alrighty here we go let’s

see people are streaming in hello everybody it is great to see you

here great to have you Mike and Dave very excited for this topic it seems

like this is a topic that a lot of people seem to be interested in we had

more than a couple hundred registrants for this so I think more than any other

topic I can remember so you guys are clearly bringing

bringing the people into this meeting so hello everybody Welcome to this month’s

webinar we are talking about all things job costing quoting understanding your machine rates

your overhead rates your margins your direct labor costs your indirect costs

we’re talking all these things that are so important for getting right in a Manufacturing Company um and we have

some people that really know this topic well I’m mostly the the moderator today

the real brains of the operation are these other three gentlemen you see here I’m just the uh as Dave was saying

the pretty face the the the guy that just turned 50 but doesn’t look a day over 30 thank you right thank you Dave

so kind um but uh let’s let’s dig into it um so

uh you all know me I’m Paul I am one of the founders and the cro I guess that’s

my title here at Pro Shop um joined by Kelsey my good friend of 30 plus years

and business partner our CEO fearless leader and then Mike and Dave I’d love for you guys just to share a little bit

about yourselves here for a minute and then we’ll jump into the topics go ahead

Dave well uh a little bit about myself I’m a T die maker by trade and worked my

own my own shop through 2010 had an exit went into Corporate America a bit

learned quite a few lessons and then uh was very fortunate enough to join Mike

in 2019 working with shops across North America and really really loving it but

uh teaching people I’m trying to I live I’m trying to live my life to try to be the man that I walked in my shop 30

years ago and came alongside me and taught me a few things so that’s that’s who I am what I’m about

Mike my name is Mike Watkins uh I came into the Consulting Arena back in 2001 I

started working with machine shops here in uh in the greater Denver area and uh ended up writing a book called scaling

the exit uh which addressed the issue of baby boomer the baby boomer demographic

and uh these baby boomer owners wanting to sell their business bu to fund their retirement but their business wasn’t

sailable and so uh I started along that path Dave joined me in that path and we

have a solution uh to uh help uh double the valuation of our client companies in

three years uh all and and More than 70% of our clients now are not baby boomers

looking to retire they’re just uh uh you know gen xers and some Millennials

looking to build their business awesome well I love that mission um it

is so important uh this is what our mission is um we deliver powerful

manufacturing software by deeply understanding our clients challenges in order to meaningfully improve their

businesses and Inter their communities and I know that uh that speaks to you guys you care about making uh impact in

your clients um and uh so it’s it’s great to be here with you both I do want

to say I’m just going to back up Mike I think you need to regrow that mustache that is so sweet just love it so much so

um little bit of housekeeping here um there obviously we’re on a zoom uh webinar there is Q&A and there’s chat um

I will start off the chat please throw in there hopefully the Chat is enabled for everybody um if not our team in the

back end will do that quickly tell us where you’re joining from and uh and then maybe what you’re what what are

some of the things you really want to make sure you learn today and then in the Q&A that’s when you actually have

questions as we go through we’ll definitely get to Q&A at the end please put those in the Q&A it’s a little bit

easier to track than if it’s in the midst of the chat so all right fantastic

cjun country we know exactly where that is JD um look at all this people from

all over the place from Canada very good all right fantastic us Arizona from

Arizona to Anchorage kitum South Carolina Montana very good fantastic

great to see everyone here okay let us jump in to our next slide so yeah I’ll I’ll

just share start off with this one um you know I did the quoting and estimating for our shop for close to the

full 17 years we did it um so I know how important it is to get this right um but it’s not always an obvious easy thing to

know how much you should charge um but uh but the uh important lesson and I

know that Mike and Dave you stress this all the time is even when it means dialing it in and that’s going to be a

higher price than you are currently charging today that is often the very right answer because the market will

bear your pricing increase in almost all cases and it will lead to a more successful profitable valuable shop

right absolutely yeah so all right let’s get

into the meat and potatoes of this stuff I I’ll start by um by um maybe asking

you Mike to share a little bit about your your Co your thoughts on on this topic here this slide here well I think

understanding your cost uh can be boiled down uh into uh the the the concept of

uh if you aren’t covering your cost in your pricing then um you’re

going to lose money and I had a I had a client who

um a construction company and they came to me and they said hey we hear that you

help people with profitability and we we can’t seem to make money and I said okay

how how do you price your product and they said we’re Cost Plus Awards uh plus plus

15% so I said well you can’t lose money if your cost 15 you know and and so when

I sat down with them of course the reason why they were losing money is they weren’t capturing all their costs

and so if you’re not charging for your cost then you’re eating your cost because you are in fact incurring those

cost and if you don’t have a plan for how to uh handle them then then you’re

going to eat it yeah and we know a lot of shops are just barely eing out a

profit or they’re not they’re actually losing a little bit or a lot of money each month

and the the change in what a company can do when they are

reliably profitable the course over years is is a dramatic impact right

without having profit to fuel that growth you just can’t grow right um

so yeah and I would say if we’re talking about costs you know if you think you understand your costs really well and

you’re one of those one of those shops that’s amazing I’m so glad to hear it and how are you reflecting that how are

you reflecting that to your team how reflecting that in the to the estimating team so knowing your costs understanding

your costs it’s a team sport pricing maybe you hold that a little closer to the to you know to the

lapel but uh costing that’s a team sport everybody should know where your costs are coming from that’s that’s going to

be helping a lot awesome well let’s dig in and look at some

actual um some actual numbers here we’re going to get into a spreadsheet a little later where we’re actually going to do

some calculations and show you how you would derive some of these things into the into the proper buckets um but uh

