Value of equipment to gross sales
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    Default Value of equipment to gross sales

    I am curious if any of you smaller shop owners could chime in the ratio of equipment cost to sales.


    There are so many variables but I would be curious what your best guess would be.

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    100:1



    ..…………..

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    My best guess would be way too many variables. You could have a shop that repairs and balances air craft carrier drive shafts on equipment that a scrapper wouldn't take unless you hauled it. One the flip side of that a tier 1 automobile parts supplier could be running with robots and pallet systems on 5 axis mills making a nice bottom line, but very low profit margin percentage wise because of high overhead.

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    Over what kind of time period? Been buying equipment for 35 years. Some of it is 15 years old, some brand new. Gross sales for this year or the last 35? What I bought last year compared to gross sales last year about 1 to 5.Year before last 1 to 50. You need to define parameters better to get any kind of real information.

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    Sales is more job related then equipment related.


    If I made a widget for $100 on a clapped out 91 Haas mill that I was given and was able to sell one widget a day for $1100 out of my garage I could make 365k a year on a single machine.

    If I made that same widget on 500K Mori and still only sold one a day, I am out of business in the very near future.



    I buy the machines that best fit my work...I don't buy machines then try to find work to fit them. The value of the machine is not the key, its the value the machine can produce which is dependent on the work. AND the ability to use the machine...of course.

    Yep...think it's dead, I beat that horse a bit much.

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    Gross sales is meaningless. If you're doing a small amount of work on a large piece of expensive material, the gross could be huge but the profit small. You don't need a lot of machines to do a little work. If you're doing a lot of work on a very small piece of material, the gross could be small but it is all profit.

    Either of these could be a good business, but this metric would be totally different.

    Turnover is vanity. Profit is sanity.

    The better rule of thumb for our sorts of stuff is that equipment should make enough pretax profit to have paid for itself in two years. So if you have a $200k machine, you should have made at least $100k in pretax profit per year with it, including rent, power, paying yourself a competitive salary, etc.

    A faster payback would be great. Slower and you might reevaluate something.

    A building has a longer life so it is okay to pay back more slowly. Say, ten years. So with a million dollar building you should be making another hundred k per year pretax.

    And so on for other stuff. Profit, not gross.

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    what is the reason for even asking this? seems kind of pointless if this is what keeps you up at night better get focused on more important things than this....

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    Quote Originally Posted by ducesrwld View Post
    what is the reason for even asking this? seems kind of pointless if this is what keeps you up at night better get focused on more important things than this....
    I don't know the OP's motivation for asking. I can think of a couple reasons for asking though. Maybe he's looking at buying a business and wants a way to compare to similar businesses. Or, maybe he's selling and again wants a comparison.

    In spite of how most of us might not want our businesses categorized by simple ratios considering the variables involved I'm betting overall we're more similar than different. I'd like to see "average" ratios (if for no other reason than curiosity).

    For the ratios to be most meaningful, IMO, it should be current market value of equipment as opposed to original cost.

    In my case the ratio would be about .75:1. My biggest variables are my equipment is getting older (auction values would be low) and my 4 best customers go back 20 years and more. We grew together and know each other well, whether anybody else could step into that relationship is a big variable.

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    I asked the question as if I had my elbows on the bar next a friend.

    Don't think about it too hard.

    I would think .5/1 would be pretty common by my worthless metic.

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    Kid walking thru the neighborhood during a snow storm with qty (1) snowshovel, offering to shovel sidewalks/driveways.

    Investment ?
    Overhead ?
    Gross receipts ?

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    Quote Originally Posted by digger doug View Post
    Kid walking thru the neighborhood during a snow storm with qty (1) snowshovel, offering to shovel sidewalks/driveways.

    Investment ?
    Overhead ?
    Gross receipts ?

    don't be a dick

    or go buy your own shovel and figure it out!

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    To yoke (OP).
    0.1 - 10x ratio, depending.
    And cost vs value on industrial tooling is 1:20 / original cost x ancillaries (1-2x).

    e.g. If you *need* an auto saw or roller line to transport bits, you need one.
    A new one might be 30k, original worth 1k$ as scrap.

    Endless shops make 90% of value in turnover and net money on artisan stuff with minimal tooling in size vs industrial stuff.
    Like those using NSK = Nakanishi spindles.
    Submerged welding.
    Laser hand 5 ax welding, maybe.
    Some metrology, optics, gem stuff.
    Some prop stuff for yachts.

    Most machine shops have value due to industrial infra in lifting, handling, logistics, permits.
    And customer contacts, ongoing business.
    And usually 1-2 new or newish cnc machines, with full support infra from the materials racks, cranes, saws, compressors, toolholders, tools, collets, toolbit tables, vices, deburring, tumbling, washing, industrial cleaning/sumps/permits, drying, powder coat, ac, major industrial power, metrology, etc.

    Most .es shops (=eu) have 2.5 important guys, 10-11 metalworking machines most obsolete, 250 sq m2.
    Based on my factual analysis of about 2000 shops (much more).

    The tools each line are worth near-scrap, unless a going concern, and a going concern is worth 10-20x a typical fire-sale. Permits and processes are worth a lot.

    But new truck doors, power, ac, permits, logistics stuff cost 30-100-200k just to install + the stuff itself + work + mandatory paperwork.

    It costs about 400k€ to setup a new shell-only machine shop (Rolls Royce/NASA quality) in the EU, spain etc., 400 sq m + 200 office.
    Without logistics, any machinery, any permits for production.
    Having done so, 2011. Details proprietary.

    Yet a client with a 500€ lathe and 1000€ worth of 50 year old sewing-machine size ancillaries lifted a huge excellent business from it, in 2 years, worth more than 10M€.
    So did another with less than 10k€ in tooling.
    Etc etc..

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    Quote Originally Posted by yoke View Post
    I am curious if any of you smaller shop owners could chime in the ratio of equipment cost to sales.


    There are so many variables but I would be curious what your best guess would be.
    As you and most others suggest, it would be about as worthless a metric as one could imagine.

    Company "A" has been around 100 years, has sales of $10 million. Over those years it has spent $100 million on equipment. Ratio is 10:1. FWIW, I once had a client making serious profit with equipment averaging something like 50 years old. They were about the only ones making paper-based fast food take out containers at a time when everyone else was molded styrofoam -- and the market was just beginning to see a backlash (20 years ago) against it. And despite that profit, failure to upgrade was still a bad idea.

    Company "B" has been around 10 years, has sales of $10 million. Cost of equipment is $10 million. Ratio is 1:1. Just not all on one year.

    Company "C" just started a couple years ago and leases most of its bigger machines. Sales have skyrocketed to $10 million. Cost of equipment is $100,000. Ratio is 1:100 Give a CEO a metric like this to get a bonus for -- and he'll never buy another piece of equipment.

    We could play similar games with the depreciated value of equipment (which is probably closer to what you were thinking) etc. The number gives very little guidance about either if the business is well managed or what it's worth.

    There is some value in a similar number -- annual purchases of capital equipment vs. either gross or net income. Since newer equipment tends to be more productive (and can often be written off in that tax year), companies might look at a number like 10% and wonder if they should be higher or lower than that this year.

    What really matters is staying competitive, making a profit, and not getting caught in cash flow binds.


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