Payroll as a Proportion of Costs

Cabinetmakers help a colleague analyze his labor costs and compare the office, shop floor, and installation shares of it. May 12, 2008

I run a commercial cabinet shop and we manufacture frameless cabinets using a beam saw, edgebander, point-2-point, ect. We do about 1.5m in sales/year. We have 18 fulltime employees. I feel that our expenses are pretty much under control (except administrative fees charged for payroll service 1% of sales). It seems our COG's is on the high side not leaving us much net profit. This leaves me with three conclusions either low productivity, under estimating projects or not enough sales for amount of office employee's.

If I break down our payroll by class, office personnel including owner 34%, manufacturing personnel 55% and installation 11% of total payroll. Our payroll is 36% of our sales.

Could anyone give me some insight to your payroll percentages for a similar company profile? Does this make sense? Am I making it more complicated than it needs to be?

Forum Responses
(Business and Management Forum)
From contributor D:
Complicated? No! You seem to have things narrowed down to its simplest form. That is a good thing!

In overview, I think your percentages look pretty good. Your manufacturing expense percentage is high for the equipment you have. Your installation labor percentage sounds very good. Your office expenses sound right in line. The 1% administrative payroll fee is certainly not your problem.

Now, looking at the big picture, 36% overall payroll including the owner is a pretty darn good number. I would take a look at what is going on in the plant. It seems to me that your surprisingly efficient field operations are carrying the weight of some deadbeats, and inefficient operations in the shop. If your shop operations were running as efficiently as your field operations, you would be swimming in cash!

From contributor M:
I have a couple of comments.

1. 1% of revenue or 1% of payroll for your processing fees? If 1% of revenue you need to find a new payroll processor. We have the same number of employees as you and pay $86/period to ADP.

2. Your sales/employee seems really low at $83k per year/employee. But I'm in a different aspect of woodworking that is probably not as labor intense and probably lower gross margins. Since you seem to imply that you think your labor is high what have you done/looked at such as automation of processes, CNC, improved material handling, value stream mapping, continuous flow, etc?

From contributor W:
I may have some good input if you answer some questions:

How busy are you; in other words, are you always looking for work to stay busy, or are customers 'tolerating' your long lead times? Is there room in the shop to add 2 or 3 entry-level people productively? Finally, do you have an incentive system in place and how is it structured?

From the original questioner:
First, I will address Contributor M's comments. Administration fees work out to $288/week average. I am currently seeking quotes for better rates or even bringing payroll in house and working with our accountant which charges $5/check or about $90/week. Because our current payroll company takes care of the workman’s comp I will have to re-establish this elsewhere.

Contributor W - we seem to keep a steady stream of work with about two times per year getting slower than normal. What I am saying is that our receivables per quarter are consistent within 50K. By my calculations I feel we should be doing 1.8m per year in sales but we can't control that in a dynamic market. So I am trying to determine how to balance enough labor for the slow times and the busy. Surges of work seem to come from nowhere. We have been getting more work over the past twelve months than in the past (due to new estimating system and better customer service which seems to bring a lot of repeat work). Our back log use to be 250k-500k over 6-12 months.

Now we have 800k-1.2m over 6-12 months with lots of fill in work (repeat customers and referrals). Is there room in the shop to add 2 or 3 entry-level people productively? Yes, I believe this would have advantages.

We have ten shop employees. Seven focus on boxes. There is one man at the beam saw and bander, one between p2p and assembly as required, one full time builder, one full time laminator, one full time hardware, one floater and one full time helper works where needed. We have two custom fabricators and one supply and logistics. The pay scale for shop employees range from $8-20/hr and the average is $14/hr. We have two full time field installers.

Do you have an incentive system in place? How is it structured? Not at this time. We do small things like donuts every Thursday and cookouts from time to time.

From contributor D:
To the original questioner and contributor M: can I ask you guys a question? I am in no way trying to intrude on how you guys run your businesses. I am just curious about something. The original questioner is running $1,500.000 through his books. He seems to have profit percentage and cash flow concerns, or both. There are several attributes that could in fact be the problem. In attempt to detect the problem, you both suggest that the first place to look for the missing profit is to audit a service that constitutes 1% of his receipts? We have office personnel consuming $183,000 a year. We have shop personnel consuming $297,000 a year, and you guys go straight for the throat of a department that is costing $15,000 a year? This may or may not be high just depending on the extent of the accounting services performed by that particular department, but now is not the time to question this department! Have you guys ever heard the term: Focus on the Whales, not the Minnows?

I just cannot understand why you guys would look first at the department that consumes the least percentage of all the other departments that are costing the company significantly more money?

To me, this is the equivalent of being on a sinking ship, and grabbing for a child’s balloon to help stay afloat instead of a Coast Guard certified life vest, and/or life boat that are in equal grabbing distance.

Gentlemen, I mean no disrespect for you or your methods, I just cannot understand this. Perhaps I missed something, but if I didn’t, an explanation to this rather unconventional problem solving method would be greatly appreciated.

