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Calculating Profit

bosmos_j

Hot Rolled
Joined
Jun 9, 2015
As mentioned, if I take a $800 piece of S7 and spend 6 hours machining it, it's a $1250 die detail, using $60/hr as a shop expense rate, at $75/hr I've made a mere $90.

Your shop is on your property and it costs you 60/hr to keep the lights on and tools sharp? I consider shop rate to have profit in it. It doesn't cost me (1 man shop) 75/hr to pay the bills, maybe 75/day. What's left goes to pay me or grow the business (buy fancy tools). The latter I suppose is the actual profit. At tax time it looks like I made less because I can count a fair amount of depreciation. You also mentioned you're booked of for a month. I would raise prices, until you're not slammed at a rate you don't think is making you money.
 
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Fal Grunt

Titanium
Joined
Aug 5, 2010
Location
Medina OH
Your shop is on your property and it costs you 60/hr to keep the lights on and tools sharp? I consider shop rate to have profit in it. It doesn't cost me (1 man shop) 75/hr to pay the bills, maybe 75/day. What's left goes to pay me or grow the business (buy fancy tools). The latter I suppose is the actual profit. At tax time it looks like I made less because I can count a fair amount of depreciation. You also mentioned you're booked of for a month. I would raise prices, until you're not slammed at a rate you don't think is making you money.
$75 a day? That's $18k a year. Your total expenses for a year are only $18k?
 

bosmos_j

Hot Rolled
Joined
Jun 9, 2015
$75 a day? That's $18k a year. Your total expenses for a year are only $18k?
Yes, in that range. That is not counting materials which is a huge chunk, but it goes into the part price separately. Rent, insurance (edit: business insurance not health, wife covers me on that) and taxes put my around 15k. Utilities aren't bad, all I have is electric. Lots of other nickel dimer stuff, LLC fees, website fees, but I'm probably under 20k. I have a 900SF warehouse space with a Speedio, lathe and some other random machinery.
 
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Ox

Diamond
Joined
Aug 27, 2002
Location
West Unity, Ohio
Of course there is profit on paper and profit in reality. Some companies calculate costs differently and so net's can look different. If you factor in really creative accounting, it can be downright disorienting.

I couldn't tell you the last time my company actually made profit on paper at tax time. In fact when I bought my Brother the bank wanted to see the previous years financials. I had filed a $17,000 loss the previous year, which at my gross (less than $100k), is a significant amount. He looked it over and proclaimed that my financials looked really good and they would be happy to loan me the money. I was rather stunned.

As mentioned, if I take a $800 piece of S7 and spend 6 hours machining it, it's a $1250 die detail, using $60/hr as a shop expense rate, at $75/hr I've made a mere $90.

In reality this boils down to wanting to gross higher, with a better net, to pay myself more. Currently I pay myself very little, and reinvest in the company heavily. Since 2020 with the gross stupidity of the school system we began homeschooling our kids, I backed off the amount of work I was taking and now work based on what jobs I take. This was a great move, because as many companies moved jobs in house, and the market changed, I was able to be more flexible. My wife provides health insurance, and my company allows us a significant tax deduction every year. We are endeavoring to increase my gross, and increase my pay, so as to allow for her to leave her job. Insurance (with two little kids) is of course going to be a significant sum every month.

Based on my expenses with the company, adding in estimated insurance costs, I would want to gross around $180k, to pay myself a slightly less than comparable wage and cover insurance costs. That means $15,000 a month, $3750 a week, or $93.75 @ 40 billable hours or $75 @ 50 billable hours. However, this leaves little for profit, and I mean genuine net profit.


I do a P&L statement, but to me that is the score card at the end of the game. I am asking more about strategy and thinking ahead of the P&L in planning for profit. The "deeper" part you are referring, I think based on what you said, is an after action report, or analysis. I'm looking at the front end planning, to make sure on the back end there are positive numbers. In the end, all of the expenses have to be covered by the hourly rate, and that hourly rate is subjective to actual billable hours. As you said, I have a lot of unbilled hours, which is part of the question. Some folks charge for all aspects, some folks charge just for their time machining, some folks have some really weird ways of estimating cost, some folks simply throw a dart at the wall and hope for the best. That was part of asking was to see how different folks did it.

I would be very interested to know what you quote per spindle hour on your Brother. That is the whole point of this thread.

My grandfathers Tool & Die shop was billing $75/hr in 1992 and paying his tool makers $25/hr in 1992. The last job I interviewed for (2020) I was offered top dollar on their corporate pay scale and was aggressively courted in an attempt to bring me on. Their offer was $26/hr.

