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For the first time, I sat down and actually figured out my annual overhead. I’ve estimated before but this time I used real records.
I counted anything that wasn’t job specific. That’s basically everything except labor and materials.
I added up truck payments, truck repairs, insurance, gas, tool purchases, tool repairs, computer, cell phone, advertising, paper and ink, etc. etc.
I also added in the cost of things everybody else has through their job but we don’t like disability insurance, 401K, health insurance.
My annual overhead is…twenty three thousand dollars. (notice I spelled it out to make it look really big.)
I don’t start to make anything until I make $23K OVER MATERIALS. That’s staggering to me. That’s just for my little one man show. I’m not extravegant in my spending by any means. I think I’ll keep the spread sheet with me and when I get a price objection, I’ll bring this out.
Replies
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Ryan,
That's no surprise to me! I know where you are coming from. Here's an even bigger shocker. I once figured out that with me and one guy I needed to make 70k to break even. The particulars escape me but I think I compared it agains a job at mcdonalds. Fortunately I manage to eek out a bit more than that.
Do you use and accounting package such as quickbooks?
It makes it really easy to see the big picture.
Lately I've been debating the merits of hiring high skilled workers over apprentice types. I always have this urge to hire a green guy or two, but now I really see what they've been costing me in terms of turnover, teaching, and screwups.
You put a lot of thought and work into your business, you will be further rewarded for it!
Tom
*I'm using quicken. Got automated last year but didn't realize until Jan. that I had catagories wrong for taxes. Now I''ve finally got everything straightened out (got to credit my wife. The monthly reports really tell you where the money goes. Charts and graphs make it all so clear. Geez I spend alot of money on insurance!!!
*$23,000. If you work five days a week, forty six weeks a year, that's a nice round one hundred dollars a day.Rich Beckman
*...that's 12.50/hr. Ryan, did you include rent for your shop space?
*ryan ... just for an exercise... compare that figure to your schedule c.. if they don't agree.. find out why...usually your schedule c is NOT capturing all of your legitimate overhead.. so you real overhead should exceed the amount on your schedule c...or ... line 19 and 20 of your 1120S..these make good reality checks...b but hey, whadda i no ?
*Ryan, I'll bet it's actually more than that: 1. 1% for bad debt2. 1% for guarantee work3. Cost of doing books. Pay who ever is doing it, even it's yourself. I pay Barb $150 per week.4. A vehicle cost, besides the oil, gas, insur., plates, etc., actually costs around $8000 per year including "depreciation."5. Depreciation for major tools and office equip.6. Office equip and major tool repairs7. 1% for Future Capital Expenditures (just like the big boys do)8. Uniforms9. Sortware, including upgrades10. Better increase it to cover increases in major medical during the year.11. Time for tool maintenance such as sharpening chisels, changing electric tool brushes, etc. If you were bigger and had a full time warehouse man who also maintained the equipment, would he work for free?Now none of us really work 40 yours per week consistently for 46 weeks. You have to include "productivity down time" such as rain outs, owners not home, wasted time for one reason or another. Like attorneys, what's billed is always less than what's actually "worked" on jobs. So, for that reason, you might want to kick it about 15% for the above reason. Sit down and think about how many hours are wasted an any give 40 hour week. In factor'ies, it's called the "production factor."For even a one man operation, overhead is at least 25% of sales unless he's in a single trade business, like siding, electrical, etc., in which case it could be as low as 15% for a well run company.One more thing. If you spend 40 per week working on ljobs, but an additional 25 hours on sales calls and estimating those sales calls, figure your labor cost for those 25 hours per week as an overhead expense. Again, in the big companies, estimators and salesmen get paid don't they?When I do esitmating, after computing the final price, I add 5% for sales commissiion. I figure 5% is fair since the company pays my vehicle expense and office supplies. One way or another you must get reimbursed for sales time.
