Question
What's the average profit percentage that most of you are experiencing? We've done a few spot checks on projects and come out at about 18-22%. Don't ask me where that money is... We are in the process of streamlining our operation to find and close the vortex that's sucking our profit into oblivion. Appreciate any insight on this.
Forum Responses
(Business and Management Forum)
From contributor P:
Most will try to get 20% true profit. A lot of people have no clue what their true overhead costs are and that is where their profits end up in covering those costs. For example, companies get an average of 5.5 hours of work from a worker getting paid for an 8 hour day, so that has to be figured in. Also, changes done to a job that add cost, but are so small you decide not to charge for, because you do a lot of work for that designer or contractor… When you add these up over a year, they can cost you money. The main thing is, on every job, watch all costs, from utilities to material and labor.
We have checklists for everything, including one the estimators use to address every area of the scope of work, including reading the specs and listing what sections we are in for our scope. When we mock cabinet jobs up, a checklist is run to make sure everything is accounted for. Then another is used for install, the load out, the punchlist and even the billing.
I know, anal, but it seems having payroll in the bank, taxes and material money in there has become a lot easier too.
If you get a copy of True 32, there is a statement that will change your whole outlook, and it kind of says: When you employ people in a shop, you are in control and they will do what you say and follow the procedures you put in place. It really makes no difference to them, they are there to collect a check. We have truly realized that and I changed some of the collecting-the-check attitude by giving some space, but I still control the surroundings, procedures and the tempo of the shop floor.
Look at your books at the same time daily, pay your bills when they come in, and look at every procedure to extract more efficiency. You'll be shocked at the results. We pride ourselves in paying everything by the 5th of the month and in these lean times, credit for materials has become very easy.
The most important thing is we get the materials in the shop and push like hell. We extract every dime from every movement to be profitable. We will make just as much from melamine closet packages as we will from solid surface windowsills. The guys look at casework as a joke after we push out 50-60 sinks in Corian tops with integral splashes.
We estimate and price it correctly from the start and don't tolerate waste. From estimating and materials loading to finished product, we won't tolerate waste.
Our biggest leap was putting a system in place. And learning to ask 4 vendors to price the same Jowat pellet glue - 254.00 to 131.00 for 55 lbs. Same on melamine - 19.36 a sheet to 28.72 in unit quantities. Just got to constantly work to control costs.
We run sliders, vertical panel saws and a couple of PTPs. Hell, when we are overwhelmed with a mess, we stop everything, get the chaos under wraps, then move on. No, we are not the only ones running lean or smart purchasing, but it helps us and that's what matters to us.
Example: One-man garage-shop cabinetmaker versus cabinetmaker with 10,000 sf facility and a dozen employees. The two will never be on par when it comes to pricing, and it is totally out of each shop's control. The one-man shop cannot buy and store a truckload of materials, so he must pay more for materials, and the employer with a dozen employees has to pay much more for everything else, from taxes to electric, etc. From a competitor POV, neither can really do anything about the other's position, as it is out of their control.
What others are doing… I just can't spend any time on it. If you direct the time spent on studying others on yourself, you can be miles ahead in short order. By writing down what I was doing daily, I got to see where I was wasting time and correct it.
Economies of scale: well, we just aren't going to cut and assemble so much that we clog the arteries of the shop with work in process. It does no good to have precious real estate taken by half completed projects.
I noticed the original poster said he was finding 18-20% by spot checking. Not that he was making 15-20%. I frequently make that much on individual jobs, but if I don't do enough of those jobs in a month, there is no profit. Also we can lose enough money on a blown estimate, bad engineering, shop mistake, or a purchasing error to cancel out a couple of good jobs. Eternal vigilance is the price of profit.
On the other hand, if a project has 20% profit but you sit still for 2 weeks, you probably ate up most of the profit in fixed overhead. It's quite easy to come up with large profits when you produce a lot of work in a short period of time. It generally gets reduced over the course of a year with operating expenses. It can come from having less overhead than expected due to the time the project was completed in, plus smart purchasing and good production management and everything else in the process.
Another place your "profit" could be sitting is in work in progress, depending on how your software relieves WIP. At 20%, for you to not see the money, your AR days would need to be quite a bit out, like 90 or more. So is your inventory overvalued? Too much WIP? Every project invoiced? All project extras invoiced? Receivables coming in or delayed? So many places to look.
I learned a long time ago a good month or two's profit can go away quick, so we work anything in we can. We bill for everything and not a change is made until an order is issued or an estimate is signed, period. It all adds up. If you shoot from the hip on pricing, your profit goes way down. If you buy what you need for the moment, productivity goes way down.
