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How healthy is your Vertical Analysis?

Discussion in 'Picture Framing Business Issues' started by Alex, Nov 5, 1998.

  1. Alex

    Alex Guest

    For years I've been following along in the trade journals for our industry about costs associated with operating a retail framing operation. There have been articles on 'How to Price' to the 'Annual Surveys', as to how each portion of the country compares, etc....
    What I have never seen is any real solid information or discussion of what the costs are in the form of a Vertical Analysis. For review, for those who may be unfamiliar with this accounting procedure, it's a percentage calculation, setting any one particular income, cost of goods or expense dollar amount, in relation to gross sales. Example: If the customer spent $100, how much (in percentage) is it costing to purchase the materials for the project? What are the expenses (in percentage)? What is the net income (in percentage)? I do a vertical analysis every single day. So my real question is: what are those percentage numbers for every single category or account for some of you?
    I'd be curious to know what ranges some of you are falling into for costs of goods, shipping, advertising, insurance, bank fees/credit card processing fees, small tools, travel, etc...in percentage terms (no dollar amounts).

    This information is so vital yet I haven't found it anywhere. We all struggle to come to terms with what we should charge in fees and services. There are all kinds of mitigating circumstances that cause us to be more or less than a competitor, I understand. However, there ought to be somekind of acceptable ranges for each of these categories or accounts. I would be willing to discuss this if anyone is interested. (I want to reiterate, I am not wanting or interested in discussing anykind of dollar amounts). A vertical analysis only needs to involve percentage information. I think it could only be helpful to build us all up.

    Thanks,

    Alex
     
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  2. MerpsMom

    MerpsMom <span style="color: red"><b><i>Charter Member</i><

    This type of discussion fascinates me. What are you "allowed" to earn? Why do you charge what you do? Do you figure your costs, overhead, time, etc., add a figure and hope to make $100,000 a year, or $50,000, or $10,000? Why does the doc I just visited make $250,000 a year? (My guess, but probably good) and this is after he pays his office staff? Does a plumber, or electrician, or accountant, make more than you do? Do you start from the premise that you "want" or "need" $50,000 (or whatever) pre-tax to live and support your group, and charge enough to make that? I've read everything I can on this subject, and it's still a mystery: everyone has a thought or theory. The marketplace dictates, your business acumen sharpens your bottomline, but how in the world do you become wealthy doing
    this? (No raspberries from you now, if you choose to comment at all.) [​IMG] (I probably shouldn't post this stuff after a coupla beers this late, but it is kind of fun to comtemplate. Hope benreadin and others are missing.)

    [This message has been edited by MerpsMom (edited 11-04-98).]
     
  3. Le

    Le CGF II, Certified Grumble Framer Level 2

    I'm sorry to say I only know approximately how much I need to average, gross, to keep from falling behind. I haven't had the time and I am not real concerned, My materials cost is anywhere between 0 and 60 percent depending on the size of the frame and the length of the moulding. That alone can drive me bonkers. If you want to get rich I think you are in the wrong business. Try investment banking or real estate or stock brokerage.
     
  4. GoneFishing

    GoneFishing Guest

    Try to work backwards to come to a figure. Assuming you own a small three framer shop,
    (these figures are not real or accurate - just for show)
    Your salary = 3000
    #1 framer = 1800
    #2 framer = 1500
    taxes = 750
    rent = 2400
    utilities = 500
    insurance = 750
    loan repay = 2500
    advertising = 800
    misc = 1500
    future $$$ = 500
    etc - etc - etc
    TOTAL PROFIT 15500 needed
    For a 50% profit - you would have to sell 31000 for the month, or approximately 1200 per day (15500 profit, 15500 cost of goods). This is the bare minimum to continue you business. To make money, you need to do better than this.

    1200 per day equals 12 - 100.00 frame jobs per day. With 45 min per customer, it takes 9/24 of your man/hours day to wait on them. That leaves you 15/24 to accomplish the 12 previous ordered jobs (or 1.25 per frame job) minus the paper work time, the no sell customers, the order time, the receiving time, the break time etc etc.

    So you now know what you need. Next step is how to do it. Do you increase your prices and become non competitive? Do you eliminate nitnoy frame jobs to better utilize your time and thereby eliminate some of your customers? Do you increase your framer's training to become more productive per hour and take a chance on them leaving you to become your competitor? Do you expand your base (add more non-labor products i.e. prints, ready mades, easels, and such)?

    I provide no solutions - just questions.
     
