HOW DO YOU GUYS FIGURE PROFIT?

[Jack-of-all-trades - JOAT]

Not, not trolling. This has been nagging me for awhile. As many of you know, I'm on a fixed income, and I don't do this for a living. I do sell something once in awhile tho, and I know how I figure profit.

Because I'm not doing this for a living, I don't figure in tool wear and tear, depreciation, electric, etc,, simply because I'm going to be using the tools and electricty anyway. I also don't figure in any R&D time, or R&D materials. Again, because I'm not doing it for a living. I do count in price of materials - wood, finish, any hinges, etc. And, try to figure a reasonable price for whatever, based partly on materials cost, but mostly labor. The labor is based on actual time spend working on something, and doesn't include glue or finish drying time.

OK, so based on that, what I would call profit, is anything over materials cost.

I'm curious, because quite awhile back, I read an article about a guy who makes wood stuff, for a living, and specializes in stuff like chopsticks. No prob with that, if people want to pay the $25 for a pair of chopsticks, up to them. The article covered all the guy's expenses, and how he figured all this. There was the usual overhead, elec, etc., tool depreciation, etc. Then there was materials cost. Even with expensive exotic wood, the actual wood cost was low,very low. Maybe a dollar or so, for even the realy expensive woods, but probably an average of about 25 cents a pair, and apparently he didn't use anything like poplar, maple, etc., you know, the cheap stuff. Then the guy figures in the cost of the sawyer, who cuts the pieces, at $75.00 per hour. He is the sawyer. Then, there was labor, at $35.00 per hour, to shape the chopsticks. Only took something like a minute or so for a pair. Again, he did the work. If I recall right, he figured in labor for finishing them too, and again, his labor. So, after all is said and don't, this guy only figured something like about $5 or $10 profit on each pair. He didn't count in the sawyer fees as profit, even tho he was the sawyer, and pocked the money.

So, am I missing anything on how I figure profit? Or, is this guy just trying to find every tax loophole he can?

And, not to knock the guy's chopsticks, but, personally, I've eaten with chopsticks, quite a bit actually, and if I wanted a pair, I'd just go to an Oriental store and buy some of their nice plastic ones. The wood ones I've seen tend to warp after awhile.

JOAT Atheism is a non-prophet organization.

Life just ain't life without good music. - JOAT Web Page Update 15 Sep 2003. Some tunes I like.

[Todd]

there is the decision that has to be made as to how much of what comes in that doesn't cover materials and overhead is divided between salaries and company profits. Keep in mind that if he's paying himself as the sawyer, that he's going to have to pay income taxes and FICA on that salary as well. I prefer to keep everything under the table, which simplifies things greatly (just kidding, IRS...really).

todd

[Edwin Pawlowski]

The goal is to have money left over at the end of the week. How you arrive at the figure can be varied and none are "wrong" as long as you have money left over.

In your case, factoring in tools and electricity is a minor thing. For an on going business, tools have to be maintained and replaced, so it is a definite allowance should be made. As does insurance, rent. etc. In my case I use an hourly rate that has all the expenses factored in and run at

85% efficiency. The 15% includes maintenance time, set up, or just sitting because there is not enough business at some periods of time.

Shop rates vary. Call in any tradesman and $50 to $100 an hour is common. In my case, I run machines. Dependsin on the size of the macine, I figure $100 to $300 per hour, plus mateial. That includes the labor of the operator. Unskilled labor is about $35/hour.

I like it when people look at something that sells for $1 and there are many being shipped, They say "you must make a fortune" or similar comments. My usual reply is "yes, I have a hard time spending all the money, but Mass Electric and others help" Then I show them the electric bill for one month at $12,000.

In the case of many home shop hobby guys, anything that helps pay for material and a few beers is a fun thing. If you are trying to make a living, you must be serious and careful about pricing. Ed

[Rico]

I assume you aren't asking for tax advice. If you are the IRS has guidelines on the how to figure profit and loss and depreciation.

The following assumes you want to know your "profit" for personal reasons, not tax reasons.

