If you want to own a thriving cabinet shop, then there are five very important things that you need to prioritize.
1. Know your margins and keep them at or above industry standards. In my shop, we use margin and throughput interchangeably. Other shops may call it gross profit or gross margin. For us, throughput makes sense, but use what works for you. When you assess your margins, you’re really measuring the amount of product flowing through your shop. It’s as simple as sales minus cost of goods sold.
Gross Sales - Cost of Goods Sold = Throughput
Your CoGS includes all of the physical pieces that can be attributed directly to a job.
CoGS = plywood, hardwood, commissions, contract labor, etc.
You should include anything that you need specifically because you won a job in your CoGS. Things that are not included in CoGS are expenses you pay regardless of the sales you make. Overhead, labor and other fixed expenses are not a cost of goods sold.
Keeping your margins at or above industry standard is one of the most significant ways to add value to your cabinet shop. If you can drive your costs down just a few percent, you can have a huge impact on your net profit.
2. Have a stable group of employees and management. Find a recipe that works for you to find, hire, and retain good employees. Once you find several quality employees, your shop floor becomes self-policing. Your employees will take care of themselves because they don’t want one bad egg to ruin it for everyone.
Your team should always be driving toward the same goal as you. Finding quality employees allows you to create a great work environment where your people actually want to be. Not only will the environment help you retain your employees and end the cycle of persistent turnover, but your shop will become a place that attracts other high-quality candidates.
3. Have a system to efficiently collect money. You need to put in place a consistent collection process where, regardless of who is in the office, money is being consistently collected when jobs are complete.
Set the expectations for your customer from the beginning. When you’re talking about design, measurements, and materials, tell your client how you collect payment.
You may also want to consider giving an incentive for customers to pay early. For example, we offer a 2 percent discount for upfront payment. We also waive the credit card fee for customers who pay in full. For us, losing the credit card fee is offset by the benefit of having cash in hand early.
4. Have a realistic growth strategy. Sometimes, as a small business, it can be hard to follow a growth strategy because so much of the business is fly-by-the-seat-of-your-pants. However, you really need to create a realistic, repeatable strategy to control your growth. You don’t want to grow too quickly and go off the rails, but you don’t want to grow too slowly either.
In my shop, we currently shoot for 20-25 percent growth per year. More than 25 percent can make it too difficult to keep up with the cash demands, but less than that isn’t enough fuel for our fire.
In your business, figure out a realistic number for your growth, create a plan to achieve it, and then stick to it.
5. Have a diversified customer base. This tip may feel overrated, but it’s super important, especially when looking at your business from a valuation point.
If one customer makes up 30-40 percent of your revenue, it’ll significantly affect your valuation. You want to keep your large customers to 20 percent of your gross sales or less. Allowing one customer to account for more than 20 percent of your sales creates a situation where losing them could sink your ship.
In my shop, we shoot for 15 percent of gross sales or less per customer; 20 percent is our absolute upper limit.
If you aren’t already implementing these tips, especially the last three, then it’s time for you to step off the shop floor and start working on your business. Owners who want their business to grow strive to create and stick to a realistic plan, have a diversified customer base, and groom a second in command who can steer your ship while you’re away.
Source: Jeff Finney is the founder of Ultimate Cabinet Components, based in Collinsville, Oklahoma; 918-371-7171. For more shop insights from Jeff, check out his articles at UltCab.com or listen to his podcasts at thepushthru.com.
Have something to say? Share your thoughts with us in the comments below.