Kelsey I’d love for you to take this one and talk about direct versus indirect costs for sure I’m I’m super passionate

about this um you know it’s funny because there’s um there’s definitely uh

accountants uh everywhere maybe some of them on this call who are saying you know well how how do we do this from an

account perspective and and I have a lot of respect for folks uh who have to handle this from an accounting

perspective because it’s really important an accounting software does this um in a very specific kind of way

um and understanding direct versus indirect overhead is a crucial part of your business in fact uh the reason

there’s a big box around direct gross profit is because it’s a very impactful number um there’s the easy number couple

above that gross profit but uh but that gross profit piece misses just such an

important part of the picture right in this case 12 and a half per. so if you were wondering how’s my gross profit

you’re like hey my gross profit 69% that should be enough to cover the business and you’re like wait a minute direct

gross profit is what we call it which includes that component of direct overhead um is is a significantly

different number and then of course there’s indirect overhead which is all the things that you really can’t say are even remotely rated related to

processing jobs so indirect overhead is you know what are you going to do about the Insurance every month it’s like that

doesn’t go on any job you can’t you can’t even closely relate that and in many ways your sales team your whole

sales effort your marketing your website could you possibly say that’s related to one job it’s not it’s indirect overhead

so that’s something to really think about in terms of these two types of overhead and from Pro Shop’s perspective

knowing the difference between those two is critical in understanding your costs because you know a finished part and and

I hear certainly account and say well you know we got standardized costing and I say well doesn’t it matter how you

built it like that doesn’t that have a big impact on the cost and it’s like well yeah it’s like well those big

changes can quite often be tucked into that direct gross profit right how did you build it what was happening aside

from the labor and the raw materials that contributed to the cost function

for the whole thing look at look at this cogs total number 30% right and the

direct overhead was 12 and a half it’s not quite another 50% but but it’s significant right so we need to make

sure we understand direct overhead and indirect overhead and so tell us what exactly the direct overhead we’re

talking about the machine the machines and Equipment that’s used to uh build the product in addition to the the the

direct labor costs and the out-of-pocket costs for materials and tools and you know outside processing things like that

right yeah yeah so when we’re talking about direct overhead dollars we’re

usually attributing those based on the kinds of things that create cost

mechanisms for you but aren’t to do with people and raw materials so these really are you know your your machine costs

like those aren’t free right or or even some things that people don’t necessarily think about like maybe you have Cam software was that free it’s

like nope it wasn’t did you have to have it to process jobs like yeah we process

a lot of jobs with our cam software for sure that’s an element of direct

overhead right so there’s all the N normal ones you can see and usually if you’re processing work at any given

workstation or resource there is some level of overhead associated with it but you sure as heck don’t want to have the

same level of overhead on your assembly bench which is like a little table with a few hand tools as your you know $1.2

million five AIS you know one and a half meter dmu right it’s like uh nope those

shouldn’t be costed the same so this is what we’re talking about that direct overhead is everywhere pretty much on

all jobs but to very different degrees Yeah and Mike and Dave we were talking as we prep for this and recognizing that

there’s more and more automation these days people are buying machines that run unattended for hours at a time and so

there’s sometimes very little labor content which makes this thing even more important right absolutely I mean the

the automation everyone has is having a hard time finding more and more employees right so automation fills a

gap to where you can have an employee possibly run multiple pieces of equipment and have some automation on a

piece of equipment where runs on its own where you do more inspection so some people have operators some people call

them floor inspectors because really it’s our job to verify the machine’s producing a good product and you do that

a lot with uh with automation whether it’s quick change tooling whether it’s

whether it’s a machine or a robot a cobot the loading and unloading equipment but it makes it so so

important to do that yes yeah very good all right um let’s move on here so

Kelsey I’d love for you to start with this one this is a screenshot out of a pro shop system what are we looking at

here yeah you know what perfect timing from Alex he just asked how would you assign monthly costs into Pro Shop would

this be categorized in the indirect overhead and um you know the monthly

cost of Pro Shop uh is it is it a work center you know is it like yeah for sure

it’s like right here I can put it here well no it’s tough to put it on your CMM

programming station or down here in your Lathe for this particular thing but if

you believe and I think it’s probably somewhat accurate that Pro Shop is directly related for a whole bunch of

your manufacturing you may want to take that cost and incorporate that in the spreadsheet you’ll see a little later

that we actually use to come up with this hourly rate did we get from

$55.50 you know or it might be1 1450 right this is triple for this it’s like

okay that’s something we can talk about the exact calculation there but let me just back up a little bit and talk about

this this is definitely uh keep it up to date kind of thing um that’s what I just

have right there at the top but I think this is a great phrase to start us with total cost of ownership per hour and

it’s a great way to calculate these numbers total cost cost of ownership per hour so we’ll talk a little bit more

about how to detail down to every single resource but what this list in proshop

is is it’s giving you the clear understanding of as you’re utilizing any particular resource any machine Any you

know inspection anything along the way what is that costing you in direct overhead to have that be there and

utilized one of the things that people often say is like I got this really old machine I paid for it long ago I bet my

cost to run that thing is almost nothing and I think okay but but you

either just paid for it all up front and you paid a lot back then or it really has a cost of ownership per hour over

