Profit margin

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Neal Reeves
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Profit margin

Postby Neal Reeves » Sat, Aug 07 2010, 11:30PM

I need some help from some of you very smart businessmen. Building, finishing, and installing cabinets has always been an easy task for me compared to running the business. My wife is good with paying the bills and keeping things straight, but she, also, lacks the ability to run a business to turn a good profit. I realize that we are in a recession and that we won't gain as much now as we did before 2005, but it seems that we just get by. As much work as we had in the late 90's and the early 2000's, we should have had more than we had to prove that we had been an established company. I think that we haven't been charging enough for our products. Is there a rule of thumb for figuring how much custom cabinetry is worth? We have cut all that we can cut and there is still no money left. :wall: Please help!!! Even when we're working 6 days per week, we still have to rob Peter to pay Paul. How do I earn more??
Neal Reeves
Country Cabinets, Inc.
Bonifay, FL

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Gary Puckett
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Re: Profit margin

Postby Gary Puckett » Sun, Aug 08 2010, 9:22AM

Neal,

That's a tough one, and has puzzled our business for many of us. I don't know if you are a one man shop like I am but it seems like we are always paying Peter to pay Paul. I use to do work so cheap that it was ridiculous.

What I do now is charge a hourly rate of $ 35.00 per hour, and 10-25% mark up for material, plus a 15% profit. I am now charging for renderings of the project ( been Burt to many times ). The area that I am in is a tough one ( St. Charles, MO. ) everybody wants something for nothing.

Here is a story for you. I had a client( a bother Knight of Columbus ) I have done work for him before ( modified his stair case) he wanted his bathroom done I gave him a price, he talked to me at church and wanted the bid broke down into each area ( so much for tile, so much for paint,and so on) well I did that and I explained to him that doing it that way I had to bid each area as if it were a separate job. This made the bid higher, well he still has not called, but he has the rendering of the project ( that was the last a final burn )
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DanEpps
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Re: Profit margin

Postby DanEpps » Sun, Aug 08 2010, 10:04AM

What you need to do is first, get all of your fixed costs for for the last 12 months (expenses that are not job related like rent, electricity, insurance, etc.) together. Next, get the variable costs (materials, direct labor, etc., not selling price) of all the jobs you did in the last 12 months.

Now decide how much personal income you need. Don't include business-related expenses as they are covered in your fixed and variable costs. Add your fixed and variable costs together to get a total of expenses. Divide the personal income amount by the total expense amount to get the profit margin you need.

The formula is:

M=(I/(F+V))*100

Where M = profit margin, I = desired personal income, F = fixed costs and V = variable costs. The *100 is just to give a whole number percentage instead of a fraction.

Very simple example:

$50,000 income desired
$25,000 fixed costs
$50,000 variable costs

I=50,000
F=50,000
V=50,000

M=(50000/(50000+50000))*100

M=(50000/100000)*100

M=(.5)*100

M=50%

In this example you have $50,000 in fixed costs, $50,000 variable costs and want to have $50,000 personal income. To achieve this you would need to have a 50% margin over fixed and variable costs. Each job price would consist of allocated fixed costs plus job-related variable costs times 1.5.

Note that you MUST allocate fixed costs to every job in some manner. How you allocate is not so important as making sure you always do it the same way and that you FULLY allocate fixed costs.

Neal Reeves
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Re: Profit margin

Postby Neal Reeves » Sun, Aug 08 2010, 2:37PM

Here is some more information that may make a difference in the way you perceive my business and may help you help me fix my problem. I have 2 employees. I don't have a CNC.(Want one badly! Scared to make the purchase under the economic circumstances). One of my men primarily builds and cuts. The other one primarily paints. I and my wife do all of the installing which is too much for her, but my painter isn't capable of doing it and I need my builder building the next set. I hate installing but it doesn't make sense to hire someone else just for that. I don't think I could keep him busy the rest of the time. I used to have 5 employees and had the work to support them. Now, we're busy....we're slow....very inconsistent. The extra profit that my business earned from the extra employees disappeared when the employees did. If I laid off my 2 guys, I would save 11 to 12 hundred bucks per week; however, the work that they did each week that made me money would be gone as well. It seems that I had more when I worked more people. I also had more headaches. I feel like that I and my wife together should easily be able to clear $5500 each month, but with only 2 men, it doesn't seem to be there. Maybe I am working too cheap. It makes me not want to do it anymore and I hate feeling that way. Thanks for all of your advice!
Neal Reeves

Country Cabinets, Inc.

