when you first started out on your own that you learned down the road and wished you had known in the beginning. I will be finally starting my own business in January after working for others for 10+ yrs. For the last year I have been doing tons of research on just about every aspect of running a business but I know there will be things I missed.
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Replies
I wish I knew how little I actually knew.
That the guy that charged more than the others was not a gouger, a cheat--a rip off artist. He was a shrewd and sensible businessman that would be in business for many years to come. He understood what salesmanship and quality service was about.
That profit is not wrong--it is what is left over after you pay your bills, taxes and yourself.
That profit is necessary for any business to thrive.
That Risk is gambling.
I wish I knew that the ruling class went to a different school than we did--and that they learned very different things, but most of all that they could do absolutely anything they desired.
That many people work hard all their lives and die poor--but people who work smart retire comfortably.
That the kid in trig class--who never studied but always had the best mark, was a liar--he studied every night for hours.
That you are judged by everyone you come in contact with on first impressions.
That you must market consistently--even when you don't need the work.
That someone who does not set his price for a service is not really in business--you are an indentured servant.
That I would learn more in 20 years of business than I ever dreamed possible.
L
GardenStructure.com~Build for the Art of it!
Guys,
Thanks a million. I will take the advice and print this stuff out. What I've read in books is good, but your advice is hands on. Bin there, done that ( or should have). I'll start a post when I finally get things roll'n.
I worked for a large corporation for 30 years and hired many (hundreds??) of employees.
I've learned that when hiring--- if given a choice between skills or attitude (character), always opt for attitude. You can usually teach a person skills. I've NEVER successfully been able to teach CHARACTER---- honesty, loyalty, dedication etc.
I was always facinated that when an employee was identified as a "problem" some young new manager would volunteer to take that person and help him 'see the light'.
"I can work with him/her and change him" was the pup's claim. (By the way, I was a "pup" once and had the same attitude. However, you can lecture / threaten / cajole whatever... and the best you will see is a short term improvement. The kicker is:
In times of stress, that person will (99% of the time) revert to his original behavior.
Nuff said.
Very very true. Character is formed at a very young age, almost inherited. If someone is a "problem" it's too late to change them, their bad attitude is in their DNA.
I've learned that when hiring--- if given a choice between skills or attitude (character), always opt for attitude. You can usually teach a person skills. I've NEVER successfully been able to teach CHARACTER---- honesty, loyalty, dedication etc.
Reminds me of the story of the two railroad workers, Joe and Sam.
They were out working hard one day and a big limo drives up with railroad company logo on the side.
The rear widow rolls down and a hand appears urging in their direction.....come to the limo. Sam immediately drops his shovel and goes to the limo, gets in and is in the limo for 10 - 15 minutes.
Upon exit Joe ask "Do you know the bigshot in the limo."
Sam says "Yea, that is Mike Turner, we started working for the railroad at the same time years ago."
Joe ask "How is it that Mike is in the limo and your out here working hard."
Sam tells him "Years ago I went to work for the railroad for $7.00 an hour, and Mike went to work for the railroad. People now call him Michael, but most call him Mr. Turner"
Excellent post Lawrence, I couldn't agree more. I would also add other things I've learned over the years of this business and other ventures that apply:1. Know where your boundaries are -- where your responsibility begins and most importantly, where it ends -- and stick to it.2. It takes gusto to lie, it takes bravery to be honest, do not confuse these.3. Choose your battles wisely.4. Do not let customers goad you into losing your cool.5. Remember, you are in the business to make a living, not to make friends.6. Practice empathy, treat everyone as you would wish to be treated yourself. 7. Two wrongs don't make a right; because someone else is dishonest or careless, you still have an obligation to be honest and conscientious with your dealings and your work. Don't let someone else's deficits bring you down.8. Excuses are for whimps. Take responsibility for your errors, find resolutions to problems; your goal is to always be moving forward -- even if -- or especially when -- you just got knocked two steps back.9. Think of mistakes or problems as opportunities to learn and try to make sure you learn your lessons the first time.10. Watch your money and keep personal away from the business.
I wish I had started writing agreements instead of doing business on a handshake for so long. It's soooooo much easier for everyone to remember what the agreement was when all they have to do is reread it.
Plus, it would have been good practice for when jobs got bigger, more complex.