its whole life I think that’s the way to think about it not whether you’re still making payments on it or not so we’ll

get into more of those details later but at some point you’re going to have to replace that thing yes yeah so uh so you don’t want

it to be the case that while it’s old and decrepit you think it doesn’t cost you anything and then when you buy a new one you can’t afford to put any work on

that thing because it’s costing you 150 250 bucks an hour in direct overhead because you’re depreciating it

aggressively and it’s coming off the books fast and that’s not a good that’s not a good way to run your business

think about it of total cost of ownership per hour that you ran it over its lifetime and we’re going to dig into

how you might calculate that in a little bit yeah I know that’s what people earned and also I want to acknowledge we

do have Pro Shop customers and non-customers on this webinar so Adrien uh the path to the machine overhead page

is through the finance systems dashboard um not relevant for those that are not clients yet but uh that’s the that’s the

way you get there um all right I was just gonna include a tiny bit more here you things to consider and and some

things that I think make sense uh from a total cost of ownership perspective to to just make sure you’re thinking about

it and again we’ll jump into the spread sheeet but this is like maintenance costs this is maybe some portion of you

know power and floor space this might include consumables like coolant um or other kinds of you know filters things

that that you might have had it it may also include things and should in some ways represent things like a lead or

supervisor role which is definitely considered direct overhead you know accountants will agree uh even though

they don’t know how to do that in in their accounting package I’d like to put 15% of so and so’s time into direct

overhead that’s often an incredibly difficult thing to do from an accounting package perspective but we’ll show you how Pro Shop can help that and then

there’s other kinds of things you know clearly there’s ways in which you can make choices about the kinds of things

you would want to incorporate and this would be the moment where you’d say yeah actually my Pro Shop subscription cost

should SP be spread out amongst all these things I’m gonna put another 25 cents an hour five cents an

hour from Pro Shop across all these tools look at your cost of ownership

yeah one one thing that people have to dive into well if you’re running older

pieces of equipment you have a lot of repairs and maintenance that you have to keep up on these pieces of equipment that is that also goes into total cost

of ownership per hour you might have machines that are 20 years old but you’re putting 105,000 a quarter into repairs and

maintenance that’s something you have to roll up I mean we see we see uh repairs and maintenance you know one two% of

Revenue per month we see it as high as 10% with with some factories have a lot of machines a lot of older machines so

goes to your point when you’re buying a piece of equipment you may be paying for a newer piece of equipment payments once it’s paid off then you got to maintain

it you got to keep it up to speed you got to make sure you’re maintaining accuracy and there’s a cost associated with that you have to stay on top of

that cost and roll that into these numbers as well yeah that’s that’s a really good point it’s like you may

experience very few of those costs when they’re new and much more of them when they’re old but you’re taking those plus

your initial payments UPF front and kind of averaging them out across the entire lifespan of that equipment right so

that’s a really good point Dave it’s it’s sometimes even a higher correlation between actual cost this month than you

might have thought because you were paying machine payments but nothing on the repair and maintenance side because they were brand new and now you’re like

I don’t have any machine payments but I did have to replace that board and that wasn’t cheap right yeah yeah yeah all right any

Mike any other thoughts from this page you want to talk about I would just conclude with uh as you capture these

machine hours uh in your way um and you get paid it’s it’s a good

idea to to set up a reserve on your balance sheet so you take you know some

money out of cash and you put it in a reserve it’s still available to you but it’s just a reserve account now and um

it’s way less painful when you’re paying for uh machine repairs or a new machine

out of a reserve account than when you’re paying for it out of your cash account got it yeah that’s a good one

and actually that’s it’s a nice little plug for you know if you do that on a regular basis that also Smooths out your

overhead costs you don’t end up with giant Hills and Valleys and your overhead costs as you move

along all right let’s jump to the next slide I think so this we’ve already alluded to

this a little bit but there really are significant differences in what different machines and work centers cost

whether it’s an assembly bench which some Helicoil tools or your you know Million Dollar Plus machine um yeah how

do uh how do people go about calculating what uh what they should actually be putting into their into their

costs well I think uh as you as you break down your machines obviously if you buy a

$75,000 very inexpensive three AIS Mill if you can find one for 75 grand or a

$650,000 you know DMG uh five AIS Mill or a $400,000 Swiss or $750,000 sugami

tmu whatever that is clearly you’re depreciating that on a on a Time base time basis so every piece of Machinery

costs different a different amount so you always got to be be prepared for that but we have a sheet here and you

can put your purchase price in the sheet and we talk about hey if you have a loan what is the interest you pay every year

you know how much is your insurance annually what is your property tax you know and you also got to kind of figure

out how much energy is this thing pull is it a 50 amp a 30 amp machine is it

100 or 200 amp machine what are you doing are you in molding where you’re pulling tons of power and and you should

know that um and we talked about repairs and maintenance the consumables now

we’re talking consumables you might be talking we covers you might be talking uh it’s not it’s not consumables like

endmills and whatnot like that so it’s it’s consumables part of repairing and maintaining the machine um and then

support if you have to pay support there are a lot of machines out there that uh the OEM can dial into the machine and

help you troubleshoot on site but you have to pay for that and Pro Shop there’s a good one I I like how we added

that um and but you got all these expenses that roll out and then you have and if you’re hey I like that uh and if

you have the number of hours per year we calculate we calculate um I like it the

10 number of years that service expected um I I talk about h a little bit I call

him a Chevy truck you know sometimes it’s a 5-year machine could be a four-year machine could be a six-year

