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
(Business Forum)
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.
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.
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.
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?
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%.
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...