Contributor R, I have read and reread your posts and this one is crystal clear. I will not fight for 10% on those kind of numbers, period.
I started in my basement and left it about 7 years ago with a hot air bander, Powermatic 66 and Blum machine. After a big job with that low capacity stuff, I jumped in full tilt, bought the big stuff and about lost everything over the way I did business and all the work in progress crap and other mistakes. Yeah, I've made them, but I refuse to repeat them. I'm hoping my clear cut thinking and posts help others.
Contributor J's post is nice - it kept me up last night reviewing where we lost money on what job and why, and how not to repeat the same mistake.
Here's an example. In another thread a few days ago, a poster asked about the 32mm system. Contributor C very confidently told him that he should:
"Go the route of the office pushing the CNC from design to cut in the screen-to-machine mode. Cabinetvision ain't cheap, but neither is standing around waiting for cutlists to be generated."
Sounds like contributor C is speaking from experience, that he has found success with this method. After all, he's claiming 20% + profit margins in this thread. But in the next sentence he says:
"That's where we are almost at. The idea of shop drawings corrected, to cutting is getting us excited enough to wet my pants."
Wait a minute, are you telling me you almost have Cabinetvision working right? So when you finally achieve screen to machine, what then, 50% net profit? Come on man, give me reality. If I am seeking advice, I don't want it from someone who thinks they might be on to something.
We use Cabinetvision daily, and all the bugs are worked out for our system. However, we don't post to our PTPs and just program it at the floor. Whatever it is the poster buys, they will need to dial it in. We don't post to our PTP, but send copy our jobs and run them to a friend. They cut it while we do our thing at our shop. It's nice to watch 30 pages of drawings turn into a job cut a few days later.
I have my own flat table, and CV ultimate, just not the link, and it's just a few months until 2 trucks and a bander's payments go away. I learned not to get too deep, especially in this economy.
Paul Akers talks a lot about fixing what bugs you, as what bugs you is where you are losing control. Where you are losing control is where you are losing money. If you don't have metrics or dubious metrics, that is the place to start, but don't overdo it.
Next come fees (i.e. banks, late charges on invoices, utilities, etc.). One area we have had a challenge with variable costs is gas. Perhaps a better way of looking at this is, what are you doing as a company to increase profit during these times?
I'm leaning towards 20% not being the real profit when spread out over the 50 projects of varying sizes we do a year. We also lose a tremendous amount of money/profit on jobs stretching out and not being completed in a responsible timeframe. Whether we finish a project or not, the overhead/payroll continues to tax the cash flow.
Within the last few weeks we have, however, reinvented our workflow and daily/weekly goals. Also, we work on exclusively one project at a time now, from start to finish during regular hours. We were jumping around too much before, which ultimately led to damaging delays and frustrated clients.
All in all, our business is growing and I know in order to be successful we have to get serious about the business side of cabinetmaking. And from what I can tell, you guys crunch the numbers.
I would like to implement a cost/pricing/scheduling software as soon as possible. Currently we use Quickbooks for our accounting, but it isn't cabinet friendly enough for job costing/estimating. Can anyone recommend a solid affordable software for this use?
I am also very keen to learn more on Lean Manufacturing.
The thing that really got me to start using Lean was the Paul Akers show. I would just start listening.
We made a 5% profit this year. The corporation gave my partner and I a 25% raise in July.
The biggest variable for us has always been labor. We have a good computer based system for that, but it requires the cooperation of every employee to make it valid. If during the day an employee starts working on a different job and he doesn't log in to that one but continues to be logged into the prior one... You get the idea. Provision for tracking time must make it fast, easy and automated. We started with hand-filled-in time sheets - hopeless. The habit was to fill them in at the end of the day with what they guessed they had spent their time on. Then we got a time clock and the usual time cards with a place to write the job number. Problem was you had to walk to the clock and back to your work station. A waste of time and it didn't encourage logging in and out as needed. Sometimes you could even read them. Finally we went to a computer based system. We installed 5 shop terminals connected to a server. The software keeps track of time, can generate job specific reports, writes the checks, calculates taxes, vacation time, etc. Since we label most parts with all sorts of information at the beginning of production, finding the job number is easy. The day before payroll, a time printout is given to each employee so he can confirm the information.
We gave up trying to track some small items of inventory. Sheet materials are tracked/entered at the router and panel saw. Lumber is tracked at the rip saw. Hardware is assumed to be what was either on the bid sheet or what was on the purchase orders. The software for bidding, purchasing, inventory and production is all linked.
