Labor and profit - Same thing?

[Rick Fisher]

Think of your woodworking business as a seperate individual. You are the employee. The business pays you and makes a profit.

If you arent making a profit, go work for someone else. You should make more profit than wages IMO.

The single biggest issue facing small business is failure to charge the right amount. Your woodworking business should be able to pay you a wage for a few months or more, without any business ...

Treat the profit and labor as two seperate components and you will have a real business.

[chris dub]

Profit is the compensation to the owner for the risk of being in business. You should keep your profit in the bank for the business, pay the owners for thier risk or use it to reinvest in the growth of the business. Or it covers you in the down time so you can still eat. That's how the automakers are loosing money but are still "in business". They are living on yesterday's profit. But the workers are all still getting thier paychecks to pay thier bills.

[Rich Engelhardt]

Hello Matt,

What are your thoughts? This whole business/pricing side of custom-making furniture for a living is the hardest part.

SCORE - Service Corps of Retired Executives.
They offer free business advice to small business people.
Excellent source of information of all sorts, from accounting to sales to marketing to you name it.

[Drew Eckhardt]

LOML and I are in disagreement about this. She thinks labor and profit are the same thing, and I should not charge profit. On the other hand, from my research profit is separate and should be between 20-40% of materials and labor. So I charge profit. What are your thoughts? This whole business/pricing side of custom-making furniture for a living is the hardest part.

Labor is a fair wage fo the work in question. When Yo Co employs you it pays its share of FICA+medicare and witholds your share. After that you pay income taxes.

Profit is what's left after you've paid for all the expenses. You, Inc. distributes it to the company owners (which may be just you). When You Co opts to be taxed as an S-corp the profit is taxed at the share holders' ordinary income tax rates with no FICA+medicare surcharge.

Smart companies price goods to maximize the product of profit per unit and number of units sold. In some cases the potential profit isn't enough to make it worth your while.

Talking to an acountant about this could save you thousands of dollars in taxes.

[Derek Hansen]

My 2 cents.

For your own accounting purposes, I say you can think about it however you want. However, when you are invoicing the client, I think it should all be built into your labor rate. Whether you split it into "labor" and "profit" or not, it's all money that goes into your pocket.

If I was a customer of a 10 hr project for example, and you charged $40/hr labor plus a $150 profit, I would asking questions like "aren't you making profit from the $40/hr I'm paying you" and thinking "hmm, I wonder if he would do it for a little less profit". I honestly would rather just see a $55/hr labor rate.

[Matt Meiser]

In the consulting industry, at least at the firms I've worked for, billing is done as Derek describes. We bill clients X per hour for a time and materials job or X total for a lump sum job. The hourly rate on a time and materials job includes labor (salary, benefits, etc.) overhead (office, electricity, phones, computers, marketing, management, etc.) and yes, a profit margin.

[Peter Gavin]

From an IRS perspective, a Schedule C business (i.e. not a corporation) cannot deduct the owner's labor costs when calculating profit. In other word labor is considered profit.

In the real world however, you may prefer to break out a labor and profit segment. You could simply figure out what would be a fair wage for the type of work you do (if you were working for someone else) and add an amount above that to reflect your profit needs. You could calculate it as a % of the invewtmetn in the company (paying yourself a rate of return on your invested capital) or a management fee for the work you do that is not directly related to your 'job', or any number of any schemes.

The one thing I would Not do, however, is seperate out the Labor and Profit items on your invoice. I don't beleive in sepating out labor form materials etc anyway unless it is absolutely necessary. I think you should say you will build this item for this cost and leave all the details to yourself.

Pedro

[Thomas Williams]

Labor is a component of production. The value or money earned by someone's labor would be their wage. An accounting profit is the difference between the selling price and the total cost of production. So if you build your neighbor a piece of furniture, and charge for it, the amount you receive over the material and other costs would be only your wage.
By the way, IRS considers it income.

[Art Mulder]

She thinks labor and profit are the same thing, and I should not charge profit. On the other hand, from my research profit is separate and should be between 20-40% of materials and labor. So I charge profit.

Lots of interesting discussion in this thread on the difference between profit and labour...

But what about the big picture? Matt, if people are paying your price and giving you business, then why would your wife want you to charge less?

All other arguments aside, doesn't everyone charge what the market will bear?

For that matter, if you've got business lined up for the next 6 months (for example), then maybe you should charge more.

[Jim Becker]

Labor is the cost/price of the services you provide in a given time period and doesn't directly represent "profit". There is no profit until your costs, including labor at whatever rate is appropriate, are covered. You certainly have the option of gifting your labor to someone and that's likely what your spouse is really suggesting you do. That's one of the reasons I'll never take "commissions" from a family member, not that I take them from anyone else, either. (No time) There tends to be this automatic expectation that because they are family/close friends, your time shouldn't count in the cost of producing something...