If I understand your question and circumstances, here's a couple suggestions as to how you can evaluate your profit. There are also many other valid ways to arrive at an answer.

Profit = Sales Price - Cost of Production.

In your case, since you have a shop full of tools that would be sitting there unused if you didn't use them or would be used for not for profit hobby stuff. I wouldn't count the cost of maintaining your shop, or tools or what you have invested in them. You would have them even if you weren't making stuff for sale.

Cost of production would include purchased materials and on hand materials that you will have to eventually replace because you used them to make things for sale, wear and tear on tools, advertising, mileage, postage, anything that you do specifically to make and sell your stuff.

Your labor cost. That could be anything from $0/hr to whatever you want to call it. One way is to call all your "profit" labor expense and determine how much you were making per hour. Hourly rate = ((Sales Price) - (Cost of production with no labor included))/(hours labor).

Rico

[Bill Thomas]

Greetings,

Over time I have noticed the cost of materials approximately equals the cost of labor for anything anyone does for me. Assuming these tradesmen have their act together, computing the sales price as double the retail price of the materials would put the sales price at about the right level.

Sincerely, Bill Thomas

[Robert Wein]

This is how I compute SELLING price. There is *no* profit in making something for someone if you are making "on the side" or as a hobby. Don't try to calculate it - it will just depress you.

For me, calculating the selling price is simple:

Family and good friends --> double materials Acquaintances and cold calls -- > triple materials

If it is REALLY complex or figured, I'll add a premium but that is based on what it is. Haven't done that for a while - the 2x and 3x has worked well for me in the past.

[Andy Dingley]

Profit is easy. Count up what it cost you, and subtract from the pricetag.

What's stumping me is how to pick the pricetag. I can any (theoretical) profit I like, if I just set the price high enough. OTOH, this may well mean I don't sell any 8-(

[Eric Olsen]

I have recently been doing a lot of one of a kind projects. I have adopted adding up all the materials I will use in wood. This I figure by the square surface footage and then add between 15-25% waste, depending on the choosen wood, to come up with the board ft I will need for the project. Waste, isn't really wasted but by the time you match grains, and pick just the right pieces from the load of lumber the wholesaler has sent you, it seems to work. Then add in the expensive hardware, ie full extension drawer slides, specialty hardware, etc. Then I use 3x that for basic projects and

3.5- 4x for complex projects with awkwark angles, a lot of fluting, spirals, etc. I then take this figure and add $40-100 to it if I have had to do drawings and mulitiple consultations with the customer to fine tune the project. This complex method usually brings me between $25-$40 per hour when all is said and done.

[Leon]

If you are saying double retail price for materials to determine manufactured price, I don't think so. I multiply materials times 5 to come up with manufactured price and that is CHEAP.

Now if you are talking about installing an already manufactured price item, I could better agree that double the manufactured price would be a reasonable assumption of the installed price in some markets.

[matttheute]

I agree with Robert. I have used this same 2X/3X formula, and it has served me well in the past. My old cabinet maker boss passed it along to me, and it seems to work pretty well.

Matt SLC

[danh]

Try Google,

Some examples,

't resist

danh

[slowalker]

To quote Thomas J. Watsonon on the subject:

Formula is:

M+L+O+P (Materials plus Labor plus Overhead plus Profit)

MATERIALS COST = Cost plus Tax plus Acquisition Cost (going to get it) plus carrying costs if financed. Make sure you do your take-offs cleanly and add for waste.

LABOR COST is a bit more difficult. You need to break the job down into individual operations and make sure that you charge for all of them.

Once you have your number of hours figured you need to figure your shop rate.

Maximum number of hours available for work = 2080 (52 weeks x 40 hours = 2080 hours). Minus vacation time = 2000 (2 weeks x 40 hours = 80 hours). Minus holidays = 1944 (7 days x 8 hours = 56 hours). Minus non-billable hours = 1555 (20% of 1944 hours = 388.8 hours) (marketing, selling, bidding, bookkeeping, purchasing, emptying spittoons, etc.)