Things have gotten better with time, not perfect. At our end of the month job reviews, we still find things that could have gone better. We decide if they are worth the time/cost to fix, monitor or just let them be part of the lost percentage between what we had entered as our profit percent on the bid form and what it really comes out at the end of the year.
By the way, our target profit on the bid form is 14%. I'm perfectly happy with 10% at the end of the year. Where did the other 4% go? Uneven flow of work is a major culprit. Errors in time estimating is another. Reaching the breakeven point? Maybe! Damage, no-pays, the list can go on... We are a small shop with sales in the $2-3 million range.
There is a vast variance of profit margins in cabinet shops in North America. Some are making tons of money and others are struggling to keep their doors open. There are hundreds of reasons why.
I honestly don't care about the percentages as much as some would think. I'm more worried about a solid line of work making the shop hum, day in and day out. I just make sure we bid the work right and when it's not a plain sliced job, we let everyone know we have such and such allowed and if anyone knows an easy way to get an odd job done, let me know.
I don’t think everyone here is comparing apples to apples. Some draw a salary and others do not. Is their Net Profit Margin then not including the owner’s salary? Some include the owner's 401(k) contributions and others not.
I assume most of us are either an LLC or a Sole Proprietorship and file a Schedule C. Let's use the standard formula of: Net Profit Margin (percent) = (Net Income / Revenue) x 100
Then take from your Schedule C Net Profit Line 31 and divide that by Total Sales (after returns) Line 3 and you get your Net Profit Margin. If you have paid yourself a salary, you need to add that amount into the Net Income value.
The 401(k) contribution for the owner should not be included in the business expenses, as this is taken as a deduction from your personal taxes and not the business. Regardless of whether an owner wants to max out his 401(k) or not contribute at all, it doesn’t change the Net Profit Margin for the business.
Once we all start reporting the same source for the numbers, then the percentages will start to make sense. My Net Profit Margin has been running around 12% for the last few years.
The assumption is you are a LLC or Sole Proprietorship. The business itself doesn’t pay income taxes and all income gets passed on to the owner(s). An example is below.
Business A – owner draws a salary
$1 M sales
$900 K expenses all other deductions
$100 K owner’s salary (taxable income to the owner)
$0 business profit
0% net profit margin
Business B – owner does not take a salary
$1 M sales
$900 K expenses all other deductions
$100 K business profit (taxable income to the owner)
10% net profit margin
The owner of “A” says my business made 0% profit (though he paid taxes on $100 K of income).
The owner of “B” says my business made 10% profit (though he paid tax on $100 K of income).
The bottom line is both business owners ended up with the same $100 K of taxable income, however the Net Profit Margin is very different. We cannot compare business to business unless everyone uses the same set of inputs. If you take a salary, then you need to add that into the business profit to then get the correct Net Profit Margin. I’ve seen profit numbers listed on this forum from 0% to 30%, but they are meaningless to me unless everyone in including the same set of numbers.
Contributor K, you pay tax on your salary + bonus + net income.
The only way we are going to be able to benchmark ourselves is when we all use the same set of numbers. Since the salary of the owner(s) is a high percentage in small businesses, including it or not including it changes the profit percentage dramatically. To me, all the profit percentages listed in this thread are useless numbers.
Maybe a better term we should use is cash flow. Cash flow is the movement of money in or out of the business to the owner(s). Cash flow then equals salary + bonus + company profit. When a bank or buyer looks at your business, he evaluates the cash flow of your business, not the profit of the business.
So I will ask the question differently: “What's the average cash flow percentage that most of you are experiencing?”
Cash flow = Owner(s) salary + bonus + profit from the business
My Cash Flow Percent has been running around 12% for the last few years.
In your A & B example above, if the owner takes a salary or does not, but instead a draw, the $100K is removed from the gross profit in both cases, so in both scenarios, after doing so, it leaves a 0% net profit. It doesn't matter which way you draw it out, the net profit is the net after you do so.
The net profit is the same set of numbers if you are talking net and not gross profit, hence the original question. I see where you are going, but your cash-flow method just adds confusion to the mix. It asks for three components (owner salary, bonus and then, I assume, company net profit). To get your cash flow number, you still have to determine the net profit. The simplest method is net profit as it is the most naked number for measurement.
That said, if a company has already established capital reserves, etc. but has debt, there should be no net profit, but additional payment to the debt principle to remove the debt burden and retire it earlier. If you carry debt, but want to be able to say you carry a net profit, you are actually eating away at future net profit by paying taxes to the government on the existing company net profit, and additional interest towards the debt.