From the original questioner:
To contributor D: It is ok. Admin fees were more of a side note then the main topic. It was easier to address then the big picture.

I found your comment interesting about the installation numbers being good. I always felt the field crews seem to miss the mark (what we estimated). This might be that we under estimate the installation (lost profit)?

As for the manufacturing side I failed to mention we have six employee's doing boxes, three full custom, one supply and logistics and one helper. I did not want to open another can of worms but we are working without a foreman at the present (no direct production control = lost profit). We have had some ups and downs in finding a good replacement over the last 12 months.

Please don't lose any sleep tonight over this it is not that critical yet. Indirectly, I am new at this (1 1/2 years millwork owner and 11 years in a manufacturing environment as an employee) and just looking for clues (guidance from the more seasoned) to put the puzzle together. It is good to hear I might be on the right track.

From contributor M:
You'll note my second question is specifically focused on what appears to be a productivity issue, or too much overhead staff. Looking at the original questioner’s numbers 18 total with 10 in the shop and 2 installing it appears that 6 people (I assume including him) are in pure overhead roles. That’s a third of his workforce and since it includes him I would assume it’s well over a third of his payroll. I would recommend taking a serious look at reducing the overhead staff while at the same time improving the productivity of the manufacturing staff. With the possible exception of commission only sales, any money saved in the front office again goes directly to net.

I'll go really out on a limb here since I know nothing about your specific business; this is based on my experiences with a number of companies, my own and as an employee for others. As a 1.5M company you should be able to run the office with 1 sales person, yourself, and an estimator. During busy times, vacations, etc you may need to consider a temp to handle phone calls, etc. and fill in for the missing person yourself. Work with your network (accountant, attorney, payroll processor, etc) on the non-core responsibilities. If these numbers work your headcount in the front office would be cut in half, your sales per employee would bump up 15% to $100k/person/year which is big improvement, and the payroll you save could go back into the business in new equipment, automation, etc. etc.

Next, or at the same time, you need to get out on the floor and observe, make notes where you see waste (unnecessary movement, rework, over-processing, etc. etc. anything that is not adding value you can charge your customer for) this is one of the many aspects of LEAN, and is, in my experience, an easy way to identify improvements that can be made and will benefit the bottom line and lead times immediately. If you are not comfortable with LEAN read through some of the threads here on the subject, check out the workbooks and other training material at the Lean Institute, work with a consultant, etc.
Once you’re comfortable with LEAN do a value stream map on each of your product lines, involve key staff from the shop, installation, and the front office the results will amaze you.

Going back to the first point I made in my original post if the 1% is inclusive of workers comp then that big number, and it is a big number because any reduction goes straight to net profitability, is not so bad. I jumped on this because it seemed so incredibly high.

From the original questioner:

There are actually 13 in the shop and 5 in the office I just miss counted. What do you think about this? I have one assistant (handles the phones, faxes, copies, payroll hours, helps with billing, enters invoices, receivables, keeps tracks of current bids and projects, filing, ect.). There is one fulltime drafter for submittals, field measurements and such. There is one fulltime estimator 80% of the time and helps with overseeing the shop and field 20% of the time. One project manager coordinates all aspects of each project including ordering materials, produces mfg drawings in CabinetWare, schedules installation, ect. and myself which seems to have my hand in all aspects of operations pretty equally at this time.

From contributor W:
Based on what you have said about estimating and customer service, I think you will keep on growing. A short lead time and quality products are your best sales tools.

Here is what I see, without having further insight, of course: raise prices yearly. Otherwise, customers will balk when you have to make a huge increase after several years. You do need to review all your expenses such as pay rates and materials, but the easiest way to increase profit is to increase output with entry level employees that you take the time to train and develop. Have a backlog? Hire them, and focus on getting the work out. The work will come. And the profit you make will easily cover you in the slower times. Use the slower times for cleanup, cross-training, etc.

You need a production based incentive system. Production is how you make money, therefore it is the basis. Verbal discussions about quality and relating customer conversations and concerns to your crew will generally get everyone on the quality bandwagon. People naturally take pride in quality. Production takes a lot more effort and focus to achieve.

Your shop needs supervision. Look for someone internally that you can trust, someone that you know respects you. They need to have a huge portion of their pay dependent on production output. Make it clear (nicely) that if they are only making their base pay, you will be looking for a new supervisor. Tell the crew that when they are only making base pay, you are only 'breaking even', which is a minimum acceptable profit for you, not zero profit.

This is a very important concept that I took a long time to embrace. You are not in business to 'make better than breakeven/zero profit'. You are in business to make 6% (pick your number) or better profit. Organize your business around making your minimum acceptable profit or better.

If I am only making my minimum acceptable profit, something has to change, and in a big way. I am in business to make money, no bones about it. Having a well run business means corrections are fluid. A poorly run business is a PITA to fix.