Romania wasn't built in a day.
That advertising is the way to launch a business. The "I built it all on reputation and referals" advice is good but slow. It takes a lot of time to work for enough people that tell their friends before you have enough referals to keep you busy at a steady pace.
Everything Lawrence said.
That building a business is not soley about the work but about the business. Doing good work and making the customer happy with your work is the easiest part. That charging enough, getting paid and developing systems so you do business smart and not hard is where it is at for the long haul. DanT
Grasshopper, the hardest lesson is the lesson to say No when the red flags fly in your face when your stomach growls empty.
Ohmmm...........
all good ... with some explanation
<<<
Customers lie! It is one fact we live with.
Always get it in writing.
T&M... T&M... & T&M.
Price T by living and business $$ per month divided by 17 days of work per month. You can't work every day. some days are office and sales days.
Get testimonials from satisfied customers to show new prospects.
Work 2 years before adding Employees.
The smaller projects have the highest profit ratio.>>>
determining your Labor by a 17 day factor is pretty good.. we use 1600 production hours for our employees
for myself about 1200 production & 1200 office
but working T&M is difficiult because you have to state two things that you might not want your customer to know ... what your rate is, and what your mark-up is
if we're working T&M we charge $50 / hr per man and markup everything else 25% ( 15 % + 10% )...... as a result , it's very hard to make a profit working T&M
90% of our work is Fixed Price Contract... and our markups are higher than T&M
waiting 2 years before adding employees usually means never having employees, or never learning how to have employees, or having employees but trying to treat them as Independent Contractors.... i'd venture to say that most of the posters on this board do not have employees.. some tried and didn't like it.. some don't want the hassle, some have gone the Independent Contractor route
if you want a business that runs when you are not there, you need employees.. bite the bullet and get one.. then add another
Mike Smith Rhode Island : Design / Build / Repair / Restore
to the original poster----------
do yourself a favor and print out lawrence's list----------- you can't go wrong following that advice.
carpentry specialist made 2 ESPECIALLY good points!------- get Testimonials--and I would add to that Take a lot of pictures on a digital camera.-- those are probably the 2 things I wish I had been doing for the last 20 years
also--- small jobs have a higher profit margin than large jobs-------- that's the hardest thing for new guys to wrap their head around, I think. I KNOW i would much rather open my briefcase and see job folders for 5 one day jobs--than to see 1 five day job. the cumulative $$$$ earned from the 5 one day jobs will be MUCH higher( it really will!)-----and at the end of the five days you will have 5 happy customers giving out your name in referalls. conversley-- with the single 5 day job- the BEST you can hope for is LESS money and ONE satisfied customer-- but you have 5 times the chance to irritate him ! LOL------------------------- Even after about 20 years- I STILL prefer the smaller, more profitable projects.
If you WANT to have employees-- you would do well to follow every piece of advice mike smith would care to give you on the matter--- . If I was an employee, I would be thrilled to work for some one like mike,
HOWEVER---- having employees is not for everyone--it certainley isn't for ME. LOL It's probably the one thing I most strongly dis-agree with mike about. As a solo operator--you can actually make satisfactory money for a year---in about 3 months or so--------- but with employees--- you need to keep them working pretty much year 'round--so you find yourself hustling work YOU personally don't need--------- that is YOU end up working for your employees to a certain extent. Statistically, very few small construction businesses ACTUALLY evolve into a seperate salable entity------- so that's not a goal I choose to pursue. As a solo operator, you CAN however generate a revenue stream which you convert into investments ,which WILL be worth multiples of what you ever would likely have built your own company into !
don't under estimate the financial return from " doing nothing". I am absolutely certain I have made more money laying on my couch with a pencil and paper thinking " what if I.......????????", then I have ever made climbing ladders or swinging hammers.
Be prepared to be always thinking-always calculating. when I HAD employees, there were many times I sent them home after work knowing I had maybe 5 more hours work ahead of me personally that day. Even now, my production hours are under 1000 hours a year-- but i think about this stuff almost every waking hour. On vacation I seek out cool ,old ,houses--everywhere I go I am thinking----- " how would I scaffold THAT?", WHERE did they get THAT material-is it still available?-what would I have done differently?- should I have done it another way?