So, you now have 1555 billable hours in which to earn your money for the year.

How much do you want to make a year as your wage (not including profit, that's a different animal)?

Let's use $50,000.00 a year just for fun.

Labor Cost per billable hour = 32.15 ($50,000 / 1555 billable hours = $32.15 per hour).

OVERHEAD COST = All the costs of doing business. Some of what I put here should go into a thing called Labor Burden but screw it, I'm putting it here, which works if you're a one man shop.

Shop Cost = 3.86 (We'll include heat and electric, etc. in here, $500.00 per month x 12 months / 1555 billable hours = $3.86 per hour). Machinery Cost = 1.29 (Acquisition, repair, maintenance,depreciation, $2000.00 per year / 1555 billable hours = $1.29 per hour). Truck Cost = 2.22 (34.5 cents per mile x 10,000 miles per year / 1555 billable hours = $2.22 per hour). Office Cost = 1.16 (Space, furniture, computer, supplies, etc.$150.00 per month x 12 months / 1555 billable hours per year = $1.16 per hour). Insurance = .64 (Contractor's Liability, building, etc., $1000.00 per year / 1555 billable hours = $.64 per hour). Health Insurance = 1.93 ($250.00 per month x 12 months / 1555 billable hours = $1.93 per hour). Professional Services = .64 (Accountants and lawyers, $1000.00 per year / 1555 billable hours = $.64 per hour). Other = .5 (All sorts of consumables and other stuff that can't be directly billed to a job, $.50 x 1555 per billable hour = $.50 per hour).

Total Overhead per billable hour = $12.24.

Labor Cost plus Overhead Cost = $44.39 (Labor @ $32.15 plus Overhead @ $12.24 = $44.39)

PROFIT is not how much you make as wages, it's how much the business makes.

A rough split on the cost of jobs is 1/4 material and 3/4 labor (Labor Cost plus Overhead Cost).

If your yearly billing for labor plus overhead is $69,026.00 ( $44.39 per billable hour x 1555 billable hours = $69,026.00). Then your yearly materials cost should be about $23,009.00 ($69,026.00 / 3 = $23,009.00).

Annual Sales = $92,035.00 (Does not include profit, yet, Labor @ $69,026.00 plus Materials @ $23,009 = $92,035.00 per year).

Profit = 8.88 (15% of gross annual sales, $92,035.00 x 15% = $13805.00 / 1555 billable hours = $8.88 per hour).

SHOP RATE = 53.27 (Labor Cost plus Overhead Cost @ $44.39 plus Profit @ $8.88 = $53.27 per hour).

ANNUAL SALES = $105,840.00 (Labor Cost plus Overhead Cost plus Materials Cost plus Profit).

QUARTERLY SALES = $26,460.00.

MONTHLY SALES = $8820.00.

WEEKLY SALES = $2035.00

Every time I start thinking like this it makes me want to go back to working for somebody else.

I'll probably catch hell for this because no accountant would ever group things together the way I have. Also, they don't, as a rule, make as much use of the WAG method as I have for cost estimating. They like GAP, I like WAG (they be rich - I be poor). I guess my point is: If I'd had someone present things to me in this way when I started, I probably wouldn't have started at all but, at some point you have to start thinking this way, preferably with the aid of a real accountant, or you won't really be in business, you'll just have a very expensive, very time consuming hobby. And, for you guys who think that 15% is a gaudy figure, yeah, so do I.

Good Luck

Regards,

Tom.

Thomas J. Watson-Cabinetmaker

278 Balligomingo Road Gulph Mills, Pennsylvania 19428

[Michael Baglio]

Pretty much the best piece I've ever read on the topic was posted here this past February by (who else?) Tom Watson. It was a keeper, so I did. :)

Here's his post in it's entirety.

-------------------------------------------

Formula [for how much to charge] is:

M+L+O+P (Materials plus Labor plus Overhead plus Profit)

MATERIALS COST = Cost plus Tax plus Acquisition Cost (going to get it) plus carrying costs if financed. Make sure you do your take-offs cleanly and add for waste.