I talked to a local company because they were having issues with one of their suppliers. Out of tolerance parts, terrible surface finishes, late deliveries, etc. I have done other, but limited work for them, and they always remarked at how good of quality my work was. When I asked them about doing some more work they casually commented that they would love to have me do the work, but their current supplier is so cheap, they didn't think I could be competitive. Their current supplier makes parts at $35/hr.

I would rather go for a hike with the kids or sit in the back yard and read a book than make parts for $35/hr. Or make whatever I feel like and put it on the shelf and sell it or not sell it at $75-$100/hr.


Part of the reason I purchased a Brother was to grow my own products, and to start bringing on some regular production work and to move away from Tool & Die work. It is very nice for repeat work, however most of that left with 2020.

I agree that at times shop rate can be a misnomer, which is part of the reason I asked about how people plan for profit. Some shops I know do not have a "shop rate", however those that I know well enough to talk to, can't actually explain how they come up with the prices they quote, nor can they usually explain how they know if they are profiting or not other than whether or not the bills are paid and there is money left over. Inevitably, I feel that it boils down to $/time one way or another.

One company I know, I believe I mentioned above, has a very firm grasp of their costs, and each job is quoted as a function of those costs, marked up 30% for profit. As a strictly production company, it is much easier for them to do this. They do not quote jobs based on a $/hr rate, except in relation to the costs incurred for production.

You can easily quantify if a "job" is making money or not:
Material
Perishable tooling
Hours

But when you figger the overall overhead (just like you are asking that last guy) that is a big variable.


Fixed overhead:
Payments on Real Estate and Personal Property. (building, machines, and tooling)
How much payroll is gunna be [min].
If you are by yourself, you likely aren't going to take more for overtime, but you likely aren't overly able to take less either, so that is sorta fixed for you.
Then there is the "other" costs that just seem to roll in that are easily forgotten:
Property taxes
Electric bill
Repairs
Some of these are fixed costs and some are variables per how busy that you are. (hourly overhead)


But trying to determine how profitable that you are at the end of 2Q is only a view, b/c that is ass_u_me-ing that you will stay on the same path through the next 2 qrtrs. But if things slow down, your variable costs will still follow, but those fixed costs are always there! Every month!

So things can look good on June 30, but you could still end up on the other side come 12/31.


But again, unless you are a C corp, you aren't going to "lose" money, just that your annual income got a demotion.
(maybe next year will be better?)
But then again - you could be just keeping your head above water on 6/30, and still finish the year well ahead of expectations.

If you set your income level low, well then you have a bunch of :"profit" at the end of the year.
If you like to live now, pay later, then you could end up not git'n any paychecks the last 6 weeks.

Until you have zero fixed costs, you're really not making any "profit".
You could be dooing well the last cpl of years, and then lose the whole thing next year. (2009 anyone?)
Lots of folks lost it all in 2009, only to have been living and looking well for the last 10 year prior.


You have to decide what the term "profit" means to you, and go from there.
Personally, I wouldn't spend much time pondering that issue, and just make sure that you are dooing the best that you can. The rest will likely take care of it'self.



With that said tho - One thing that I doo see that I personally don't like - and that is that S7 job, at 2/3 material costs.
Not saying that I never take jobs that are over the 50% threshold, but they better be awfully simple and forgiving!


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

Think Snow Eh!
Ox
 
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Fal Grunt

Titanium
Joined
Aug 5, 2010
Location
Medina OH
Yes, in that range. That is not counting materials which is a huge chunk, but it goes into the part price separately. Rent, insurance (edit: business insurance not health, wife covers me on that) and taxes put my around 15k. Utilities aren't bad, all I have is electric. Lots of other nickel dimer stuff, LLC fees, website fees, but I'm probably under 20k. I have a 900SF warehouse space with a Speedio, lathe and some other random machinery.

To my point, everyone calculates things differently. I include all expenses and costs in my hourly cost. I don't include customer costs such as materials, cutters, workholding etc. I include my speedio payment, and once it is paid off that cost will be there for replacement or adding another machine, tooling costs, maintenance, I am assuming you pay yourself something? My labor costs are an expense, and are I include mi in my hourly cost. In my case, I currently have health insurance through my wife, but we are hoping to expand so that she can quit her job. Cheap insurance (catastrophic) for us would run $2600/mo, that expense is included in my hourly cost.

It adds up pretty quickly, and as Ox stated, I can make my wages low and have "lots" of profit, or raise those wages and have "less" profit. That $60/hr cost

You can easily quantify if a "job" is making money or not:
Material
Perishable tooling
Hours

But when you figger the overall overhead (just like you are asking that last guy) that is a big variable.