  5. gentlebreeze

    gentlebreeze Guest

    Great topic! I'm going to run some figures for a vertical analysis later on today. One piece of info that I can pass at the moment - on a yearly average we cover our overhead in the first 10 days of operation. That figure would cover all the categories mentioned by GoneFishing. Our LJ rep recently did a survey of custom framing charges broken down into categories of glass, matting, stretching, labor, etc. which covers his territory. For the most part we fell dead center.
     
  6. gentlebreeze

    gentlebreeze Guest

    sorry, we cover our monthly overhead in the first ten days not our yearly. Gee, we were almost weathly there for a minute! *lol*
     
  7. JPete

    JPete <span style="color: red"><b><i>Charter Member</i><

    [This message has been edited by JPete (edited 11-06-98).]
     
  8. Alan Sturgess

    Alan Sturgess CGF II, Certified Grumble Framer Level 2

    I have a 38 page detailed report done in 1984 by the PPFA. It is called “Operating Ratio Study” and it covers a whole range of framing
    shops. I think it is out of print. If you want a copy of it and are willing to reimburse for the costs I will gladly send it to you. I heard a few years ago that the PPFA were thinking about re-doing the study to bring it up to date. I really do not think that the figures would have changed that much over the 14 years. It breaks the figures down by region, type of store (proprietorship, incorporated, partnerships) and the size of the stores. It has both income statements and the balance sheets. E-mail me privately at <asturges@direct.ca> if you want to obtain a copy of it.
     
  9. JPete

    JPete <span style="color: red"><b><i>Charter Member</i><

    I have one of those reports from 1975.
     
  10. MerpsMom

    MerpsMom <span style="color: red"><b><i>Charter Member</i><

    Lots of good advice here on this topic, and its post always adds more. I believe you can indeed make a very healthy living doing this: it takes a lot of work and attention to the business side, but it has paid off for us so far. Knowing the costs of goods is an important factor in my bottom line, and a computer program that does that has been most helpful. We employed several methods of figuring out how much we "needed", both frontend loaded, and backend loaded, and it worked out better by covering basic costs (overhead, insurance, salaries, etc.) first, adding what we wanted to "keep", then knowing how many jobs per week we had to turn at what cost-to-profit ratio. Even popping the materials 10% can be astounding.
     
  11. Alex

    Alex Guest

    Alan. I received the fax of the National Results vertical analysis. Thanks a bunch. After a quick review, I have to say I am shocked at the numbers in the Cost of Goods (43.5%) category! This is outrageous! Cost of Goods (COG) is way way too high. This number is very unhealthy. I am beginning to understand why so many framers are complaining about being overworked and making such a little income. Even for the top 1/3 group, COG is running close to 40%! Why do I say this? Because my COG's runs 24% for the actual materials and, if I include the costs of freight (1%) and low price readymade impluse counter graber items and all out-sourced laminating projects, add an additional (5%), for a total COG's of 30%. Heck, I know of operations where COG's for materials is running 19%-22%. And I know of a local competitor not too far from me where her COG's is running 50-56%.

    Gross profit is running at 56% for the national averages and at almost 61% for those in the top 1/3rd profit margin. These numbers are also too low. No wonder net income is so low. I can visualize my accounting professor slamming his fist on the lecturn saying that the only way to increase net income is to increase the amount charged to the consumer or to decrease COG's. Net income cannot be increased effectively by trying to control expenses--it's very negligible.

    Overall, the expenses don't seem to be out of line at about (48%). Net income of (7%) has taken into account distributions for salaries and payroll taxes, but is still too low.

    I agree with Merpsmom, there is money to be made here. I wish there was a way to get it through to the framers of the world that overall they don't charge enough for their services or product. I have gone round and round with the CEO of one of the leading industry suppliers for years, in talking to him about helping to arm the framers with better pricing principles besides what's out there. He said if we offered it, no one who sign up or show up. So, they don't do that. Rather, they hold framing seminars and festivals to teach framers how to hold their breath underwater while painting a french panel or making notched gilded beveled inlaid corners! And when framers arrive at the fest, they get a free box of glass and a pen! Well enough of that.

    The analysis has been most helpful in that it presents something very tangible against which my own operation can be compared and contrasted. It would be great if there could be anouther study done to see where the industry is now. Did someone mention that they have the results of a study from 1975?

    Hey, much appreciated.

    Sincerely,

    Alex
     
  12. framer

    framer Guest

    <BLOCKQUOTE>quote:</font><HR>I have gone round and round with the CEO of one of the leading industry suppliers for years, in talking to him about helping to arm the framers with better pricing principles besides what's out there. He said if we offered it, no one who sign up or show up.<HR></BLOCKQUOTE>

    I bet that CEO was from LJ. Too many framers believe the pricing guides put out by the suppliers. For years I've seen little movement in the pricing guides but costs continue to increase.
     