LABOR COST is a bit more difficult. You need to break the job down into individual operations and make sure that you charge for all of them.

Once you have your number of hours figured you need to figure your shop rate.

Maximum number of hours available for work = 2080 (52 weeks x 40 hours = 2080 hours). Minus vacation time = 2000 (2 weeks x 40 hours = 80 hours). Minus holidays = 1944 (7 days x 8 hours = 56 hours). Minus non-billable hours = 1555 (20% of 1944 hours = 388.8 hours) (marketing, selling, bidding, bookkeeping, purchasing, emptying spittoons, etc.)

So, you now have 1555 billable hours in which to earn your money for the year.

How much do you want to make a year as your wage (not including profit, that's a different animal)?

Let's use $50,000.00 a year just for fun.

Labor Cost per billable hour = 32.15 ($50,000 / 1555 billable hours = $32.15 per hour).

OVERHEAD COST = All the costs of doing business. Some of what I put here should go into a thing called Labor Burden but screw it, I'm putting it here, which works if you're a one man shop.

Shop Cost = 3.86 (We'll include heat and electric, etc. in here, $500.00 per month x 12 months / 1555 billable hours = $3.86 per hour). Machinery Cost = 1.29 (Acquisition, repair, maintenance,depreciation, $2000.00 per year / 1555 billable hours = $1.29 per hour). Truck Cost = 2.22 (34.5 cents per mile x 10,000 miles per year / 1555 billable hours = $2.22 per hour). Office Cost = 1.16 (Space, furniture, computer, supplies, etc.$150.00 per month x 12 months / 1555 billable hours per year = $1.16 per hour). Insurance = .64 (Contractor's Liability, building, etc., $1000.00 per year / 1555 billable hours = $.64 per hour). Health Insurance = 1.93 ($250.00 per month x 12 months / 1555 billable hours = $1.93 per hour). Professional Services = .64 (Accountants and lawyers, $1000.00 per year / 1555 billable hours = $.64 per hour). Other = .5 (All sorts of consumables and other stuff that can't be directly billed to a job, $.50 x 1555 per billable hour = $.50 per hour).

Total Overhead per billable hour = $12.24.

Labor Cost plus Overhead Cost = $44.39 (Labor @ $32.15 plus Overhead @ $12.24 = $44.39)

PROFIT is not how much you make as wages, it's how much the business makes.

A rough split on the cost of jobs is 1/4 material and 3/4 labor (Labor Cost plus Overhead Cost).

If your yearly billing for labor plus overhead is $69,026.00 ( $44.39 per billable hour x 1555 billable hours = $69,026.00). Then your yearly materials cost should be about $23,009.00 ($69,026.00 / 3 = $23,009.00).

Annual Sales = $92,035.00 (Does not include profit, yet, Labor @ $69,026.00 plus Materials @ $23,009 = $92,035.00 per year).

Profit = 8.88 (15% of gross annual sales, $92,035.00 x 15% = $13805.00 / 1555 billable hours = $8.88 per hour).

SHOP RATE = 53.27 (Labor Cost plus Overhead Cost @ $44.39 plus Profit @ $8.88 = $53.27 per hour).

ANNUAL SALES = $105,840.00 (Labor Cost plus Overhead Cost plus Materials Cost plus Profit).

QUARTERLY SALES = $26,460.00.

MONTHLY SALES = $8820.00.

WEEKLY SALES = $2035.00

Every time I start thinking like this it makes me want to go back to working for somebody else.

I'll probably catch hell for this because no accountant would ever group things together the way I have. Also, they don't, as a rule, make as much use of the WAG method as I have for cost estimating. They like GAP, I like WAG (they be rich - I be poor). I guess my point is: If I'd had someone present things to me in this way when I started, I probably wouldn't have started at all but, at some point you have to start thinking this way, preferably with the aid of a real accountant, or you won't really be in business, you'll just have a very expensive, very time consuming hobby. And, for you guys who think that 15% is a gaudy figure, yeah, so do I.

