Fixed costs

[Matoaka]

I'm trying to revamp our hourly shop rate. Do most of you include "labor" as a fixed cost? And does "labor" include actual payroll PLUS payroll expenses such as Social Security?

Thanks.

[Sherry Gray]

Definitely I include labor in overhead costs, as well as payroll expenses, including myself and my two employees.

[Bob Carter]

Hi Susan-You need to start talking to the only person that can give you a proper answer-that being your CPA.

It doesn't matter how I do it, the guy down the street or the framer in Hoot and Holler, WVA.

Your CPA should (and I am a little surprised that it isn't already set up somewhere) have a method and it needs to be followed consistently. It is a comparative value.


There are things that simply need to be left to a professional

[HB]

CPA? What's that?


(Just kidding?)

[Matoaka]

Point well taken, Bob. I'll call them tomorrow. Now, to find my "hourly shop rate": I divide my average monthly fixed costs by average monthly total man hours? My numbers are coming up too low... Any thoughts?

HB: Curious Pencil Activator

[Bob Carter]

Hi Susan-I think we sometimes over-analyze stuff like this. I think we have far too many variables to get such a finite number.

For example, this type of calculation doesn't accept the fact that we never seem to run at capacity (or even near it). Another great example is does your shop hourly rate change in February as opposed to Jan or Mar?

These are best guess ideas that need to reflect more of what you need to make and what the market will pay.

But, to say that it is a predictable, mathematical function might be a little less than useable

[David N Waldmann]

Originally posted by Matoaka:
Now, to find my "hourly shop rate": I divide my average monthly fixed costs by average monthly total man hours? My numbers are coming up too low... Any thoughts?There are two major factors that affect the "total man hours". One is time paid for but not working, such as break time, holiday & vacation, and lunch (if you pay for it). Then there is the percent of time that they are "working" but you can't charge out their time, such as opening packages and putting stock away, sweeping the floor, talking to customers, etc.

In our small manufacturing environment where we are almost always running at 100% capacity, only about 55-60% of time that we pay for ends up being billable (and we are considering only production employees, not office workers).

Absolute best case secenario where you only pay six holidays, give one weeks vacation, have two fifteen minute breaks a day, and your employees are doing billable work 100% of the time they're there, you're only looking at 90% "efficiency".

[Ron Eggers]

$60/hour is a nice, round number. You look at a project and think, "That'll take ten minutes" which really means it'll take 30 minutes, so your labor is $30.

When it's time to raise my shop rate, it'll have to be $120/hour so I can do the math in my head.

[wpfay]

Bob,
Can't you look at shop hour rates much the same as other pricing?
I figure mine based on what other shops are getting and the degree of difficulty of the job.
If I'm offering a service that other shops in my area don't offer, the rate is a premium. When I have to compete I keep the rate closer to the median.
It is rarely used because most rates for services have been figured into an option on the POS.

Another comparison I make is to look at what other specialty service businesses are charging. Granted, plumbing and electrical work are often more of a necessity, but they can give us guidelines as to what to charge based on specialized skills coupled with overhead and posession of specialized tools.
I think that most framers don't take into consideration these ideas when thinking about their shop rates. They are scared at pricing themselves out of the market and in doing so end up losing money on jobs priced by the hour.

Then comes the shock when you do have a meeeting with your CPA and they make recommendations about your hourly rate and their bill comes in at $150-200.00/hour.

Not that this will work for everyone, but I charge in 15 minute intervals for shop time not unlike some of the other professions.

[Matoaka]

Ok, I see your points. Shop rates are a little more arbitrary than I first thought. But I've been reading a lot about pricing in the old threads.. and I come away with the idea that everyone seems to be doing something a little different. But finances for small businesses should be a little more exact, don't you think? Do we just look at the bottom line and feel comfortable if we can our pay our bills with a little left over? What about the framers that are just starting out and have no history to look at? What about writing a business plan?

If I take a completed work order, and subtract my COGs, and then substract my fixed costs (based on the time required to complete the project), and the bottom figure shows about 30% profit... can I assume that our pricing is in line?

And, if I'm just screwing myself into the ground with all these questions (picture pocket protecters and sun visor and bloodshot eyes)... why does the subject of pricing keep coming up in these threads?

I'm really not trying to be obnoxious... just curious.

Thanks.

[Bob Carter]

Hi Susan-I don't think you are being obnoxious at all and you should be curious. Good for you

My concern is that we tend to try an d makew finite decisions on non-conclusive data. If we were running a Kathie Lee sweatshop in Honduras making T-shirts for Target, we could absolutely peg an accurate cost per unit number. The components could be defined and quantified.

We simply have way too many variables to make this number anything more than a comfort level. Ron correctly points out that we estimate 15 mins. and it takes 30 mins. Does that mean that if your shop charge is $60/hr, that you just lost $15?

The real problem is that we have had these numbers spoken with such reverance as if they were the Holy Grail.

Bottom line: Pricing for everything, glass, moulding and time, needs to reflect your costs, your needs and your market. There simply is not a "plug it in" chart that is the best answer. Sure, it's easier, but it is not better

A great example is the recent mailing from Tru-Vue with suggested pricing for their glass products. I truly wonder if they ever market-test this stuff. They sure do not have a retailing person involved.

But framers will see it and follow it.

The one thing the pricing schedule is designed to do is to get you to sell Museum Glass at exceptionally low margins so that you might sell more (read: Buy more from them)

Pricing is designed to sell something for as much as you can without sacrificing turnover

[Baer Charlton]

Oh Bob, I thought you had sent that to me as a JOKE. :D

Seriously, you're right, their 'suggested' has no realm of "Retail" reality... it is just a suggestion to push more museum.

Note to TV: If you want me to push more Museum, start selling in boxed sizes like 22x28 and 24x30... There is no way a customer is going to pay for me to chop up a 32x40 for their 8x17 shadowbox.