*And that said, there's alot, I mean alot of one guy shows working for $15 - $20 an hour around here.
*And don't forget opportunity cost. That is the cost of having your money tied up in your business instead of being invested in something that brings income with no work on your part. So, for example if you have $100,000 tied up in business specific assets and you could have invested it conservatively at 6% your opportunity cost would be $6000.
*Fred, along the line of your last post, you'll love the book "Rich Dad, Poor Dad".The authors expound on the fact that middle class parents teach thier kids to work for money, while rich parents teach their kids how to make their money work for them.My the way, even in a mutual fund, the return is from about 17% to 23%.Buying Cisco Systems or Sun Microsystems would have returned over 1700% in the last 5 years in stock appreciation.
*Ryan, the main reason for so high of a failure rate in our industry; heck in others also, is because they just don't know their "numbers."They work for no profit, just wages, and when all of the hours are added up, that "wage" is below minimium.But they can say "I'm my own boss." Yea, and a dumb one at that.
*Sonny,Great post. The voice of experience is heard. I hope your advice is taken seriously.Jim Scales
*Sonny:Yeah, I know. But I didn't want to make him feel too bad.As far as where to put your money; well that is a more complicated subject than what a person might expect. Factors like age, occupation, ability to re-earn the money if it is lost, risk tolerance, etc all come to play. I remember a study some magazine did about 20 years ago. They analyzed "rich" folks investments vs the general public. They found most of the "richest" people invested in two things: businesses and debt instruments like bonds and mortgages. Contrary to popular thought they didn't have a very high percentage in stocks that were not original issue.Maybe, it would be worthwhile to talk about where to put your money.b "Anyone can make money. It takes skill and talent to keep it"
*Fred, you're right. Each scenario dictates the investment type recommended. At 58, my needs or desires are certainly different from my two sons for example, who are 33 and 35.I suggested to them not to be an active trader or position trader as I am, but instead, buy stocks in companies as I mentioned above, along with Rambus, Juniper, Motorola, Lycos, etc. - the "blue chips" of technology and the Internet. And to forget about them, not watch the market daily, but to just leave them for 10 - 15 years. Trex is another company doing well - great management, numbers, and annual sales increases. A 40 - 50% minimum return is guaranteed. With those stocks, the normal daily volatility is unimportant when in it for long term investing.But as Mike would say, "Whadda i no?"
*How many guys keep a good eye on the ROI (return on investment) for their business? Overhead isn't too hard to get a handle on, but I know a lot of people in my area of specialisation look to ROI as the best indicator of how their business is doing.Ryan; there are lots of one man shows here going for a hundred a day, cash, c/w truck, tools, etc.
*I track the company net worth. It is a easy indicator of whether or not the company should expand and if the company can sustain growth. I like it better than P&Ls although I look at all the reports of course.
*Tommy, Ive had a huge amount of success with two greehorns that started with me two years ago. Just keep searchin for the right ones.Don't hang on to losers. Cut them quick, the first day if you know for sure.blue
*Fair enough. ROI is important to anybody leaning to manufacturing, though, due to the cost of machinery. It's becoming way more common now to see one and two man cabinet shops with a half a million in gear, hence the eye on investment.
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For the first time, I sat down and actually figured out my annual overhead. I've estimated before but this time I used real records.
I counted anything that wasn't job specific. That's basically everything except labor and materials.
I added up truck payments, truck repairs, insurance, gas, tool purchases, tool repairs, computer, cell phone, advertising, paper and ink, etc. etc.
I also added in the cost of things everybody else has through their job but we don't like disability insurance, 401K, health insurance.
My annual overhead is...twenty three thousand dollars. (notice I spelled it out to make it look really big.)
I don't start to make anything until I make $23K OVER MATERIALS. That's staggering to me. That's just for my little one man show. I'm not extravegant in my spending by any means. I think I'll keep the spread sheet with me and when I get a price objection, I'll bring this out.