Good Luck

Regards,

Tom.

[Silvan]

He's just proving why I'm happy not to be in business.

If you _don't_ figure every little thing, you never know whether or not you're actually making any money, but if you do, you're too busy doing math and melting the hair off your head to make stuff, so you're not making any money.

Me, I just use the 3X rule. 3X materials = retail price.

Of course, in order to actually _sell_ anything, I've had to mark it down to cost-of-materials + $5.

[Silvan]

Seeing all that just made me again glad I've never gone off the deep end and gone into business for myself.

I'm *way* too stupid to figure out how to actually earn a living at it.

[Luigi Zanasi]

On Wed, 17 Sep 2003 13:38:05 -0400 (EDT), [e-mail] (Jack-of-all-trades - JOAT) scribbled

That's your net cash flow, not profit in the economic or accounting sense (well, maybe it is, see below). For profit, you need to subtract your other real costs. Profit is always gross revenues (or sales) minus costs. The issue is how do you calculate costs.

There is a useful distinction between accounting profit and economic profit. Accounting profit is what your taxation authority and bank are interested in. To calculate accounting profit, you take off your other costs (power, depreciation on machinery, wages paid to others, etc.), but not the cost of your own labour.

For economic profit, which is what you should be interested in, you also need to take into account your "opportunity costs". E.g. what is your time worth and what could you earn in interest if you left your money in the bank instead of buying equipment. Note that these are not theoretical costs, they represent actual money out of your pocket. It is important to consider those as costs if you're trying to set up a business. You might have a large accounting profit, but if you end up only earning a dollar or two an hour, it might not be worth doing. Even if you end up making a decent hourly wage, you want some amount over that so that you're making more than if you had left your money in the bank and gone to work for someone else. (Of course, you might also put a value on the flexibility and satisfaction working for yourself gives you, but that's another issue.)

In your case, accounting profit is irrelevant (except for your tax return). You are saying that there is no opportunity cost other than the cost of materials, since you would be spending that money anyway. So the opportunity cost of power, machinery, etc. is zero in your case. You don't want to or can't work for anyone else, and presumably enjoy making the pine cone turkeys and would be indifferent between making them for sale or doing other stuff for yourself. So your time has no opportunity cost. So, for you, the economic profit is as you would calculate it - Sales minus material costs.

This guy is looking at it from an economic profit perspective. He is counting his labour as an opportunity cost, he assumes he is worth $75 per hour as a sawyer and $35.00 per hour for shaping (?) & finishing, etc. Another way of looking at opportunity cost is that if he wanted to hire someone, this is what it would cost. So, if you're looking at whether it's worth setting up a chopstick-making business, he is looking at it properly. And it is a profitable business, I should get into making $25 chopsticks.

He cannot deduct the value of his labour as a cost for accounting purposes, so there is no tax loophole: he has to pay tax on his labour. It does not matter whether he pays himself a wage or declares it as profit (net income). So, his sawyer fees are not part of his economic profit, but they are certainly part of his accounting profit. I'm not familiar with the US tax system, but in Canada, an individual would end up paying the same amount of taxes and Canada Pension Plan contributions whether he paid himself a salary or not.

All this is my professional opinion, and worth exactly what you're paying for it. Luigi Replace "no" with "yk" twice in reply address for real email address

[Young Carpenter]

your looking not actually for profit but the figure to use. I learned it as Markup. you markup in hopes to make a profit. I learned in Carpentry class that contractors make anywhere from 15%-35% markup (depends on the market and who you do it for) Most want to make a certain percentage profit (often between 15-25% of the whole) The mark up doesn't necessarily mean the profit. If you estimate after the fact it often does. But if you have to Estimate before hand it usually doesn't Anyway to markup. how much you really want to make?

15% is not unreasonable and will at least cover simple overhead. Cost divided by (1.00 - overhead percentage) in otherwords Cost (of materials, labor) divided by .85 = final mark up price.

[Bob G]

My general impression always was that materials were about 1/3 of the retail price...