machine I remember the old am moris the more old Mor nl’s the suckers would last 20 years right and just depends but you

got to really offset your repairs and maintenance for that we talk about number of hours per year 8760 if you’re

running Dave can I really quickly uh in this spreadsheet we’re we’re summing

line S through line 14 we’re summing those those are annual costs

and then we add them to the price of the new machine the original price and

divide it by 10 and that’s how we get to uh you know the the total

cost um of of the machine absolutely thanks Mike yeah and then you got to

figure out how many hours you’re running one shift you’re running two shifts you’re running three shifts you got to figure out how many hours you’re

actually running so and that calculated to how many hours are available uh total

hours per year right um and then you but you really need to figure out your

annual usage we’ll talk a little bit about this too with uh you got utilization numbers and you got

efficiency numbers and you should have a good handle on that metric and you take that and you take that uh that

percentage and say okay how many hours is this piece of equipment really used because if you have a piece of Machinery

that cost you $500,000 but it sits on your floor and you only use it one day a week you need to be careful with that that you know

you can’t just bill it like it’s like it’s running every day every hour of every day right otherwise you find that you’ll wind up losing money so as you

calculate that on down you get lifetime hours over the 10 years and basically you got an hourly rate of what that

machine cost you so a lot of people say hey I own a piece of equipment doesn’t cost me anything well you got to

remember as you’re as you have that as you’re calculating an hourly rate that

$10.39 for this piece of equipment is going toward the next piece of equipment you’re going to buy because this piece

of equipment isn’t going to last eternally right it’s going to expire and you’re going to replace it you got to stay in the front edge of technology and

everything else so in that you always I love Mike’s idea building a reserve taking that money every month putting in

a reserve account then when it’s time to rotate that piece of equipment you take your trade in value along with your cash

instead of borrowing at a crazy interest rate and you buy a piece of equipment um I love that but it’s very important to

understand your cost this is how we calculate it Mike do you have anything else well and so if you have 20 machines you’ll do this 20 times each machine

will have its own unique hourly rate yeah and I think that you know

those those levers that that you’re both talking about which is like this is where your sense of your equipment has

to come in and you have to be able to use that to calculate it right what are the actual years I put in here 52 weeks

85 hours a week I put this number very specifically in here because guess what

pushop tells you how much you’re utilizing your equipment every week if you’re time tracking correctly and every

piece of equipment has this like the last week the four-week running average and the eight-week running average of

how much you’re actually utilizing that equipment right so this number should start to get you know something you can

actually check back on and see am I getting that do I have to do something here um and the the the concern of

course is what if this number starts dropping and and you know for whatever reason we’re really not using that machine very much and it’s like a only

getting 25 hours a week on it can we really charge $35 an hour for it well

the short answer to that question is don’t confuse charging with

costing yes it is actually costing you 35 bucks an hour to run this doesn’t

mean you should charge that you may need to just get some more work for this machine but I kid you not it costs you

this amount to run or will over its lifetime yeah yeah I was on that I’m

glad you brought that up I was gonna ask the question so if someone adds a third shift or a second shift should they go ahead and

redo all these calculations and plug in different numbers into uh into their costing system Pro Shop or whatever that

is yeah I think the lifetime average happens like if I think if you think you’ve substantially changed the

lifetime average of this then yes you you probably should right you’re you’re

you’re talking about those highly automated companies what if you start to realize that you’re reliably running a piece of equipment 50% more hours with

the same labor even than you were before yeah those rates should be going down and what that does in the pro-op context

is it defers some of those costs out into other spaces in this case into your indirect overhead right like if this

isn’t cting you as much per hour then those costs are going somewhere else so it’s not like you’re losing those costs

you’re still accounting for them right and that’s key pushing them out of one area just means they’re being absorbed

in another area uh now you may be absorbing those costs that your hourly rate keeps puming but

you keep using more and more hours so your actual total dollars for that resource are the same every month even

though your rate per hour is going down I think that’s a great Point Kelsey and

when you add shifts Paul that’s all about number of hours per year and understanding that that is that is a

major shift whether you’re adding a shift or or retracting a shift even that’s something you need to adjust but

something on a month- over Monon basis that you really need to keep an eye on is your usage your usage there’s a lot

lot of different softwares out there to help you understand your utilization that’s that’s a number that we have to

know and understand well we have some shops that are high mix low volume that their utilization is 37 and A5 per. we

have other shops that are high volume low mix and their utilization 95% but it’s very important if you’re

making laser guided missile systems and you’re 37 and a half% all your all your

money is tied into your programming and your setup and not always the usage of the machine so it’s very important to

understand what you should build on the on the usage and and using the utilization

number yeah so we had a question rela to this where is the cost of cost of floor

space yeah so that one I think is is you know in in this kind of um realm of you

know here’s some recommended things that you can put in here but obviously I mean I came in and added Pro Shop in here you

can add in anything you want that you think truly is representative of what this particular piece of equipment

should bear in terms of your costs remembering that if you take it here

it’ll come out of somewhere else and if you push it out of here don’t worry roop’s calculating that it’s going to

come in somewhere else so so it’s not like you’re you know worried that maybe you’re under representing and therefore

blowing your whole numbers in your shop it’s not like that it will be represented whether you capture it here

and take it out specifically for this piece of equipment or not yeah this spreadsheet was specific to how much