Remember-people are more willing to open their wallets to make a problem go away------ than they are to make a dream come true. sure, they will spend$$$ on making a dream come true-- but that dream is endlessly postponeable-and they are always going to want it for less-------- but a bad enough problem?- they will pay ANYTHING to make it go away!-- that's where opportunity is.
Very best wishes to you----- I hope you let us all know how things evolve!
Stephen
Stephen, interesting contrarian advice.
Did I miss when you decided to give up having employees? When did you decide to go solo?
Mike Maines
mike,
I have never been terribly enthusiastic about having employees--- although I have had many over the years.
a couple of years ago I decided to stop having employees. the day I let the second to last one go-------was one of the most fantastic, uplifting,positive days in my life !
not having employees has freed me to concentrate on moving into things I want to do---instead of hustling up work to keep employees busy.
I concentrate on building really solid relationships with a couple of close subs. smaller jobs I still do myself---bigger ones I produce by combining work with my own hands with subbing out larger portions of the project most effectively done by younger guys-- i reserve most carpentry, flashing,skylights,chimney,slate,metal,rubber work for myself. I still work personally on EVERY project--- but at the end of a bigger project------ the sub goes his way---and i go back to working solo with a song in my heart and a smile on my face.
Ironically-- I make more $$$ this way, the combined efforts of myself and the sub crew produce a better job than the sub crew does alone and we do it better than I did it with my own employees. It's really win/win/win---me/sub/customer.
as an added advantage I can also pursue a wider variety of work than I could with employees--using obscure/obsolete or self fabricated materials. Experimenting with some methods--eliminating others.
mike- I tell you,- I used to hate sunday afternoons--dreading having to ride herd on employees monday.-- now I get up between 5:00-5:30 a.m. every morning eager to get on with the day. some of my projects are still a little mundane---but in general I am doing a lot of stuff NOW that I find much more exciting and that I could never have done with employees. formerly-- I was planning to " retire" by age 50 or so.
i will still be able to do that------- but NOW I want to work way into my 70's--so much to learn,so much still to try,so many houses waiting for me to work on, so many prospective customers to meet ! formerly------ I was happy if I NEVER laid eyes on a customer--- NOW---I want to meet them all.
you may detect a change in my attitude???? I assure you it is entirely from liberating myself from employees.
BTW-- you are the guy on Nantucket, ain't ya?
absolutely the very best wishes to you,
Stephen
What a bunch of mentors-- Impressive advice all.
Stephen, you are right about lean and mean.
Much of the work showcased on my site was done with a crew of 3 or less, quite a few subs for certain trades. It was simply the only way to keep quality high and clients happy. They expected TLC--and I had to be there every day.
What I discovered was that many of the best carps were working on their own--so to hire them it was a subcontract deal--they needed profit. The trouble with subs--they never care as much about your job as they would if it were theirs.
Go Big--or keep it small. That's the way to make money.
Good employees are difficult to find--they are human, and they never care as much as you--so if you are not there, things don't happen as quickly and things get overlooked.
So... you have to be there all the time--or you need to pay more and give autonomy.
That's why I set my company up the way I did... It's their job, It's their profit, Their pride, their reputation as well as mine. I get to be the designer--and the coach, and grow the business quickly. It was so tough building this business that I became addicted to learning... Without it I'm cranky.
LGardenStructure.com~Build for the Art of it!
Lawrence,--- why is it that when someone agrees with us--we think they are a genius??? LOL
My "problems" with employees are at least 50% my fault. As my wife says" stop trying to "save" them.------ My preference was to hire young men-and give THEM the opportunity no one would give ME when I was 18-19 first looking to learn this business--- I would have killed for the equivalent opportunity--- but 19 year olds aren't interested in learning this business or caring about the WHY of what we do.
and older guys-late 20's-30's----well-if they are skilled enough to be WORTH the money they want paid( and to be fair NEED to be paid)---- well anyone I would actually WANT to hire is capable of starting their own business.( to my way of thinking they SHOULD be starting their own business)-----so---if they are willing to work for me they come with a LOT of BAGGAGE !
BTW- I am referring primarily to roofers here folks-not carpenters.
the system I work with now--working primarily solo and teaming up in tandem with subs for larger projects------- gives me the best combination of personal freedom, creativity, and income potential. Really-- there are almost NO constraints on any of those 3 areas-----and it actually takes a degree of self dicipline to maintain a civilized balance between all 3 of those highly desirable commodities.