Contributor R: "I also take draws - when the company is profitable I take more and I have more money, but the company is less profitable."
As usual, right on the money. The money left over after all income, draws, bonuses, expenses, etc. is the profit. Net profit, that is. If you draw it all out, there is no net profit. If you don't, the company income sheet gets the net profit and is taxed based upon that.
Also, I am referring to federal taxes and not state or local taxes. Most state taxes follow the federal guidelines, but I’m not sure of every state. NY state follows the federal guidelines.
When I refer to the owner, this means Single Member LLC, Multiple Member LLC, Sole Proprietors and Partnerships, basically the owners of the company, and it could be one or many.
Basically, if you file a Schedule C, your business pays no income tax, zero, nothing. Schedule C passes all income to the owner and the owner pays the tax on his personal tax return. This is called a Pass-Through entity.
For example, Schedule C Line 31 is the Net Profit/Loss from the company. That number is then carried over to the 1040 line 12.
Form 1040:
Line 7 Wages: This is wages you paid yourself through the W-2 process.
Line 12 Business Income: This is the value of Schedule C Line 31 from above.
Line 22: Total income: The total of wages and business income, and a lot of other income, but that is not important here.
You pay tax on your total income. The business itself pays no taxes.
To see this, go to your last income tax return and look at the 1040 and Schedule C. If you don’t have them available, do a Google search for Schedule C and take a look at the form. Nowhere on the form will you see the words "income tax." Also ask your CPA or tax preparer. They will confirm that the business itself doesn’t pay income taxes.
Now, getting back to the original question, how do we benchmark ourselves in an apple to apple comparison? With the calculation of:
Net Profit Margin (percent) = (Net Income / Revenue) x 100
Net income then includes the owner's wages paid through a W-2 plus the Schedule C Net Profit/Loss.
Also, it doesn’t matter whether you take a salary or take draws during the year, the bottom line is the same - it is all included in the business profit. For example, I take monthly draws based on my estimated profit/12. I don’t have to report a W-2 but I do pay quarterly estimated taxes. If you get a paycheck (W-2) income, then you are paying the taxes every time a check gets issued.
Basically, for Schedule C filers, there is no real capital reserve for tax purposes. Since all profit is distributed to the owner at the end of the year, there is no capital to put into the reserve. Now, in reality, not everyone takes all the actual cash from the business, so there is a capital cash fund that is available for you to use, but in reality that is your personal cash because you have already paid income tax on it.
The company doesn’t pay taxes; the owners do. Taking a salary or drawing an amount from the business doesn’t change profit. Profit or loss is a result of an activity and a measurement of that activity. For example, a sale is made, employees work, material is purchased, utilities get paid, etc. Issuing a payroll check to the owner is an accounting transfer from the business account to the personal account. No real activity took place to change the profit or loss of the company.
Once we all start reporting the same numbers, we can then establish a benchmark to see how we compare to each other. When stating your Net Profit Margin (percent), you don’t need to report your total sales.
Our business pays myself and my partner (both owners) a salary based on what we reasonably think it would cost to have someone do our jobs. I personally also consider what I would make employed somewhere else using my skills.
I don't think it matters whether it is a lemonade stand or a large corporation, compensation for labor expended is an expense that wouldn't exist without the business activity and should be treated as such.
One can state that their business profits X relative to revenues, but if the owner is putting work into it and not accounting for his salary, he is inflating the business profit by understating labor expenses. An unaccounted labor subsidy.
Should one want to seek financing/investing or sell out, the other party will want to see these figures using GAAP. Since there is no tax advantage from the standpoint of a proprietorship, partnership, LLC or SCorp, there is no reason for it not to be accounted for as a labor expense.
Not including compensation for active owners in line with their function in the company understates expenses and inflates profits. My wage has nothing to do with the company's net profit except when I am giving myself my performance review. It is a valid expense and is treated as such in my profit/loss calculations.
I base it on many factors including recent job listings, my top paid man, my personal employment best, etc. It is enough for me to live on and competitive enough that my partner could get help if I became incapacitated or left. My partner and I may or may not take extra out on a good year - it depends on everything. Every situation is unique and decisions about profit allocation are as varied as the owners that make them.
There are variations in the profit percentage that seem to run along revenue lines. A company doing 1.2 mil may do 7%, 84k net and a guy may do 250k at 20%, 50k net. Both examples from my personal experience. For the record I am not satisfied with our recent or current performance.
Net Profit Percentage is useful as a benchmark, and comparing with others is interesting but little more. Comparing it to your own history and your previous projections is where its true value is.