  13. Alex

    Alex Guest

    Yes, you're right. It is LJ of whom I was speaking.

    I've saved the pricing catalogs for the last ten years. Turn them all to the page of the 'Recommended Retail Markup' and look at the multipliers. It will shock you. Anyone who follows these as a pricing method most certainly is having financial trouble.
     
  14. MerpsMom

    MerpsMom <span style="color: red"><b><i>Charter Member</i><

    I don't have any of these things to read. What multiplier are they recommending, and what one are you recommending? Are you applying the multiplier to mats, glass, etc.?
     
  15. jwc

    jwc Guest

    While I have my own business (homebased), I work full time for a local distributor. I use the LJ pricing guide as a goal when talking to our customers. By that I mean that most of the shops, both homebased and store-front, DO NOT even get close to the LJ recommendations. One local chain (5 stores), pays us $32.50 for a particular frame (chopped and t-nailed), sells it normally at $69.00 and then runs 50% off sales!!!!! (frame only). I have not been able to convince them to bring their prices into the real world (they also charge $0.18/UI for reg glass). As such, they influence almost all the shops in the area, including Michaels, which lowered their pricing from the "A" group to "C" pricing so they could compete. Therefore, the LJ pricing guide would be a welcome start.
     
  16. woody

    woody CGF, Certified Grumble Framer

    hI, jwc, hope the world's treating you right. Being familiar with the store you are referring to I am quite aware of their pricing practises (Ihave one a mile or two from my shop). Unlike a purely custom frame shop they don't have to rely just on framing to make it, selling as they do everything from ribbons to dried flowers. Each department works in conjunction with the others to get people into the store so that the whole produces their profit. My experience is that the example you gave is the exception rather than the rule. Usually they use LJ's "simplified pricing guide" for moulding which is designed to artificially inflate moulding prices so they can give their 3O to 50 percent off. It is the same for Michaels and Ben Franklin stores. Unfortunately, those price-only customers fix only on the idea of the discount and don't stop to find out how the regular price comparesd with other shops. It's all marketing. We have another store in the area that jobs out all its framing to a production house and advertises prices that are always "4o percent off regular price". Of course, they're not but many people are fooled by such tactics. You are right that such pricing tactics have a "dragging down" effect on the rest of us whether we mean it to or not. This is especially true in our area where prices are probably only a cut above a Moroccan casbah anyway. How do you compete? The only way I know is to be everything they are not. A fair, profitable price, quality moulding and other products they don't sell, a knowledgeable sales story, a well designed and quality product, and the best service you can give.
     
  17. JPete

    JPete <span style="color: red"><b><i>Charter Member</i><

    One 1970's report shows 15% of frame shops were framing only, keep that in mind. The following are averages with some ranges in ():

    Framing sales to Net Sales....39% (12-99)
    Non owner wages/Net Sales.....16%
    COG/NS....52% (ranged 27%-63%)
    Advertising/NS....2%
    Rent or Mortgage/NS...5% (2.7-22)
    Depr/NS...2%
    cash/TA.....8.5% (3%-56%)
    Accts.Rec/TA....11%
    framing inventory/TA....25% (2.1-56)
    Equipment/TA....8.5% (2.5-31)
    Furniture and Fixtures/TA....4.5%
    Acct's Pay/TA...12%
    Gross Profit Margin....50% (25-63
    Net Profit Margin....8% (1-23)
    ROI....16% (5-35)
    Liquidity/debt ratios.....3%
    Current Debt/inventory....41%
    TD/TA......36% range 8%-78%
    Smaller operations at that time were more profitable but not able to borrow as easily.

    Now where do we go from here?
     
  18. Alex

    Alex Guest

    I raised prices on Dec 1st of last year a solid 10% across the board for everything; mats, mounting, labor, glass and all mouldings. Not one single person has complained about the increase.
    I closed out the year with a Cost of Goods at 22.5%. Where are some of you falling with the COG's? I will be aiming for a COG's of 19% this year. I hear complaints only from the busy framers down the street about being so busy, they have to have three employees to get all the work done! Man, what a headache, just the paperwork and filing of taxes. I'd rather work less, not be backed up, focus on true quality and service and attract only the individuals who already know what real value is.

    Bringing in a line of closed corner frames selling for $300-$400 per foot. Anyone with experience in that range?