Yesterday, we were to start a roof( last complete roof of the year). Waking to a 6degree windchill factor---we decided to stay home---and I spent 3 hours selling what will likely be a WONDERFULL project for me--and then I spent 2-3 hours working on the proposal for it.
this morning-it's warmer--but now we have a couple of inches of snow------so still no roofing. Instead i will finish painting(indoors) the 6 wooden storm windows I built this season, locate some hardware for another project, I hope to hear back on a price for 4 square of sea green slate I need for a couple of small roofs, and If I have the time I am going to split a "stail" out of a chunk of maple I have which in a few weeks will be steam bent and shaped for a music stand I am making. ( Actually I will split a couple maple stails and a couple of cherry stails---cause they are hard to bend-I anticipate some failures--and I want to make several music stands.
tomorrow- if the weather permits-----we will do the roof. If NOT, then perhaps I will hang the 2 exterior doors I have waiting for me--- or I can do the chimney flashing project waiting for me.
so--this is actually quite a pleasant week for me--- but If I had 3-4 employees depending on me to earn a living--- I would be miserable AND I wouldn't be able to accomplish most of what I WANT to accomplish this week.
Best wishes, Stephen
you may detect a change in my attitude???? I assure you it is entirely from liberating myself from employees.
BTW-- you are the guy on Nantucket, ain't ya?
I do detect a change in your attitude. You've always had good sensible business advice, and your grasp of your own numbers is impressive, knowing how many billable hours you have in a year and all that. I recall a shift when you started thinking about specializing in hanging entry doors to keep you busy over the winter months. I just didn't realize how major a shift you'd made.
I am the guy on Nantucket, or rather I was, I've been back home in Maine for a couple of years now.
What I wish I knew then that I know now...
I started off, out of college, as an independant carpenter/furnituremaker. Worked my way up to doing nice jobs in Boston and on Nantucket. Had employees and subs work for me, but I was the classic technician who couldn't run a business. Eventually gave it up, now am a foreman for a GC. I am one of those rare employees who DO care about my company as much as my boss, in fact quite often I think I care more about it than he does.
Case in point, over Thanksgiving weekend I worked Friday (company day off) and Sunday, and until 8:30 Monday night (14 hour day), to finish a job for a former customer who was selling their house. The job needed to be done, so I got it done. T+M, we're not losing money. Not a frikken thank you or even an acknowledgment from my boss or the clients. I don't expect a medal, but I treated the business like I would have my own, and the extra effort is ignored. So far this year I have around 200 hours in overtime, don't want any of it, almost all billable, with no acknowledgment.
The thing is, I have been on the exact opposite side of the coin many times, and expected my helpers to put out extra effort. Now that I am an employee, I see much more clearly the value of people's time, not in dollars, but in that they are giving you part of their life in order for you and them to make a living. That should be treated like the gift it is.
Eventually, hopefully sooner than later, I'll have my own enterprise again and will keep that in mind as well as the great lessons from everyone here.
Mike Maines
Hey, I thought you said you were just starting out? My advise was for that.
Hope you have a good accountant. But if you want to be big time the bench mark is 100 productive hours per day. (i.e. 10 Guys @ 10 Hours including the MIA's)
And I don't care if my client knows how much I make. A little humble arrogance can help the sale.
<< Get testimonials from satisfied customers to show new prospects. >>
Just curious, how do you handle this CS? Do you just ask the customer to write a little feedback and then produce some sort of "sell sheet" that shows pictures of your projects along with quotes from customers or something? I'd like to do somethign similar, but not sure how to approach it. Justin Fink - FHB Editorial
Your Friendly Neighborhood Moderator
Its easy. Just make a form Grading your service and skill level like a kid report card. A+ to F. Stick them in a loose-leaf binder using sheet protectors mixed with pictures of your work. What you'll end up with is a flip chart type presentation all about you. The last page is your blank contract.
My form has 5 lines and a comment section. The date, their name and what community they live in below that. I give them the blank form when I'm sweeping up and they're writing the check. I tell them it's optional whether or not they fill it out. (Most do though) And tell them I'm not looking for a glowing report, just an honest one. I get a lot of "A's" rarely a "B" or lower.
