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|Posted on July 31, 2015 at 9:50 AM|
I recently had a potential customer balk at the price for a custom TV enclosure that was 8' long, 2' deep and 4' high in a special Formica laminate finish. My estimate was $4,500. He told me that he had 3 shops bid it and we were all in the same price range. He then compared it to a kitchen remodel he did last year for $6,000. Based on that comparison he said we must be making a killing! Ahhh, I wish that were so. I wish we cabinetmakers were rolling in profits. But this is the old comparing "apples to oranges" scenario.
The cabinets he used in his kitchen were made by a factory that produces over 2,000 cabinets a day. A custom shop like ours generally averages 5 cabinets a day. The factory cabinets are less expensive because of the economies of scale. There is a rule of thumb in any custom manufacturing company regardless of the type of product: If you build 100 units of the same type, sell them for $100. If you build 10, charge $500. If you only build 1, charge $1,000. In other words the cost to build one custom piece is 10 times as much as 100. Imagine what it would cost for Ford to build just 1 automobile versus 100,000!
When a product is built it has a lot of individual costs: design time, material cost, ordering, receiving, parts cutting, assembly, finishing, warranty, mistakes, packaging, inspection, shipping, installation, legal, taxes, insurance, utilities, rent and so on (ad infinitum!). All of these costs have to be accounted for and included in the selling price plus the profit margin so you can stay in business and have some reward for your labor. For example, if my labor cost to design a piece is $100 and I build one unit I have to charge $100 for that cost (plus profit). However, if I build 100 of the same units then the cost per piece is only $1 each.
I heard recently that many people think that most companies net profit is 50% and more. If that were true then a company would make a 50 cent profit on every $1 you spent with them. I wish that were true because we would then all be rich and we could pay our janitors $100,000 a year to clean toilets! The reality is a little different. The national average profit for the best performing companies is about 5%. That means that after paying for all the costs in providing that product to you, the consumer, the company makes about 5 cents. And many companies make less than that and are often loosing money.
I recently reviewed our cost of operating for a year. This is the cost that it takes to "open the doors" everyday before you sell anything. What I found was both pleasing and scary at the same time. We run a lean operation and our operating cost is about 30% below comparable businesses. That is a good thing! However, when it was boiled down it costs us about $120 per hour to operate ($2 a minute or $960 for an 8 hour day). This includes rent, utilities, employee wages, taxes, insurance, automobiles, office expenses, insurance and so on (ad infinitum!). This cost must be covered before we begin to make a profit. That money is being spent whether we are producing anything or not.
When we price a job for a client we have to factor the job-specific production cost plus the material into the bid and then add a profit margin to cover the overhead and, hopefully, have 5% or so left over when it is all said and done.
(I would add that as a business owner I get paid out of the profit after everyone else is paid. If there is no profit then my paycheck is zero.)
Running a business, small or large, is challenging and risky. While it may seem that we are all making enormous amounts of money the truth is that some are making a little money and some are losing money. In a few rare cases, some are making a killing but that seldom lasts long thanks to the competition engendered by free enterprise. I am not sharing this to complain or gain your sympathy - I chose to be a business owner and knew what I was in for before I started this business - rather, I share it so that you can tell the difference between the apple of mass production versus the orange of custom work. They are two different types of fruit and comparing them is fruitless (pardon the pun!).
Categories: Cabinet Costs