does the actual piece of equipment cost to roll up and understand on an hourly basis how much to save to replace that

piece of equipment down the road and then you have the overhead rate or direct overhead rate of uh of floor

space however you’re going to build that in yeah if your machines all total 50%

of uh the floor space you have under roof then the other 50% of of your rent

needs to be an indirect overhead I mean you have to make sure you’re keeping track of all that stuff

yeah yeah and and there’s a couple of questions coming through and in fact you know I think Dwayne you you just asked

here um any tips on how to work through these pieces I I think there’s a bit of a

balance here which is you’re way better off doing a first pass on this and putting some numbers in here and

refining that over time as you understand how those costs are truly starting to play out and whether they

actually jive with what you think those equipment Pieces cost you you could put

in all the numbers here everything you think down to you know 20 items on this list instead of the six you’re seeing

here and if you think that that’s not really well representing your business

then you should change it right like it’s not it’s not dollars lost so don’t worry about that piece but instead say

maybe I didn’t catch all that and I’d balanced that off against do you really want to do a 20 line item thing for

every machine and spend you know tons and tons of hours only to find yourself changing it two months later to

something slightly more realistic start with the basics you know what if this were just three lines and that’s all

we’re going to do for now and these are smaller numbers let’s just not worry about them better to get that in right away and start the journey than to go

crazy on working your way through this and making sure that you’ve covered every penny across the across the system

and again for those of you who aren’t Pro Shop customers I know I talk about that a fair amount just because that’s the that’s the one we’re on um but yeah

it is the case that in Pro Shop you will not lose any dollars that you don’t account for here they will be accounted

for either in another equipment’s piece of direct overhead or they will end up

in indirect overhead so don’t worry about things you might have missed you’ll just see them in slightly different cost

buckets good stuff um had a couple several questions coming in uh for the

two that ask yes we will make this template available later so when we send out the recording of This webinar we

will include a link to this and you can download it as an Excel file and you know tweak it to your

liking thank you Kelsey um so Tom ask I have a small machine that costs $10,000

is it worth putting it into this cost model yeah I mean that’s an easy one Tom

like yes is the short answer like okay it’s gonna cost me you know very little

to do this right like this didn’t cost me anything you know this cost me 60

seconds to take your $10,000 piece of equipment and know that it was a buck 38 and you say what do I care about a buck

38 I don’t know but is that potentially you know 1% of your total cost or or one

and a half percent of your total cost oh actually maybe it is right I kind of do

care so for the cost to for you to fill out the spreadsheet for 60 seconds that

was a gimme yeah that’s take a doll 38 with a

a th000 hours a year that’s 13300 bucks it’s going to fall to the bottom line of your p&l and and you want that

absolutely because yeah you might buy another $10,000 piece of equipment after this one’s

done y all right uh we’re gonna move on I’m gonna reare my screen here Kelsey

great thanks um all right so let’s talk about

Target chart of accounts who wants to start on this one well we um when we have a a pro shop

client come on board we we do the one- day uh onsite uh assessment of the

business and we get to we get to understand uh the strengths of weaknesses of the client and then uh you

know the first thing we want to do is hey give us three years of financials and uh in order for us to compare apples

to apples like we want to compare you client to to others that are similarly

situated um so there we have Top Shop uh ratios we have industry best practice

ratios well those ratios are contingent upon everybody sort of accounting for

things the same way and U we see some really wild chart of accounts and so if

your chart of accounts is really wild and it’s producing 70% gross margin um

you you know you probably have cost showing up in the wrong place so it’s good on the one hand that you’re

capturing all your costs but your financial statements should be talking to you they should be telling you how

the business is doing and that can only work if if your chart of accounts is structured correctly so we come in and

we say you can structure your chart of accounts the way we like to see it or

you can leave your chart of accounts the way it is and we’re going to map it to our version or chart of accounts but

what happens when we map it to our version of the chart of accounts and then you go I think we’re want it we want to entertain an exit you know

entertain a buyer well the buyer will look at your financial ratios and so

forth and say well how did you get to these financial ratios from these financials I mean that doesn’t make

sense so it’s it’s uh it becomes more difficult Downstream if you don’t put the time and energy

into restating your charg of account so that uh so that your financials produce

ratios that make sense yeah I can tell you from selling our machine shop several years ago when they go into the

due diligence phase and I’m sure you can relate to this two day when you sold your shop it matters that it’s a real

industry standard method of doing it and uh it’ll save you a ton of headaches I

promise you and we will also uh along with that last spreadsheet we will share a nice sort of clean standardized chart

of accounts um with the recording so you all can see that and see how you might want to incorporate that or compare what

you have to to this standardized list all right there goes a floating

thumb I love it thank you to whoever thumbed that um all right let’s see I

think I was just gonna quick address a question that came up uh and it was right on it was actually on on this and

the next one which is like Hey we’re you know we’re we’re looking at carrying costs like like tooling and and it

starting to look at making sure that we get some you know information into the accounting side about what we’re what

we’re really doing in terms of you know those things um in terms of whip finished goods raw material and tooling