Actually, I wash I had more "B's" to show because it would make the "A's" that much better.
Class dismissed!
I wish I knew how to tell a good tradesman/builder/contractor from a mediocre one when I first started out. As I posted here long ago, in the beginning I worked for various contractors and I saw and heard so many conflicting theories on technique, materials, methods, tools, etc. that I didn't know which way was up.Of course there's not always one best way to do anything, but I realize now how much time I sort of wasted doing things in what I now know to be inferior ways. What I'm learning now is how clients are happy to pay a premium for high quality work from people who actually show up and finish according to schedule. The contractor I'm working with now turns down so much work because he's booked so far out. It's just such a pleasure to shake hands with clients when you're finished and everyone is feeling so great with how things turned out.
Hire the very best people you can find and hire them based on what they are and not what you want them to be. Don't go cheap and hire from the bottom of the barrel figuring you can teach them or that they'll be 'good enough'. You'll get exactly what you pay for.
If you need a laborer.... hire a laborer. Sure he may turn into a good carpenter someday. But don't hold your breath. If you need a good carpenter..... hire the best carpenter you can find that you get along well with. And don't settle..... hire and fire until you find the guys that fit your company philosophy and culture. And then treat them like family so that they never need to go looking around.
Don't hire anybody with a tattoo on their neck.
Watch the paper, a shoebox or paper bag full of receipts does not = books.
If you are thinking to yourself "this guy is a jerk but my checking acct is empty" say no anyway.
Joe H
Yes indeed! Figure out how you're going to organize your receipts and manage the money for several projects before you get several projects. Learn MS Excel if you don't already know it.
Interesting question and surprisingly, there's only one good answer for me.
I could talk about a lot of things that are important to know, maybe a thousand things. The one that comes to mind, that trumps all others:
Have a good business plan before you start.
There's nothing more to add except perhaps: if you have a good plan, you will not fail.
Blue
ps You can't judge the worthiness of your own business plan. You have to submit it to someone with a history of reading them to evaluate them properly.
AMEN blue
LGardenStructure.com~Build for the Art of it!
blue,
I think maybe you are about 95% regaurding the plan. the "missing" 5% would be the observation that sometimes following the plan will cause you to miss other,better opportunities along the way. you have a higher certainty of achieving the plans' goals--- but you may miss what could have beeb a better goal.
good luck on the school house project,
Stephen
Stephen, a good business plan changes periodically as new realities surface. A business plan is a road map, but occasionally a washed out bridge creates a detour. The intelligent traveller always adjusts his plan as he journies.
You are an excellent example of a man with a plan, that is constantly tweaking it to make it better.
Best wishes for you in your Carpentry career.
blue
how to calculate markup
Welcome to the
Taunton University of Knowledge FHB Campus at Breaktime.
where ...
Excellence is its own reward!
PAY YOUR BILLS FIRST.
TAKE TIME FOR YOUR WIFE AND YOURSELF
DON"T BUY TOOLS YOU THINK YOU NEED,BUY THE ONES YOU MUST HAVE TO DO THE JOB
DON"T OVER COMMITT
FINISH ONE JOB BEFORE YOU START ANOTHER
Learn to reduce overhead hours. Don't give away your time thinking it will all work out in the end. All it does is reduce your potential income and take time away from profit making activities.
Don't chase tire kickers unless you don't have enough work.
Don't waste everyone's time with long-winded sales presentations to tire kickers. Get to the facts, let them know what it will cost for you to do it, say why you would be good at it, and ask for the sale.
When courting clients, it's just like working on a new girlfriend--you don't lay it all out on the line, but do make a good first impression, act like the professional they would want to hire.
When bidding, it's not necessarily unprofessional to over bid a bit to reduce time spend on preparing the bid.
Line up clients as far in advance as possible. There is a comforting feeling to having your year planned out, not just the current month.
Be confident in everything you do. It shows through to clients, just like the dog that can sense who's affraid and who isn't.
Work on learning the business of paperwork now. In a year I guarantee you will wish you learned more up front so more of your time is spent on carpentry rather than trying to figure out if it makes more sense to use vehicle expenses vs. strickly milage for your quarterly taxes. Log book? What's that?
