|CWB February 2001
Not Making Money?
Here's why, and an assignment that can put you on the road to profitability.
By Anthony G. Noel
Many of the consulting relationships I have developed with custom woodworking businesses over the years have begun with the owner asking me this question: "Why am I not making money?"
The question is not always asked so directly, of course. They may say, "Everybody tells me my prices are too low." Or, "After this many years, I feel like I should be doing better." In any case, such owners have two things in common - a sincere desire to become profitable and utter confusion about how to do it.
I recently got a phone call from one such owner. "I've been doing this full-time for five years now, and I don't understand why I'm not making money," he said. "A lot of people tell me I don't charge enough for my work."
"Who is telling you that?" I asked.
"Other guys who own shops in the area," he told me.
"Do these other shop owners have the exact same tools and equipment as you?" I asked.
"Well, no," he replied.
"Do they pay the same rent? Have the same loan obligations? Build the same projects?"
"So why," I asked him, "are you letting them tell you what to charge for your work?"
Then I had one more question:
"Do you keep track of every hour you spend working on a job?"
There is really nothing confusing about pricing work in order to allow for a profit. Any decent custom woodworker has more than the minimum mental capacity required to figure things out. Yet, those who don't track their costs seem surprised to find they are not making money.
They shouldn't be.
Still, it seems many woodworkers would rather plod along, just scraping by, than try to learn what they must in order to become more profitable. Maybe they figure it is easier to raise their prices based on somebody else's hunch. Or maybe they are leery of feeling like they are turning into a "real" businessperson.
But I've got news for them. If they are relying on woodworking for their livelihoods, it is too late. They already are real businesspeople.
Most woodworkers would rather give up their table saw than involve the owner of a competing shop in their manufacturing processes. Yet, many gladly take their competitors' advice when it comes to pricing. They charge what they believe ("guess" is a better word) the market will bear, instead of finding out and charging what their work is worth. This approach is about as successful as a two-legged chair.
Who does John Doe, Cabinetmaker, think he is, telling you how much to charge? And why the heck are you listening? Just as you figure out what is best for you and your customer from a technical or design standpoint, you have to do the same on the business side.
Your prices must be based on your costs. Equations don't get much simpler than that. (And by the way, your costs are your business, and yours alone. Leave Mr. Doe out of the loop.)
There is nothing about documenting your costs that is intimidating, and there is nothing very complex about using the information to establish prices, either. Best of all, you get to sell your work based on numbers you have real confidence in, because you know they are accurate.
To help owners with the process, this month I'm beginning a new series, complete with easy-to-follow steps to set you on the road to becoming more profitable.
Profitability begins with record-keeping. An astounding number of very experienced and talented woodworkers have absolutely no idea how long it takes to perform given operations in the shop. That might be okay if you are Sam Maloof and your prices have more to do with your name and reputation than anything else. But until you reach that plateau, you need to keep track of all the time spent, all the time, on every job you do.
To begin, sit down at your desk, visualize and list each of the operations involved in producing a job - any job. It is usually easiest to list them in the approximate order they actually occur on a typical job, starting with receiving materials to delivery and installation of the finished project. Assign each task a name, and write the names down as you continue visualizing the job working its way through the process. Leave out all office-type functions, such as purchasing, customer service, sales and design work.
Once you have racked your brain, slept on it a bit and feel you have the most complete list possible, create a simple form with each operation on the left, and space to enter dates and time worked to the right of each category. Allow several such spaces for each task, since some will take more than one morning or afternoon and you will likely alternate between certain tasks.
Your form should accompany every job on its path through your shop, and it will produce information enabling you to establish baseline values for specific operations. But remember: That information will only be as accurate as you are about entering it. Therefore, I strongly recommend filling in the blanks as you work, throughout the day. Trying to "reconstruct" your day at quitting time tends to produce a lot of bogus information based on guesswork.
The more "real" information you can gather, the less "estimating" you will have to do, even when you are actually estimating jobs! Sure, you will still be taking an educated guess at your total time, but the key word is "educated." The more you keep track of your time in the shop, the easier it becomes to accurately estimate future work, even when that work involves new tasks.
The reason? By developing the timekeeping habit, you will also develop the ability to visualize what is involved in every operation, even new ones, and to do a pretty fair job of estimating how long they will take. Without regularly appreciating the time you actually spend on given tasks, you might as well be throwing darts as a way to set your prices.
By the way, you can (and should) use the same "tasks" form you use in the shop for estimating jobs. Using the same form for both estimating and actual on-the-job time-tracking makes comparing your estimated times to reality very easy when the job is complete. Be sure, as you identify new tasks and update the form accordingly, to throw away previous versions. And include a few blank boxes on the "operations" side of every version, so penciling in such newly discovered tasks is simple.
So, we have identified the first step custom woodworkers must take in order to begin making money: They must keep track of time spent producing work. Consider doing so your assignment until next month. Work on identifying and tracking the time you spend on tasks in the shop, ideally on a job you are doing right now. You will be amazed at how quickly it becomes second nature, if you are diligent about doing it initially.
Though it may seem purpose-defeating to "start in the middle" by tracking time on a job you may already fear you have priced too low, don't worry about that. The fact is that you won't be sure about the outcome no matter what job happens to be the first that you track your time on. The key is to get started, so you can begin to see exactly where things stand.
Next month, we will take the first step in establishing an hourly shop rate, factoring in overhead and including the cost of administrative tasks in your pricing and cost-tracking processes.
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