    Alex
     
  19. Ron's dog's flea's brain on acid

    Ron's dog's flea's brain on acid MGF, Master Grumble Framer

    This was/is a good string.
     
  20. Scarfinger

    Scarfinger Guest

    Interesting statement above about paying the overhead in the first 10 days of the month. My Dad told me 30 years ago: When you start out and you're too busy to do actual financial planning use the old rule of thumb: 1/3 cost of goods, 1/3 overhead, 1/3 for you. And he said to get to this just keep raising prices until 1/3 of your sales is a keeper.
    Of course 30 years ago there weren't discount chains.
     
  21. JPete

    JPete <span style="color: red"><b><i>Charter Member</i><

    Now it's 1/3 taxes!
     
  22. Alex

    Alex Guest

    Did you mean to say: 1/3 taxes; 1/3 COG's; 1/3 rent only; and 1/3 all other expenses? Snicker snicker :)

    ------------------
     
  23. accent

    accent True Grumbler

    Would appreciate more data being sent in.
    Our cog has been running about 30%
    Gross profits at 69%
    Non owner wages at about 20%
    advertising 4 to
    Last but not least ,net income of 8% not including owner wages.

    We are in a very competitive area with 4 frame shops within 4 square blocks.
    I would be most interested in what other shops use as a rule of thumb for employee wages.
    P.S. THe rule of 1/3's
    was told to me many years ago by a salesman from Omega Mldg. Don't I wish it was still true.
     
  24. accent

    accent True Grumbler

    Would appreciate more data being sent in.
    Our cog has been running about 30%
    Gross profits at 69%
    Non owner wages at about 20%
    advertising 4 to
    Last but not least ,net income of 8% not including owner wages.

    We are in a very competitive area with 4 frame shops within 4 square blocks.
    I would be most interested in what other shops use as a rule of thumb for employee wages.
    P.S. THe rule of 1/3's
    was told to me many years ago by a salesman from Omega Mldg. Don't I wish it was still true.
     
  25. Scott

    Scott True Grumbler

    A while back I asked my accountant how I could take more money home from my business. I expected him to tell me about some great tax loop-hole. Instead he said "Sell more or spend less." Since selling more seemed to mean working more I have been spending the last year trying to spend less, with mixed results. I went to the Vegas Art and Framing show primarily to take the Jay Goltz pricing seminar. (It was packed, by the way.) His message was know your costs and charge more. Anyone who can make a milliion bucks in the framing business gets my undivided attention. Interesting thing about Jay Goltz and many other super successful framers: they have backgrounds in accounting or finance not in art. It kind of changes your perspective a bit. You won't find me in those mat cutting seminars ever again!
     
  26. Alex

    Alex Guest

    Accounting instructors tell us that there are only 2 ways to increase Net Income "Effectively". 1) Charge more. 2) Reduce the cost of goods.
    No one can "effectively" increase Net Income by managing expenses. Okay, possibly 1-2% increase can be gained by managing the expenses. But is this what you want to do? The key here is "effective".

    [This message has been edited by Alex (edited 04-12-2000).]
     
  27. jframe

    jframe <span style="color: red"><b><i>Charter Member</i><

    I've been wanting to bring this thread back for a couple of weeks. I find it interesting to compare the cost of goods discussion in this thread to the current threads about pricing strategies.
     
  28. Framing Goddess

    Framing Goddess SGF, Supreme Grumble Framer

    The Goddess is about to sing the praises of Jay Goltz again!
    I was at his (capacity) seminar in Las Vegas in January and he addressed these percentages quite directly. The ONE thing I remember even when I am stressed is that COGS should be 30-33% of gross. Or you will be suffering financial woes! I compared his percentages to mine and we were darn close. Just working toward that million now...
     
  29. LBFOOTE

    LBFOOTE Guest

    Thanks, Jframe.

    I read the whole thread before I realized it had started more than 2 years ago. But the information still is current. It is time to go back and reread all the "old" threads.

    I am currently putting together a business plan for re-opening of our frame shop. (We closed our frame shop/craft store last April after a major dispute with our landlord of 22 years. We hope to reopen in our own building by January.) Our lender needs to see our business plan. But, I am really doing this for my partner and me.

    I read the Grumble every day, as I believe this is the best source of business/framing advice. Thanks to all the Grumblers! I feel I know all of you, even though you rarely hear from me. I even get a kick out the ones who are so hard on "newbies". Just remember, there are a lot of us out here who will forever be "newbies" (translates: asking questions).



    ------------------
    LBFOOTE
     
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