Learn a basic accounting system. Hire an accountant to help if it's too complicated, or if you're too busy.
Develop backup plans for your time. If you have a down week every month it can really add up at the end of the year. That's 1-1/2 months of no income producing work. Instead do a little marketing, call past clients and ask if they need any additional work, find other contractors who can use your help for short amounts of time, look for new clients, do things that matter and don't just sit at home and play video games.
Don't be afraid of firing a client.
Contractors who clean up after themselves and who look clean themselves get far more referals than those who don't . You may not think it makes sense or is "fair", but that's reality.
Beer was created so carpenters wouldn't rule the world.
I haven't been in business for very long, but I've already learned that a same-day callback and friendly service will quickly set you apart from the dozens of guys who are too "busy" to deal with those minor details.
Also, being non-confrontational (when possible) takes all the fun out of it for the jerk clients of the world, and I'm not in business to be playing games with jerk clients. Don't give them the satisfaction, ever.
Justin Fink - FHB Editorial
Your Friendly Neighborhood Moderator
Make your quarterly payments to the IRS.
Remember most people are tire kickers. Be careful how much time you spend with them without a financial commitment.
Estimate with real numbers, based on making money. Don't get caught in the trap of worrying about other contractor's bids/pricing. Someone will always be cheaper, and faster.
The worst feeling in the world is the "I'm losing money on this job" feeling. It's really bad for business because it kills your motivation, and affects(or is it effects? I can never get that straight) your quality control.
Most importantly, don't forget that time is money. You should be compensated for every minute you put into your business, including bookkeeping. It's easier said than done, but you have to keep it in mind.
Tune in Tokyo.
I wish I had known how hard understanding the business side of things could be. After being a carpenter for years and years, I figured "How hard can it be?" Really ***king hard, that's how hard. Whatever you do, learn your financials...how to forecast, budget, market, read a P&L statement......all that stuff.
Learn basic business practices, even if you have to go to night school.
Study and work with the best.
Only cut corners if it doesn't affect the quality and integrity of your work.
Learn and practice good people skills.
Give a good presentation of your own self on a day to day basis, both physically, mentally, and spiritually.
Be clear in the deals that you make with people. Get things on paper so it protects both you and the customer. Don't be wishy washy.
Return all phone calls within 24 hours.
Be ok with what you chose to do as a vocation. Have and show real interest in what you do.
Reading Lawrence's list I have to agree with the ideas; but think small business people need to reorient their goals deffinition as it relates to profit.
Profit is not just what is left after paying L & M bills. Here is the definition:
"The positive gain from an investment or business operation after subtracting for all expenses."
Profit is really the reward for taking financial risks.
One must first think in terms of an incorporated business where as owner you pay yourself a competitive wage/salary comperable to what that same effort would earn if employeed elsewhere. Your time for management, sales and purchasing and bookkeeping are included and are then a business expense. Benifits e.g. medical insurance & employeers portion Social Security, fees for training classes, etc are also expenses to an incorporated entity.
Purchases of materials to be consumed in a job are also expenses.
But, purchases of equipment and facilities with a prolonged usefull life (trucks, dozers, shop & office buildings, computers & software ) are not expenses. They are investments. It is the depreciation on these purchased items each year that is a pre tax expense. A business must recover this depreciation if it is to be able to replace that facility when it wears out.
Yes, clearly government has allowed some bookkeeping leeway by allowing single year tax write-off of smaller equipment.
But now comes the crux of the "profit" issue. Profit is the return on investment of the owners assets in facilities and equipment necessary to operate the business. This investment is the net of original purchase cost less accumulated deprecation. What this says is that you as an owner of a small business or as stockholder in a larger one should, for taking the risk of investing, be able to make a return on that investment that is greater than would result if you invested the same money elsewhere.
An example of this is the case Dieselpig just quoted of $89500 on his forklift. Expenses for ownership of that is something like($89500 less 25%)/useful life per year. If usefull life is 5 years, as an example, depreciation is ($89500-$22375)/5 or$13424. That $13424 plus fuel & maintenance is what he should recover each year from his sales revenue margins to offset costs. The remainder ($89500-$26850 after 2 yrs) or $62650 is the amount on which he needs to generate profit. If this were equity financed i.e. with his own money the equipment should be earning about 20% pre tax (14% after tax) or $8770 just for his risk of investing his money in it. Taken together and omitting fuel he should be recovering from his sales about $13424 + $8770 or $22194 per year. But, of this only the $8770 is attributable to profit; the other $13424 is expense. The calculations are different if the purchase is debt financed, but the concept is the same. You need to be earning money "profit" on that part of the value of the equipment you own plus depreciation.