I too am retired and on a fixed income and maybe I just stopped learning the day I walked out of school and got a job.... But most of mny "education" was aquired during the summer months working in the construction and remodeling business... NOT furniture...

That said I still would not retail a "set" of chop stick at 3 times the cost of the materials...BUT I would do that for a coffee table.... beccause I am not trying to feed myself...

Bob Griffiths

[Jack-of-all-trades - JOAT]

%^&*( My power just blinked, been doing that all day, including about 2 hour power outage, from the hurricaine, so have to start this response over.

Well, certainly learned a lot with that question. Most of which I will never use, but interesting just the same. I decided to keep this thread a bit shorter, but making my replies in just this one post. Below are the posts I felt it appropriate to reply to:

++++++++++ Wed, Sep 17, 2003, 6:21pm (EDT+4) From: Bill [e-mail] (Bill=A0Thomas) Greetings, Over time I have noticed the cost of materials approximately equals the cost of labor for anything anyone does for me.

Might be OK for figuring on paying for a new roof, but that would mean I would be selling some things for maybe $6. My labor is worthmore than that.

+++++++++ Wed, Sep 17, 2003, 9:32pm (EDT+5) From: [e-mail] (Andy=A0Dingley) What's stumping me is how to pick the pricetag. I can any (theoretical) profit I like, if I just set the price high enough. OTOH, this may well mean I don't sell any I've heard a rule of thumb way is by pricing you stuff. If you sell out right away, you are selling too low, raise prices. Continue this until no one will buy, then lower prices to where you can keep up with the demand.

I'm not really sure I would be comfortable with that, and not sure how it would work.

+++++++++=A0 Wed, Sep 17, 2003, 9:12pm (EDT+4) From: [e-mail] (Leon) I multiply materials times 5 to come up with manufactured price and that is CHEAP.

Now, that sounds pretty reasonable.

++++++++++ Wed, Sep 17, 2003, 11:25pm (EDT+4) From: [e-mail] (danh) Try Google,

What's a Google?

++++++++++ Wed, Sep 17, 2003, 9:36pm From: [e-mail] (Silvan) Of course, in order to actually _sell_ anything, I've had to mark it down to cost-of-materials + $5.

If I had to sell something that low, I would make something else. My time is certainly worth more than that.

++++++++++ Wed, Sep 17, 2003, 6:47pm (EDT-3) From: [e-mail] (Luigi=A0Zanasi) who is apparently an accountant, tax dodger, or both, creeps out into the twilight and says: E.g. what is your time worth and what could you earn in interest if you left your money in the bank instead of buying equipment.

Well, I figure my time is worth whatever I can get paid for it. But, I don't understand, what do you mean, instead of buying equipment? The only other valid option would be buying materials.

In your case, accounting profit is irrelevant (except for your tax return).

Actually, not even that. I don't figure I will be making enough to pay taxes on. One of the few advantages of a disability income - I'm not making enough to pay taxes. You don't want to or can't work for anyone else,

Both.

and presumably enjoy making the pine cone turkeys

May the Woodworking Gods bless you. I had completely forgotten about those. My fortune is made, if I can just find enough pinecones.

He cannot deduct the value of his labour as a cost for accounting purposes, so there is no tax loophole: he has to pay tax on his labour.

So, sounds like the guy was complicating things, for no good reason.

All this is my professional opinion, and worth exactly what you're paying for it.

And, I do thank you for it, and to show my appreciation, my check is in the e-mail.

++++++++++

Got some helpful hints, and a lot of info I didn't ask for, so all in all, it's definitely been an interesting read.

JOAT Atheism is a non-prophet organization.

Life just ain't life without good music. - JOAT Web Page Update 15 Sep 2003. Some tunes I like.

[Edwin Pawlowski]

It is common and often mentioned here. It may work often, but it can also get you into big trouble, or it can cost you business. The 3X thing has been big in my industry for over 30 years. Some of the most profitable jobs are 1.5 to 2X material, and I've seen a real loser at 10X material. You really must be cautious pricing that way. Ed