I just wanted to mention that all of those are available from Pro Shop so you can look at those and know at the end of

every month what your total balance is for those and most companies will want to as part of Gap accounting go ahead

and do a periodic Gap based inventory true up which is adjustments to whip and

inventory that will hit your p&l they should hit your p&l um so just wanted to

answer that question and make sure that that Dwayne you got that clear um we’re down at that level uh to be able to

provide the accounting software with clarity about uh at least those four main

buckets right whip finished goods raw material and

tooling very good thank you for that Kels all right uh

let’s talk about this new slide here oh yeah I just I just have to jump in sorry

guys this is like my thing representation of Labor and machine yes no I I’m gonna just go ahead

and uh you know give out a a a tip or you know a best practice that I think is just really really important um and it’s

about of course getting good data to work with uh but that’s easier said than done nobody is signing up saying I’d

like to do more time tracking C can anyone help me get I I just I’m feeling like I’m not having enough fund today I

want to do more time tracking so the answer is how do you how do you get better data without signing people up

for something they’re not totally excited about here’s a pro shop tip which is if you can start this as the

cultural norm inside your organization I think you can reduce overhead of time

tracking so reduce the amount of time people need to do this activity and get higher Fidelity information with more

accuracy and it’s a kind of a simple technique which is just don’t log out of

time tracking always log in to something new and don’t worry Pro Shop will log

you out of the old thing as long as you don’t uncheck the box but just log into the next thing you’re doing and that’s

really what’s happening where we see big gaps is somebody logs out and then either they log in 30 minutes later and

you’re like what happened to 30 minutes or they for get Al together to log back in and it’s not till after lunch that

they’re trying to figure out what did they work on at 10:00 this morning if you can start in on that path just don’t

log out sure when you go home at the end of the day of course you’re GNA log out but in general throughout your day just

log into the next thing you’re working on and if you’re working on something and then you’re going to work on two things easy log into the new thing

uncheck the box that says automatically log me out and keep going just keep logging in that’s uh that’s I want to

have a little hats off to a a particular company that’s uh that’s capturing 98 to

99% of all folks time um so it’s doable and I don’t mean 99% on jobs heck no

they’re not they’re not undoable they just know where the time is going so they can do something about it right so

yeah yeah capture that time if you don’t capture that time you can’t really dig into earn hours that fantastic company

is one of our clients right we work with those guys together and more kudos to all kinds of great Pro Shop clients that

really track 97 and a half plus of their time because if you don’t do that you can’t measure we lean into earned hours

as a metric you know you have efficiency and you have all these metrics but how many hours do we actually earn with our

folks we have 10 Folks at the end of the week how many earned hours applied to jobs so we really know what the cost is

you have that Phantom number when you don’t do that and you think you know your cost and at the end of the day you wind up not knowing your cost it really

winds up cost it really winds up costing you no pun intended because you’re floting something and you think hey you

know I pay this person 30 bucks an hour though that’s how much it cost me right no no there’s a lot more to it than that

and if you bid a different number and you think you make it but then you you think you’re making certain amount of profit but you roll your p&l at the end

of the month and you’re like I’m working so hard and I don’t have anything at the end but I’m bidding 30% margin that’s a

good flag that that tells you hey I’m not attributing all my cost to

this yeah we also see uh you know the uh the target Revenue per employee is at

least $200,000 know we’ve seen it as high as $350,000 I think Dave you’ve seen it

even higher than that but if you’re in if you’re above $200,000 you’re you know

you’re in safety zone we see Revenue per employee all the way down to $85 $90,000

per per employee and uh that is a red flag something’s broken um ifed if if uh

and and it’s it’s and the only way you’re G to Unbreak it is to figure out where the hours are going that’s

right so I I prepared an image I think I forgot to put it in the slides so I’m

gonna actually just are you guys seeing this image slid in here no we’re looking at costing oh yeah there it is Bing yeah

okay I a little bit of a rushed morning um so here’s just an example page um of a pro

shop uh time tracking and clock punching uh snapshot so um basically someone is

you know logging in for or clocking in for payroll in the morning time in attendance um and then immediately you

know tracking time uh in this case you know when they’re initiating it from a work order page it’s automatically

capturing the work centers that they’re on the operations they’re on the target times that that it’s on the category of

work that it’s in um and the goal here is to ultimately get to the end of your

day where you know I worked for 8.07 hours and I tracked 7.96 hours of all

that time right and the work centers themselves were captured uh even when

I’m running you know running one machine 50% while I’m setting up another machine 50% of my time or doing some other

activity or some miscellaneous or some cleanup time right even if we’re not

capturing things directly on work orders but especially if we are we want the the

labor to be accurate and we want the work center time to be accurate because those rates that we showed you on that

previous slide they need to apply to every hour that machine was running on that job in comparison to how much the

employee was spending on their time attending to that job and again the more automation we have the more you’re just

supporting a robot or you’re running machines with bar feeders and you’re only there a certain por of the time

that’s where it’s so important to make sure the rate of those machines is captured and feeding into job costing

which can also again help inform your quoting quoting rates all right we need to keep moving

here um so we end up with enough Q&A time uh

and uh wrap up on time who wants to take on this one I’ll

talk try to make it as fast as possible capacity is so important to understand

what your true capacity is understanding what your utilization of equipment is but it’s also important because if you

can’t deliver a part on time because you overcommit your capacity and you wind up sliding um it really winds up costing

you money in future work but you can make money if you’re running near capacity or a little under capacity say

if you have open if you have open time you just got to make sure utilization right and you Bill for it right um