Bonifay, FL

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DanEpps
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Re: Profit margin

Postby DanEpps » Mon, Aug 09 2010, 5:52AM

The formula I gave above will tell you what your profit margin needs to be--you just need to fill in the other two numbers.

Have you thought about contracting out installation? That would free up your time and in the long run would probably cost no more than the lost production when you do the installs. By contracting it out, you wouldn't have to worry about feeding extra employees when business is slow or hiring more when business is booming.

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Re: Profit margin

Postby Rob Davis » Mon, Aug 09 2010, 11:53AM

Neal, Another way to look at it is to start with fixed expenses. Those things that truly don't vary with volume like property taxes, your income, light bill, etc. Then say you are in an area like we are with plenty of competition and so we know we need to be in the 35% margin maximum arena. Take total fixed costs and divide by 0.35 and that will tell you how many sales dollars you need to generete in your scenario. Then look at your assumptions and decide if your guys can do that, etc.
Example, fixed costs are $35,000 per year. Margin assumed to be 35% so my break even in sales is $100,000. Then ask yourself, can I sell 100,000 with current employees and without adding any costs (like overtime or machinery, etc.)
You either end up knowing how many sales you MUST make to break even or you decide you have to cut costs even further or even go out of business. Or you could realize that you might sell lots more if you add one more person so maybe you add a person but double your sales, ....
These are not easy questions or easy answers in these tough times! They are the right questions to be asking however.

Neal Reeves
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Re: Profit margin

Postby Neal Reeves » Mon, Aug 09 2010, 9:02PM

Thank y'all!!! I am going to put some numbers together in the next few evenings and see what I come up with. I will probably have more questions. You all don't know how much I appreciate the info. I'll be back!
Neal Reeves

Country Cabinets, Inc.

Bonifay, FL

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Neville Bastian
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Re: Profit margin

Postby Neville Bastian » Tue, Aug 10 2010, 7:57PM

Hi Neal,
We are all in uncharted waters with running our business because all of us are tradespeople who evolve into business people.
Dan has given a great idea to work out your costs and where you want to be. I tend to look at my successful car service mechanic. No more educated or skilled than us but charging in my area $85.00 a hour and 30% mark-up on materials used if not more.
Its always scary making that charge for jobs when you quote but if you don't you will always be in that situation. To buy that new Thermwood you will never have the funds to make that payment if you don't make changes.
If you are in a tight money area you are just going to have a 3 year goal where you increase your margins and try to sell your product over your competitors based on service, quality, innovation and being all round good honest guy.

There are also Financial advisors who will look at your business and offer independent advice on how to get you where you want to be. Accountants tend not to be good being entrepreneurs.

Sorry things are tough in the States.
Regards
Neville
Neville Australia

Neal Reeves
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Re: Profit margin

Postby Neal Reeves » Tue, Aug 10 2010, 10:33PM

Thanks, Neville, but I don't think I understand what you mean by a 3 year goal. Speaking to a financial advisor is something I am considering doing to get a professional's view of my business. But, I figured that I would get the best advice from my fellow cabinet makers here at ecabinets, and it seems that I am. I think I know what you mean about accountants. I have tried to get answers out of my tax man who is an accountant, but he keeps talking in circles. He tells me that I need to make adjustments, but he won't tell me where. We are paying our bills. I thank God for that. I, though, would like to make a profit that I could see.
Thanks!!
Neal Reeves

Country Cabinets, Inc.

Bonifay, FL

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Neville Bastian
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Re: Profit margin

Postby Neville Bastian » Tue, Aug 10 2010, 10:59PM

Hi Neal,
With the 3 year plan it could be a gradual increase in your margins say 2% every 3 months. If you just add on say 20% to your Labour charge out then 15% material mark-up you find your regulars will drop you. If you sell the product not just on price but better quality, going the extra mile, Rendered drawings plus what ever else you can find that separates you from people you bid against. That's where a independent person can say it as is. Poor showroom, messy factory, poor person presentation, unprofessional sign writing poor quote letter head etc.
With accountants they have cost me money not saved money. I'm not sure what its like in the US but here they run scared they may give you advice that minimises your tax and be seen as a tax dodge. Our Tax Department make the accountants sign off that all the figures are true and correct. I'm all for paying my fair due but I would like to be told of alternative ideas.
Well if you are still in business after your recession you are doing well. I have been there and done that a few times now. You can only stand the strain for so long. Its good you have the Ecabinets forum to get other peoples ideas on survival mode.

