Costing will tell you if you are making money. But what if the answer is, ‘No.’?
The response continues to last year’s how-to series on setting up and using a cost accounting spreadsheet.
Shop owners and managers from across North America have written to say how the costing process has answered the biggest question they faced at the end of every job: “Did I make any money?”
For many, the answer is surprising: They did, but not as much as they thought they did and sometimes not even on the sorts of jobs they thought were profitable. Others are learning they aren’t profitable, period. But now they know why: They are not charging enough for their work.
That’s about as macro as it gets, right? I mean, if you are losing money, you are obviously not charging enough! But where is the line?
How much is enough to be profitable without being so much that it prices you out of the market? This is the question, my friends, which signals our arrival at a little place known as THE NITTY GRITTY.
There are two basic approaches, really. One is what I call the attitude approach; the other, the practical one. You stand to make a lot more money if you go with the first, but let’s begin with the second.
The practical approach to increasing prices is to slowly ratchet up your numbers until you see orders begin to tail off. This approach has its merits, especially when done together with consistent costing and an awareness of general trends in the broader economy. That is really all the info you need in order to distinguish, price-wise, between “slow ratcheting” and what your customers would call “crazy talk.”
The attitude approach, as the name implies, is all in the presentation. Essentially, you bring an attitude that says, “I’m great. My work is great. It will cost you this much. And if you won’t pay it, somebody else will.”
There are a couple of things you should know about this approach. First, though you do stand to make a lot more money using it, you might also find yourself sitting — sitting around a lot, twiddling your thumbs, specifically.
Another thing about the attitude approach is that it takes a particular, innate kind of personality to pull off. In more than 25 years in this business, I’ve known one guy who could do it consistently.
Finally, the attitude approach and cost accounting are pretty much mutually exclusive. If you have used this approach for any length of time, you are probably one of two things: wildly successful (so cost accounting is unnecessary) or already broke. And as the saying goes, you can’t count what you ain’t got!
The Practical Approach
So, assuming you are not one of those rare attitudinal successes, how do you break down your costing process and apply it to make profitable changes to your pricing?
You do it by analyzing how hours are spent on jobs which, in turn, allows you to use the right people in the right places. The sample time sheet included as part of the costing how-to series was a bare-bones specimen (see bubble). If you have determined that you are not making the money you should, now is the time to put some flesh on those bones.
Grab a handful of completed time sheets from past jobs. On a separate page, make note of every different task or operation listed. At the same time, imagine you are working on a couple of jobs yourself. “Do” these jobs in your mind, step-by-step listing any additional task not already noted. When you are finished, you will have a pretty long list.
Reduce that list by “folding” tasks into distinct operations. For example, you probably have “sanding” and “scraping” listed. (Goodness knows, we do enough of both.) Sanding is most often done in preparation for finishing or between coats. So think about putting sanding under a broader heading, “finishing.” Scraping, whether cleaning up stock as it comes out of clamps or doing finer work with a cabinet scraper, falls under “preparing stock.”
Continue combining categories and you will notice that different work is done in different areas or departments. Some are obvious: “Edgebanding” (where else?) at the edgebander; “Finishing” in and around the spray room or booth.
Other aren’t so distinct. For example, what about that catch-all place where projects go for special touches or customization? Call it “Specials,” maybe. And before projects get loaded on the truck for installation? How about “Final Assembly?”
Now, re-vamp your time sheet template. Beneath each department’s heading, include a list (in smaller type) of the tasks you have “folded into” it. “Finishing” might include final sanding, priming, primer sanding, topcoats, touchups, polishing/buffing. Employees don’t need to enter times for each task, but the lists will help them know where to enter the time they spend in the broader area or department.
Just as important, those broader categories make it easier for you to answer the questions you must to estimate accurately. Once you have seen the “Cutting” numbers across a few jobs, you will be able to confidently say that 15 sheets of material for the kitchen you are quoting will take X number of hours to cut.
The same will be true of all operations; you will have very precise numbers to plug in when estimating. Use them, and your pricing process will be far less like estimating and a lot more like charging appropriately for your time — which is the whole point.
If you do this and you are still getting plenty of work, start ratcheting up your profit margin. If you don’t get plenty of work, your overhead is too high. That means that somewhere, you are spending money you haven’t got. Only you can figure out where that is. But until you start applying the results of cost accounting to your pricing process, you won’t even have a clue.
Anthony Noel has written for CWB since 1994. He welcomes your comments. Send e-mail to firstname.lastname@example.org.
Have something to say? Share your thoughts with us in the comments below.