Note this concept does not talk about mark-up on time & materials. That mark-up is what for selling & manufacturing businesses goes into generating "margin" which is the difference between cost of T & M and revenue, i.e. what you charge the customer. This margin gets spent by businesses on what we call overhead-employer payroll taxes, operating supplies, liscenses, phones, utilities, fuel, etc and intrest paid & depreciation. Then what is left is profit (return on investment).
Contractor's rule-of-thumb rates for mark-up depend on what they are using as costs; including such things as owner own time. This is inpart why we see posts rangeing all over (15%-50%) on markups. An unincorporated work-alone who works from his small shop will need less markup to cover overhead than a larger contractor who spends most of his time manageing and arraingeing new business. But the end result should be that they recieve more personal income than could be acchieved if the same skills were applied elsewhare. Then they should also be earning a return on their investments-PROFIT.
Jimco--
When you want to buy equipment with your own cash.. but you don't like the writing off 20-33%--Set up a company--that will purchase and lease the equipment back to your company. Company 1 leases the equipment from Company 2 at whatever cost... That's your write off for company 1. Use the profit to buy more equipment through Company 2.
Leases are always 100% write off.
Keep it simple-that's what the tax man likes.
If you are using your money for investment in equipment--you should see a viable return on that cash. (that comes from your profit before you can spend it...)
LGardenStructure.com~Build for the Art of it!
I agree that the lease is a tax write off. But then so is the combination of depreciation and intrest on borrowing to purchase the equipment.
But, The fact that the lease exists is an incumberance on your financial statement FASB standards, for good reason, require those leases to be capitalized on your balance sheet. They become an asset and your company, to be viable, is then expected to earn a profit on those assets.
Sure, if your operation is privately held you don't have to adhear to FASB standards, but in reallity your banker looks at those things; he just may not call them that.
A good measure of whether yours is a viable company is to look at whether it could be sold to an outside party for enough to recover your asset value and to compensate you for the effort you have put into establishing good will. If it could not be sold for value. It is probably because it has no record of return on assets.
See Jim-- this is where it gets contentious.
Is success making a good living for a hard working guy and for him to retire in comfort--stress free?
Or is Success making hundreds of dollars for every hour invested in the company? (That nearly never happens in any business).
The thing to keep in mind is this.
Of 10,000 new business started only 7 will eventually net the owners $100,000 per year in profit. (someone elses benchmark from a book called "The Entrepeneurial Edge".)
Of these 7, 6 of them had help from family, friends or an angel investor.
Among the 7 the average number of business failures was 5 (bankruptcy, insolvency etc).
Sure-- Aim High, but the chance of selling a small mom and pop, named with initials construction company for a profit is slim.
Boy-- this is getting deep. You rationalize expenses like a CA, a Banker or the IRS.
My point is: Do not underestimate the difficulty in starting, running and growing a business. It is the largest challenge of your life.
Take it from the Art of War: "When venturing on a conquest, take 100 times what you think you will need with you for reasonable probability of success."
When you face a business that is full of people just trying to make groceries (illegals), and others that believe profit is somehow wrong.. you need some advantages to offset those factors.
Aside: I find the government's inaction (both in US and Canada) to be actionable. They have taken hundreds of thousands of dollars of potential profit from every one of our (professional-legal) contractor's pockets. They have tilted and continue through their inaction on illegal labour to maintain an unbalanced playing field. (but that's another posting done to death).
I'll leave you with this question Jim.
What is or would your advantage be if you were starting a woodwork business today?
Hey.. what are you doing for a living presently?
LGardenStructure.com~Build for the Art of it!
What you wish you knew......
that BT was addicting.
Actually, I'm retired.
I fully agree with the points in your original post.
The point of mine was that many, if not most, of people new to business don't take the time to understand the underlying fundamentals that it takes to be financially successful.