Kelsey I know you have a lot to say about this as well I thanks Dave I

totally do I mean one of the things that’s super clear is that you know when people talk about cogs labor they talk

about it so dispassionately like oh that’s a cost of good sold but it’s not fluid right this is the these are like

critical important people who are doing amazing work for you in your business

and they are not like oh yeah I decided to have a little more or a little less of this today um for so many good

reasons they’re not that way and I think there ‘s been a misconception partly fueled by the accounting folks that you

know labor cost of goods is a really flexible type of thing there are reasons

and you will change this but it’s not fluid like oh this week guess what I I

don’t have quite as much or I’ve got 150% work to do this week I know I’ll just bring 50% more labor force in and

they’ll just help me out this week and I won’t need them next week that is so not a thing so what I mean with that in the

capacity side is yes there’s all kinds of things that are capacity planning issues um and you know there there I I

really have not seen almost any shops that are running at about 100% capacity

that can’t make money but do you know how hard it is to run every single month at exactly 100 per. no that’s a very

very difficult challenge so instead you can pull some different levers that really help you on the price side um in

dealing with capacity which is wouldn’t it be nice if you know you could do sort of on demand pricing when you’re really

really busy just you know put a 20% premium on it well that’s not completely out of the question there are ways to

think about that and to do that um in fact we had a webinar um pricing for capacity um go ahead and and look it up

if somebody’s got that they can drop into the chat that would be helpful um but but that’s something to think about

is what levers can you pull to both Keep Your Capacity High high and not just give away the work

when you’re running crazy right so that you’re actually pricing up into the category it’s not going to be week to

week of course not but as a general thing you want to make sure that you’re you’re recognizing what the market will

bear based on your capabilities Paul’s talked about this other element a huge number of times which is you need to get

the pipeline full we used to call it positive sales pressure how do you do that how do you make sure you have

positive sales pressure it’s not the the the the core of this webinar but I just can’t help but mention you’ve got to

create positive sales pressure for your organization and that’s a long-term investment it’s not something you’re

going to turn on tomorrow but if you don’t start tomorrow it sure is not going to happen more than a day sooner

right so get on it um start to start developing that positive sales pressure

absolutely good stuff you’re taking at kelc yes yes all right why we talked

about important the important of it of having profit earlier on why is it so

important I feel like we could just skip this slide Paul no I’m just kidding so I I say profit is the uh reward for

undertaking a risky Venture and anytime you start a small or mediumsized business you are taking risk you could

just go get a job somewhere and and that that’s just a different form of risk perhaps but it’s not the same risk as

taking on an entrepreneurial venture so there’s no way that you would take on U

the care and feeding of 15 people in their families and you know $2 million worth of machinery and a $66,000 a month

rent I mean all these things that you have your name on personally if it goes

south you’re paying for it and then not have the profit which is the reward for

taking that risk it it just doesn’t make sense and and I think in our industry it’s it should be double digit profit

for taking on that risk and um so when we’re pricing our products and our

services uh we should price them to a gross a direct gross profit number that

ensures that there’s sufficient leftover to cover the indirects and still give us

a double digit operating profit or net profit and it’s it’s uh it sounds simple but if

you don’t know the numbers then you won’t hit it you won’t hit it the nail on that’s so important because you got to

be able to there’s a lot of really talented people out there that are taking care of their family and it’s we have to take care of them and we gota

and we have to pay those people a good livable wage so they can make an impact in their Community as well and we also

got to make profit so we can invest in really high-end technology and partner with the right people and so without

profit it’s really hard then you got to shop cheap and usually shopping cheap doesn’t usually work but profit is where

on time deliverying Quality Meat now on you can make a part on make

a good part on time and people will pay for it don’t ever short yourself as far as value and when you have that value

you have profit when you have profit you do really cool things with your staff really cool things with your family

really cool things in your community and with your friends and it’s it’s just it makes life better for everybody not just

you not just the one owner but for everybody around you if you use it profit is profit needs to be in the

hands of somebody responsible that’s deeply caring for their people and I know we’re almost uh you

know at the time Paul but I wanted to say about profit one of the most impactful things that happened for us uh

to increase our profitability at proc CNC was to recognize and quantify and

that was a really important piece I think we knew what the bottom of the pile was intuitively but we didn’t

quantify how much the very bottom JS were draining our business and we

actually came in and cut out 3% of our total business we’re like we’re just taking a 3% haircut there and it

increased our profitability multiple points by cutting off the bottom three%

just straight up not doing it or in some rare cases just being like this needs to be double and you’d be surprised someone

goes back and go double okay yeah I’ll still buy it that’s right can I still

have it next week really really great you’re like yeah I got a delivery coming up right right now great okay I’ll take it um so yeah t take some of these tools

and use the understanding of all three of these combined uh and know where they

sit for you uh in your business and yeah cut some jobs improve some uh yeah

you’re talking about our our lovely named kill the losers process right that’s

right we have written about we do have we do have jobs we do have some stuff we can

also share about killing the loser jobs and and yeah that because the Paro you

know the Paro principle works right probably even more so more than 20% of your jobs are causing 80% of your losses

so you got to know which ones they are get rid of them um One Way or

Another yeah and the one way or another’s key for all of you who are a little bit like us which was like we can

always make this better fine if you’re actually G to do it that’s okay decide you’re going to do it but don’t be like

ah when I get to that I’ll improve that one and in the meantime I’m G to keep taking you know a significant loss on it

and today’s in today’s Machining Market those losers can be if you have your data right and your and you have all the

data around it and you really understand your costs and you know what you should be making on that job a lot of times I

would say almost 50% or greater with our clients that reach out to the customer and say look we’re losing our tail on