Fixed overhead:
Payments on Real Estate and Personal Property. (building, machines, and tooling)
How much payroll is gunna be [min].
If you are by yourself, you likely aren't going to take more for overtime, but you likely aren't overly able to take less either, so that is sorta fixed for you.
Then there is the "other" costs that just seem to roll in that are easily forgotten:
Property taxes
Electric bill
Repairs
Some of these are fixed costs and some are variables per how busy that you are. (hourly overhead)
The biggest factor at the moment is the variable of costs dispersed over the billable hours. As I stated before, I really need to increase my spindle hours thus increasing my billable hours.
You have to decide what the term "profit" means to you, and go from there.
Personally, I wouldn't spend much time pondering that issue, and just make sure that you are dooing the best that you can. The rest will likely take care of it'self.
I'm an LLC, so as you said, it is a matter of drawing whatever is available. However, with planning, it would be necessary to have a more "regular" income.

Part of asking these questions was to try and decide based on how other folks calculate "profit". Creative accounting seems to be pretty standard, and I had thought that the opposite would be true.
With that said tho - One thing that I doo see that I personally don't like - and that is that S7 job, at 2/3 material costs.
Not saying that I never take jobs that are over the 50% threshold, but they better be awfully simple and forgiving!
Interesting, I never really considered not taking jobs with high material costs. There is of course risk if scraping a piece of material, but I usually just charged a little higher and triple/quadruple checked everything.
 

bosmos_j

Hot Rolled
Joined
Jun 9, 2015
To my point, everyone calculates things differently. I include all expenses and costs in my hourly cost. I don't include customer costs such as materials, cutters, workholding etc. I include my speedio payment, and once it is paid off that cost will be there for replacement or adding another machine, tooling costs, maintenance, I am assuming you pay yourself something? My labor costs are an expense, and are I include mi in my hourly cost. In my case, I currently have health insurance through my wife, but we are hoping to expand so that she can quit her job. Cheap insurance (catastrophic) for us would run $2600/mo, that expense is included in my hourly cost.

It adds up pretty quickly, and as Ox stated, I can make my wages low and have "lots" of profit, or raise those wages and have "less" profit. That $60/hr cost

Yes, most of my hourly rate goes to me (paycheck) and growing the business (profit). For taxes, I actually make more than my wife sees because I'm building reserve of cash on hand just in case. Yeah, I hear you on health case, holy crap, not sure if I could do this if I wasn't covered on my wife's plan.

I like what Ox said, just pick a method to calculate and roll with it. I don't really look at this stuff until tax time. If I can make my (meager) paycheck and grow the business (buy crap I need and save some money), I'm heading in the right direction. I'm only into this business a few years and things are pretty scattered still. I just try to show up and make money every day.

Count is how you want, but as far as I know about what you do, you should to be charging more. 75/hr is a pre-pandemic number, eff that. I try for 100/hr including programming/inspection/shipping ( I call that "shop rate") and well over that for just CNC run time.... BUT, I suck at quoting, so don't listen to me ;)
 

ducesrwld

Aluminum
Joined
Mar 27, 2008
Location
S.E. WI
Interesting, I never really considered not taking jobs with high material costs. There is of course risk if scraping a piece of material, but I usually just charged a little higher and triple/quadruple checked everything.

in all jobs there is always a risk on a job like above you miss one small thing or have unexpected happen and now you've wiped out any profit, might break even excluding your time, and now you are another day in the hole. my point being is doing the onsy twosy is a tough way to make it. customers never want to pay enough for programming and setup but are more willing to pay for spindle time. some production work keeping that spindle going i think would ease your mind of the profit topic.

we are heavy in the non metals more woodworking side so its even more cut throat much of our business resides in the consumer end of things so some times we get to cheat a little as products can be found on either the customer's website or a distributor factoring in materials/tooling we can gage a good price to quote at where both sides of the table can make a buck. we take some jobs for less some for more hoping to end up at a certain dollar amount over all said work for that customer. in our side of the industry you'll find guys down around $60/hr and go up to $100/hr+. We are right around the middle and as of late with the way things are going prices just continue to rise.

we have one of our better customers shipping in about 10k in material per month they'd rather pay since they get better rates then us quoting and marking up XX%. there are plenty of ways to get creative to lower those set overhead costs per month and help with cash flow.

if i was in your shoes i think i'd go hungry quick as i'm never as fast as we quote out the programming and setup side of things. and if that was a key part of our billing it would really hinder what this thread is about....profits.

that customer that is using a "cheap guy" never know if they happen to have a machine that will walk circles around you cause its a way better fit for that particular part. its the reason we aren't in the turning side of things we'd never be competitive without having a 3 or 4 axis lathe. could also easily be a shop that charges that low hour rate...those are the same dam fools whining they work 80 hours a week and can't make a living. plenty of them trying to screw this industry over in the race to the bottom. gotta be smarter move onto the next opportunity and pick the winning horses.

you are in a hard spot right now 1 guy 1 main cnc for revenue and way too many things that lead to unbillable time. trying to mix the production work in or even find a cheap 2nd spindle 1 for production and the other for the prototype/short jobs would be a big next step. you need to get over that hump what we all struggle to get over.
 