There is a vast gulf between owning a job and operating a successful business. I have a high regard for individuals who earn a good living for themselves and a few employees. But I think we also look at the contractors both large and small with some degree of envy when they are successful enough to pass their business on to second and third generations.
Generating long term viability takes understanding of Balance Sheets as well as P & L's. Lack of that understanding is what causes most main-street business to fail.
Jim-- You are right. Everyone starting a business underestimates the endeavour.
The only thing I would disagree with is your choice of words.. "profit being compensation for risk."
Risk of financial ruin is the cost of starting a new business--however it is not the risk that makes us successful.
Getting rid of the risk causes success. When risk is present, you are in danger.
No risk=success.
I am quite risk adverse, otherwise I would have taken the 2.5 mil of government money and gone into partnership with them. Knowing that controlling a 500 pound gorilla partner, (and an unethical and nearly incompetant one at that), was not likely, made them quite a distasteful partner.
Thanks for the input--you sir make good points.
LGardenStructure.com~Build for the Art of it!
Only one issue with what you said, and it's here-
But the end result should be that they recieve more personal income than could be acchieved if the same skills were applied elsewhare. Then they should also be earning a return on their investments-PROFIT.
In any given time period a self-employed business man, if sucessful, will receive more revenue than his business costs to run. The difference between these two can be considered wages, or profit, or a combination of the two.
One good way of assessing what is or should be wages is for the person concerned to pay himself whatever it would cost him to employ somebody else to do all that he does in running the business. If he does this then he can consider all the rest of the money he has made to be profit, and if he wants to sell the business, potential buyers will assess the profitability of the business in the same way.
John
If my baby don't love me no more, I know her sister will.
This is exactly right. It amounts to the same type of perception of the total value of what an owner brings to a business. These are all things that must be compensated for in "mark-up" we pass on to customers.
There are many posts on this forum wanting to know what mark-ups should be. People need to keep in mind that mark-up is only one way of charging the customer for business overhead and profit. Flat price billing is another. There is no magic formula for what they should be. It is the final result of whether they generate sufficient funds to cover those indirect issues that sets whether the mark-up is adequate.
As an example companies doing high end work with few office/staff/overhead expenses will likely use a lower mark-up percentage than one with higher overhead. But, they are taking the percentage on higher value materials and labor.
People new to business seem to think there is something distasteful about mark-up. But they pay that markup every day. It is how retailers & business are compensated for being there so you can buy from them.
Retailers in varying circumstances will have widely differing mark-up/margin rates. A grocery is likely to run on 35% margin for fresh produce, except if it is locally supplied where they may use 25%. The reason being less waste for the fresher local produce. Then they may use 28% for low risk package goods. It is not at all uncommon for retailers to start selling their wares at 100% mark-up (50% margin). And specialty retailers may have to use 150% or greater mark-up so that their overhead is compensated on slow turn-over merchandise.
Understanding these over head and profit issues is not all ways intuitive. Someone here said something like keep good records, not a shoe box of receipts. I would go a step further and say everyone in their own employ should learn to use a double entry accounting software program. They should then force themselves to set up the accounts and put in the day to day information for at least a year. I think nearly everyone would find it insightful of the economics relating to their business.
I know it will be said I don't know how. So take some classes and learn the fundamentals. You are not expected to be a bookkeeper or to represent yourself in Tax Court. Even there though, if you can converse intelligently with the one doing the job the results will be far superior.
Or it takes to much time. It really doesn't if you do it a little at a time. Does your purchasing or design or selling take too much time. It's your business and you need to understand what makes it rewarding.
That I was really a lot better at running jobs than I was at the financial management of them. I simply don't care enough about making money to be a business person, so after yrs. of self employment went back to being the employee and am happier and actually wealthier.
Congradulations now you can work as much as you want,247 if you like. Its kind of like a special little paradise for workaholics.
Theres a lotta good ones here, One of the very best things i ever did was buy fixup houses, When i was slow and had a crew we worked on the house, so i got the house done plus kept key guys busy, Then rented to good guys at a break. Of coarse the first one years ago i flipped and lost and learned my lesson, Just hang on to it even if its done you can add on, After years of my own biz i made a living but the property made me, Best deal buy a house with property you can divide wait 5 years the lot is worth what the house was.