material, 21% labor and 39% gross profit. With my P&L, it looks like my materials slipped 4%. That came out of my 39% gross, which after 24.5% overhead, came out of my net (pocket). And the labor slipped a bit also, because I don't net quite 10%. I too have some very cheap competitors and will have a hard time raising prices.

A good look at my material over runs and more sales (to lower my overhead percentage) is in order. FLOW manufacturing just may help my production capabilities. Does anyone else have any numbers they want to share?

From contributor B:
Yes, I am a partner in True32 Corporation.

My average material cost has been 38.7% between 1998 to today, my payroll expenses averaged 18.1%, my overhead varies from year to year, but averages around 20% now that I do a little less cabinetry than I have done in the past.

When we did more things in house (i.e. manufacture doors, and did more of our finishing in house rather than outsource), payroll percentage was higher, cost of goods sold was lower, but overall profit remains about the same. When I really make a push to have a good year, and concentrate on sales, I typically can run my net up to around 28% to 30%.

From contributor C:
Our shop is bigger - 7000 sq. ft. with 3.5 FTE employees, \$500,000 in sales. We run roughly 1/3 direct materials, 1/3 labor, 1/6 overhead, 1/6 profit.

From contributor G:
I'm assuming you to be owners. Is your pay/salary included in the net figures, or have they already been taken out and you're actually making those margins?

From contributor C:
My pay is included in payroll; the net is profit.

From contributor A:
I'm sorry for referring to the overall business model as labor/material. I find it the simplest way to discuss the material aspects of our business. Basically, as I mentioned before, material should not go much over 1/3 of gross sales in a manufacturing business. Your own numbers closely resemble this number, as well as most of the other people in this thread. I like to keep it simple because this discussion always ends up in arguments over simple terms like gross, net, and profit. But then again Enron, WorldCom, and Arthur Anderson had trouble figuring out their books as well.

If we price a project: time and material, the differences in overhead are taken out of the equation. The material is a true cost that comes off the first line of your sales. All other numbers like profit are calculated after material is taken out. When a business's material is out of whack like the questioner's, you have to ask simple questions to get clear answers. The labor is your shop's hourly rate, which should reflect and include profit, etc. I hope I have been clear this morning...

From contributor Y:
While we don't have the years behind us that others here do, after two years (just starting to turn the corner into decent profitability), our material costs have ranged from 19% - 28%. We don't do large cabinet jobs such as kitchens, but rather focus on high end built-ins, furniture and wine cellars. By staying in a niche that works for us, we are able to stay away from some of the competition that drives prices down in the home cabinet market.