Best of luck. Although they say the smarter you work the luckier you get.
Regards

Neville
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DanEpps
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Re: Profit margin

Postby DanEpps » Wed, Aug 11 2010, 6:58AM

Neville's suggestion on how to raise your rates is a good idea. Customers notice small incremental increases much less than they would a single large increase. It would help a lot if you could get the competing bids from your customers when you win a job. This would let you know the difference in your bid and the others.

One exercise that helps a lot is to develop a business plan. It forces you to closely examine every aspect of your business and use the information to create a five year plan for growing the business.

Neal Reeves
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Re: Profit margin

Postby Neal Reeves » Wed, Aug 11 2010, 5:35PM

This post is kind of directed toward Mr. Dan because it has questions pertaining to some of his posts, but I would like for everyone to feel free to comment if you have an opinion on the matter. Everyone's help is VERY appreciated.
Can you help me understand what you mean by a "business plan?" It sounds like a good idea, but I just don't know what actions I should take. Also, from an earlier post, you gave me the profit margin formula. Should I include my basic salary in the fixed expenses, variable expenses, or is that considered part of my desired income. I am assuming that by the phrase "desired income" you are expecting me to be realistic when I plug in a number. LOL. I am still putting the numbers together from the last year to try to figure out what my profit margin is now. If I am at or close to 35%, what do I do?
Thanks!
Neal Reeves

Country Cabinets, Inc.

Bonifay, FL

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DanEpps
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Re: Profit margin

Postby DanEpps » Wed, Aug 11 2010, 7:07PM

Mr Dan??? Geez, you're making me feel even older than I am. :joker:

A business plan is a formal document that has a few uses. The two top uses are (a) to give you a roadmap for operating and growing your business and (b) to use when borrowing money from a bank, venture capitalist or such.

It contains financial (both pro-forma and actual) and operational information. It also includes a marketing plan. A good business plan is almost a necessity to keep you on track for operating your business. I can help you develop a plan if you would like...just send me an email.

As for the formula, for this exercise don't include your (or your wife's) salary. What you are doing is finding the profit margin needed to produce the salaries you and your wife desire. For the sake of simplicity, consider both you and your wife as a one single income. Once you get your cost information together you can email me the numbers if you like and I can create a spreadsheet that will give the margin needed to produce various incomes.

The one thing that affects your business most is cost. Everything is driven by costs. Without knowing your costs on an ongoing basis, you will have a difficult time maintaining a profitable business. You need to be producing monthly financial statements so you will know when adjustments need to be made. If you use something like QuickBooks you can produce the statements yourself. If you use a CPA then they should be sending monthly financial statements to you.

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Kerry Fullington
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Re: Profit margin

Postby Kerry Fullington » Wed, Aug 11 2010, 7:24PM

Neal,

HERE is a link to an article by the late Danny Proulx that may help you determine your shop rate. (and many other things)
It is worth reading. There is info on a business plan also.
Kerry

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Neville Bastian
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Re: Profit margin

Postby Neville Bastian » Wed, Aug 11 2010, 8:02PM

I guess one thing that does mess up Mr Dans formula is the number of guys you have working for you effects your bottom line. That is why spreadsheets are fairly handy to put in your current situation then put in what turnover you would have with one or more employees. Just remember you will only get about 70% output from a guy that's why the charge out rate is 3 or more times his paid hourly rate. Also you will become less efficient because you are finding extra work and discussing this with the new employee.
If you are having trouble understanding management terms you may need to find a night school class to attend and learn these principals. One of the best advices I had from a business mentor was you make money in business by not doing the physical work yourself but from using your brain. Many times I'd save a week or months wages simply by negating material prices on a bigger than normal project.
Mr Dan will probably explain this better but the more staff you have the more profit you will make. Conversely when the work dries up you have to adjust your staff levels quickly to still make a profit. If you have apprentices and machinery leases you become limited. In the normal times without these costs you become constrained to take advantage of the good times.

Your turn Dan & Kerry

Regards

Neville
Neville Australia


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