UptownSport

Cast Iron
Joined
Jul 25, 2012
Location
Minneapolis
I can't just walk up and make parts on a Brother:
I'd have to buy it ($$Interest$$)
I'd have to know how to use it ($$Training$$)
People have to KNOW I make parts ($$Adverts/Marketing$$)
I'd have to walk away from making parts to take orders and deal with customers ($$Sales Staff$$)
The condo assoc will probably catch on that I'm machining in my closet again ($$Commercial Rent$$)
They'd probably notice the lines coming from the 3 phase elevator motor ($$Utilities$$)
They'll fine me if they figure out where the swarf in the carpet came from ($$Legal$$)
I'd have to grease, fix and adjust it ($$Maintenance$$)
I'd have to walk away from more lucrative endeavors ($$Opportunity costs$$)
I can see vast buildings for Target corporate out my window, in which they sell nothing, produce zero revenue. You have the same costs Target corp, just scaled down.
In Short, there's A LOT you guys are spending or giving up you don't account for.
 

604Pook

Aluminum
Joined
Sep 14, 2022

mikemichalowicz.com/profit-first/

This book is a great read.

I used to do custom steel fabrication, one man show, was very very tough to make a living. Hard to bill enough for my hours when I was renting a warehouse, and paying all the bills that came with that. Once I built a shop at my home, I kept quoting my work at the same hourly rate, with a lot less overhead, now I was paying myself more per hour and was getting to a better spot. This was before there was affordable to me CNC options to farm out work to or machines to buy.

Once I got access to a couple cnc's and figured out how to get stuff running on both machines at the same time with good cycle times, while I was doing other fabrication work or doing cad work for the next job, I started making a decent wage.

I also started to look at working with good shops to get them to do more work for me for my customers work. I always kept as much in house as I could to make more $ for myself. That thinking was totally wrong. What it did was kept me busy, not making $. By farming out work, yes I was keeping less money per part/finished piece but my output increased dramatically and the actual profit without any labor on my part more than compensated for what I had to pay out. This is where having good relationships with other businesses is very important.

I am currently in a new phase of my life, and setting up a new shop at my house with a couple older cnc's with the plan to work on making products with a little bit of job shop outside work for businesses I know. If I have any products that are going to be made in big volumes, I will look to outsource them as a possible direction so that I can work on the next product idea, while someone else is doing the heavy lifting on production.

If I am not making myself any $ working, I might as well be working on my own stuff.
 

gustafson

Diamond
Joined
Sep 4, 2002
Location
People's Republic
I think you are way, way overcomplicating things
the amount you charge for doing what you do, per hour, is your shop rate.
Everything comes out of that.

Pretend you have employees.
IF your shop rate is 130 an hour:
You pay your employee and adjusted 35 an hour
[employees do not work 40 hours a week 52 weeks a year]
your rent+elec+heat+machine payments might be, what 4 grand lets say
We have to make the assumption that you are a going concern with work coming in the door. So let us divide that by 130 for the amount of useful hours in a month.
So the cost is something like 31 an hour

So we are at 66 an hour, which means you the boss show a gross profit of 64 an hour. Before taxes and whatever and the month you stared at the walls and did nothing.
I made all those number up
Efficiency in a small shop is much lower than that[dollars generated by being in the building a given hour]
You do not have employees which is good and bad.
Employees are a cost that doesn't stop and you figure out how to use them or you go out of business. But they keep you honest, if you are honest. Cause you gotta pay em. Cuts to the quick but fast

If you are running your Speedio balls to the wall [rather than fooling around and slowing the rapid down or worrying about how big a chip it can take] that spindle is worth IMO many hundreds of dollars an hour.
Now it is so fast it may take many multiples of your hours to keep up with that machine, and since you can measure spindle time, as opposed to wait I had to answer the phone and oh my friend came by and wasted my time, and oh crap I better order an end mill now before I forget, at the small size of your business , spindle time is a useful thing, but it has to have a high enough number to cover all the other time.
 








 
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