this we have to make an adjustment but you make great Parts yeah but this is really a painful thing a lot of times

customers will meet you there and let you make that profit because they want you to be successful but you don’t ever know that unless you ask so if you have

a loser ask the customer tell hey either I’m going to walk away from this or I’m going to increase my price or you can

just increase your price and see what happens but I would I would I lean into the conversation but you can make you

can make some serious tracks but you got to have the data and I think telling them you have the data is like profound

in that conversation hey we we had a i a short story had a client

they were making a part for $152 it was costing them 32 bucks to

make the part they’d been making this part for years for a very large company and this large company was musling

around because they did so many other jobs for them they just had to eat it they were making 100,000 of these a year by the way so they had this big

negotiation and everything and then they we I mean after all these years finally

pulled all the data and set out and negotiated with a global person they got a five-year contract for $46 a unit

guaranteed on that product because they had all the data and they sat out they did the right thing right and they were

able to reverse that and really make it work and really pass out some nice raises in that area as well

so thing yeah and if you have a client that’s not willing to let you make a profit they’re probably not a good

client for you I would agree I would agree that’s right yeah all right you guys want to start

wrapping up before we get into the Q&A I know we’ve been answering a lot of the questions as we go um so there’s not a ton remaining but uh if you do have some

Now’s the Time to start putting them in there we may not be able to get to every single one but yeah what’s the summary here

really quickly on the people um you take a you want a fully burdened rate for

your employees and um but you know the fully Burden rate might be

uh 80% of the time that they’re working for you so that that uh what what is

that what’s the number on the bottom in a in a in a uh an equation where you’re doing some division um you you know your

your hourly rates going to be higher um because your employees not going to be

fully employed uh 100% of the time that they’re there so um we can we can miss

opportunities on our on on our labor rate because uh we would we that those

dollars have to go somewhere if you’re not collecting them in your price then uh they become an expense to you and

they’re they’re impacting your profitability so yeah so take what you

pay them and then make sure you’re including all the benefits their vacation time bonuses other other uh

burden costs and you know and in Pro Shop you can put that number in into every single person and then as they

work on jobs and track their time um that fully burdened labor number will apply to every hour um that they put on

those jobs absolutely I would say nine out of ten clients we work with when we

enter them their are hidden costs that they aren’t really Gathering and billing for and and what happens is they get

frustrated at the end of the month when they look at when they look at the measuring tool being the p&l saying hey this is what I’m bidding a 30% margin

why am I only making nine or 4% or 3% you start start talking about indirect labor you start talking about all all

those issues and like hold on a second I’m not quoting enough because I didn’t understand my cost correctly so

understanding your cost is so fundamental in being a successful machine shop in fact I would venture to

say outside of carrying and feeding for your flock it’s the number two thing that you really need to

understand Y and then of course the equipment we talked about that we’ll share that spreadsheet um so you can

start rolling in uh all of all of the various costs it it costs you to to own

that equipment on an hourly rate um and then everything left is going to be an indirect overhead yeah and I just I

gotta I gotta take this and especially because uh Sam thanks very much for your can you explain the math behind monthly

numbers and uh and and work backwards into overhead calculations um unfortunately in the remaining three

minutes uh that’s that would be a bit of an undertaking um but I want to I want to just like draw your attention for all

of you who have been to the profits entry page I want to draw your attention to about middle of the page and there is

a very important equals sign right in the middle of that page says equals on it and what that means to you is that

indirect overhead will always be a true cost of your business and we are not

missing dollars so it’s not like oh I forgot to put it in this bucket does

that mean I’m not accounting for it in Pro Shop if you forgot to put it in a bucket it is landing in indirect

overhead that is where it will be so go ahead and um check that out indirect

overheads uh for sure something you want to watch yeah all right great question

oh and then he says particularly projects takes more than one month to complete does that really matter nope

that’s all good yep Pro Shop knows what those rates are in different months and which months you put in the hours it can

span six months it doesn’t matter it’s covering all those costs from all those months what your indirect overhead was

and aggregating them correctly for that job that took you however many months to complete yeah okay um and then so darl

asks is prosop able to split the time automatically if an employee signs into numerous jobs at once uh the answer is

uh yes and Depends the the percentage of Labor will default to whatever the

target is at the at the at the part level so if you have a job that takes an hour to to cut but it’s 20 minutes of

Labor um that 33% or whatever you have in there that will default to their

running entries um so they don’t have to fill that in if if you have 100% or

nothing in that field then it’ll default to 100 but they can always overwrite that number and put in the realistic amount of time percentage that they’re

spending as they run those machines so yeah

awesome all right well that was it bringing us to the top of the hour thank

you all so much just a little bit of contact if you want to um reach out to

EGS uh fantastic partners of ours yeah great podcast I listen to that often um

and uh yeah look at all these thumbs flying up people see those thumbs I I can see those fantastic floating thank

you everybody yeah we will share with the video we will share uh those templates um and some any other

resources we can think of um and don’t hesitate to reach out to any of us if you have more questions about this um or

if you’re not using Pro Shop today and want to dig into how we can help you uh of course we’re always open to those

conversations too so thank you Mike and Dave and Kelsey appreciate your uh wisdom and expertise at this I know you

shared a lot of really valuable stuff today so appreciate you all so much thanks all of you for being with us and

uh we will see you on the next webinar excellent thanks everybody thanks Dave

we’ll talk soon