Chances are, like most woodshop owners, you know that some jobs make a big profit and others don’t, and you hope by the end of the year that you’re ahead of the game. But do you know which is which, and why?
Many shop owners simply look at their account balance once a month, see if there is money in the bank, and decide that they’re doing okay. Maybe they review a balance sheet or some cool colored graphic chart an accounting program spits out. This accounting-by-eye provides a general overview of financial health, but it doesn’t really give any detail on which jobs are making the most money.
Going after and accepting projects that bring only the highest profits will ensure a prosperous future, and if you really want to grow your business, it’s time to look at the facts and weed out the losers. You start by job costing: the process of figuring out what your costs are for a particular job, tracking those costs throughout the life of the job, analyzing the results, and applying them to your next project.
Job costing takes discipline, and if you haven’t been tracking materials, time and labor as standard operating procedure, then it’s time to start.
The first steps
Tracking materials is often the easy part since you might have only a few entries or receipts for each job. Hopefully you’re already using some sort of online checking or accounting system that has a job costing module to sort and report material receipts by job. If you don’t, it is well worth the investment.
Tracking hours can be a little more of a challenge, requiring great diligence. This process has to become a compulsive habit for you and your employees, and with today’s technology it’s easy to do. Smart phones and tablets with apps can accurately track every minute of the day and it is simple to assign time to a specific project. You can even define a sub-category task within a job for more detailed tracking. Your payroll service may have a swipe or punch-in system that can accommodate job costing, too. And there’s always the old school approach of using a time card to mark jobs and tasks performed.
It’s also important to document every hour that you’re in the shop, whether on or off a job. You can be sweeping the floor, fixing equipment, or even adjusting the radio (these non-billable hours are all recorded as overhead). Everyone’s time needs to be tracked. Streamline the process by having your smart phone handy or mount a tablet in a central location for everyone to use.
Once you get into the habit of tracking time, you can easily do a time study on a variety of specific tasks. It is a way to track a production process to the minute, and you can find out exactly how much time it takes to make doors or drawers, for example.
It is easier on a production run. In a large shop, track five employees making a series of drawers to produce an average time. Or, time one person making five drawers and average. You can extrapolate the data to see how long it takes your shop to make one, three, 50 or 500 drawers for future estimates.
For some processes, like sanding or finishing, time spent can be quantified per square or linear foot, also very helpful for estimating.
Make sure you itemize your setup time for an accurate analysis. For example, setting up a molder takes the same amount of time whether you run 100 or 1,000 linear feet, but if that time isn’t separated out, it will throw off your time study.
Mining the data
After applying materials and hours for a particular job, you’ll get an accurate job cost to compare against the estimate. And you will know how much money you made (or lost).
Job costing will also reveal tendencies. I found that my estimates were always 5 to 10 percent too low. After adjusting labor and materials costs, I still couldn’t get it quite right. Time studies showed that it took longer than I thought to complete tasks. After comparing quotes with job costs, my estimates became more accurate and profits instantly jumped.
Adding a few itemized subcategory tasks refines your data and often reveals some very insightful information. For example, you might mill your own rough lumber but discover that there is a big savings in buying it S2S and straight lined ripped. Outsourcing, buying a panel sander or going with the 32mm system can reveal itself when analyzing accurate data.
On a final note, tracking multiple jobs can get a bit overwhelming, so you might start with one or two until it becomes standard operating procedure. Over time you’ll see patterns in your workflow and profitability. You may think you make a lot on kitchens but then find out that commercial office cabinets have a significantly higher margin.
Scott Grove is an art furniture maker, sculptor, and YouTube personality who selectively teaches and lectures, most notably at the Marc Adams School of Woodworking and The Chippendale School of Furniture in Scotland. For more, visit www.imaginegrove.com and www.scottgrove.com.