[Hank Knight]

There are two ways to bill for you work: "Time + Materials": and "By the Piece" or "Fixed Price". When you go to the fine furniture gallery to purchase a hand made piece, it's price is marked on the tag. It's one fixed amount, not $X for Materials plus Labor at $Y/Hr. In that case, the profit is built into the total price for the piece, but the purchaser has no idea whether it took the craftsman 30 hours to build or 300.

If you contract to do a job on a time and materials basis, the hourly rate you bill for your work should take into account your skill/proficiency level and a reasonable profit. It's hard to separate these two concepts (skill level and profit) and most people just lump the two together, with the more experienced craftsman commanding a higher hourly rate.

In my business - law practice - I normally bill my work on an hourly rate basis. My hourly rate includeds my overhead and takes into account the fact that I've been practicing law for 30 years and it's higher than a first-year lawyer right out of law school. This takes into account that it will probably take me less time to complete the project than a less expereinced lawyer and (hopefully) I bring more value to the task by virtue of my experience. Sometines I sell my work on a fixed fee basis: I'll do this job for X dollars. When figuring what I'll charge for a fixed fee, I figure my hourly rate for the estimated number of hours it will take me to complete the project. If the first year lawyer is going to do the job, I figure more hours at his lower rate plus some of my time to review his work product. This calculation will give me a fixed fee for the job. Billing this way is something of a gamble. If it takes me longer to complete the project than I anticipated, I lose money. On the other hand, if I complete it in less time than I estimated, I come out ahead.

It's similar with selling a piece of custom woodwork. You can charge for it on a time and materials basis or on a fixed fee basis. If you're contracting in advance to produce the work for a fixed price, you're like me agreeing to to complete a project for a fixed fee. You're assuming the risk of unanticipated difficulties that will complicate the task, and might choose to build some cushion into the price for such contingencies to protect yourself. If you're pricing the piece after you've built it, there's less risk - you already know how long it took to build and what it cost you. But in any case, in charging for your work, you need to cover your costs then pay yourself for your time and your experience and include in your rate a reasonable profit for your work. That's why you're selling your work. Don't give it away.

My $.02

Hank

[Cliff Rohrabacher]

doesn't that depend on how you do your accounting?

You could use a base cost for labor and pay yourself a salary from that letting the corporation you own take it's standard pass through fees and then calculate a profit on top and hand that whole final number to the customer as their cost for an a hour of labor.
Then calculate the cost of materials to your corp., and add handling fees, then, paste profit to that and hand that as a yer another whole number to the customer.
So the Customer sees two numbers: labor and material
You could if you were that picky.

I don't do that in my practice. I charge two ways : (a) full fare ride and (b) discounted. Whichever I charge the client sees either as single unitary number. The client does however, see the full fare ride fee when I discount them. That's only because I want them to know when they are getting a break. I put it in the retainer.

[Chip Lindley]

DITTO Tom! My exact thoughts completely! Ya beat me to it! Profit exceeds any hourly rate I charge, if I am my only employee! Usually a percentage above what time and materials and overhead, which the *competitive market* will bear.

You underprice, you work yourself to death with nothing to show for all that effort. You overprice, you starve. But there are always exceptions, due to the fickleness and trendiness of the general public.

[Kevin Godshall]

Here is my 2 cents, most of it from the hundreds of potential $$$ I've probably lost learning my way around my "sole proprietorship".....

I started small- small tools, small jobs, small pricing - hoping to build a business and a clientele. Well, the everything got bigger- the jobs went from knick knack shelves to bookcases, so the equipment went bigger too. The pricing mentality still wasnt right and that grew but not enough.

I was equating labor rate with profit, however when it came time to buy the new tablesaw, planer, bandsaw, jointer, routers, sanders, etc etc., my labor money (money to live on basically) went into my shop.

If I had planned on profits, over labor, I could have had my shop pay for upgrades, rather than myself and my family. If the day ever comes that I need to hire someone, I want to know that I'm not giving of my own for expenditures, and my employee gets to keep his.

[NICK BARBOZA]

I would consider labor part of the goods produced and profit is on top of that. I'm in commercial construction, and whenever we put out a quote/bid, we will break it down labor, materials and consumables. We will then mark the whole thing up a percentage for OH&P (overhead & profit). This is standard practice in our neck of the woods.

Although personally, when i quote someone for a woodworking project i only give them a lump sum, no breakdown of labor/mat/cons. and if it a person i "like" or am just enjoying the hobby/project, i wont mark up my materials. But if its a job i dont want or a person i dont feel like dealing with, my markup goes pretty high. And if i land a job like that, at least ill make some good money for my time spent.

Also, some people seem to think that profit is a "four letter word." There is nothing wrong with trying to make money. Without profit, you are not successfully running a business.

Good luck.
Nick