Perhaps this question is too personal, but if you’re willing to answer, I am curious.
Do you (or did you) borrow money to purchase tools for your business?
If you did borrow money, how much does/did the debt put your ability to continue to operate at risk? If you could do it over again, would you still borrow the money?
For those of you who started your business on a cash-only basis, have you found your business hindered by lack of capitial?
I listen too much to Dave Ramsey 🙂
Monte
Replies
MonteB-I am an accountant and therefore deal extensively with the "business" of business. What sinks most small businesses is debt, or rather the inability to manage it effectively. If you must take on debt to fund your startup, how long will you have to work to repay that debt? Will your business generate sufficient cash to pay your debt down and provide you a living wage? Their are pluses and minuses involved with debt funding, but my personal belief is that a business is generally better off carrying no or minimal debt. Sometimes it is necessary though. Be very judicious in your use of debt financing.
I would expand your comments to include that when debt is used, use it to purchase assets and not to finance past debt. Further, if assets do not produce cash flow, then assets are really a liability.
Good point. Use debt to finance capital items, not for day-to-day operational expenses. Just like your personal life -- who wants to pay for a dinner out for the next 8 years?Businesses need three things:
* capitalization
* management
* a good product or service to sellThe lack of any of these is a death knell. Under-capitalization is a common cause of failure for start ups.
Not only should the debt be for a capital item, there should be a solid plan showing how the extra profits that the machine will produce will pay for the machine in a reasonably short period. The payback period should be shorter than the term of the loan. Going into debt on the "maybe if's" is a route to the bankruptcy court, and the bankruptcy law is a lot tougher on small debtors than it used to be.
Tony-I think your comments are right on. As part of my business, I will quite often do a pro forma analysis of exactly these type of situations. The bottom line? Will the increased cash outflow produce a proportionally greater cash inflow, and if so, when? If, by taking on debt someone can increase cash flow relatively quickly, it may be a good idea to do so. If not, it's a no-brainer, IMO. Cash is king, and cash flow (particularly free cash flow) is vital to the survival of any business.
Thanks for your comments. I learned in the "school of hard knocks"! When my older kids were in college I wanted each to take a basic course to learn how to understand financial statements and to learn how cash flows through both sides of the satement.
I would recommend to anyone starting a business to pay for advice: meaning accountants and to a lesser degree lawyers. Forgo all the "help" you get from friends and family and go straight to a professional. Before this meeting reduce to writing all questions and as many details as you can about what you want to do. When using professionals you must be specific about what you want for them to help you. It may cost a few bucks upfront, but it may save you many dollars down stream.
One comment I have heard for a long time is, "never borrow unless you'll make more on the money by not spending it". I couldn't understand why my parents paid cash for their new car in 1989 until I saw the interest on new car loans.
"I cut this piece four times and it's still too short."
MonteB I came to the the conclusion some while back that in some cases not having the tools you need to be productive can actually cost you money. Let's say that your shop rate is $25.00 per hour, if you invest $10,000 in 4 new machines your monthly debt on these machines is approximately $250.00. If these new machines make you just 10 hours per week more productive then your payback is $1000.00 per month. For this payback to materialize you must have a steady supply of work to keep these machines busy. However you can see that your break even point on this expenditure is just a 10 hour per month increase in productivity. I am not a tool salesman, I am in fact a studio furniture maker that deals with the same cash flow issues that everyone in this business does. If you keep a backlog of work and you are constantly behind then the expense of increased productivity would be well worth the investment. More specifically lets say that you spend 8 hours per week cleaning up in the your shop. The expense of a dust collection system would allow you to turn that time into more productive time in the shop and at the same time make your work enviroment much more conducive to being productive. There is a point where trying to run a woodworking business where your machinery is undersized and constantly stretched to it's limit is just a recipe for maintenance problems that always occur at the worst possible times. You cannot be profitable under these conditions.
Ron
Edited 1/26/2007 9:27 am ET by Ronaway
I am not in the 'wood' business but have run a Computer Network Company for 10 years. I started on a cash basis and grew slowly and at one time decided that I could borrow and expand. It made life really tough for several years. Everything was fine but 9/11 hit and all my customers started downsizing and I had to downsize and still had the bank loan. No fun.
I am still in business and it is going well and have grown again. If I had it to do all over again I would avoid debt as much as I could! It just makes life easier and more fun. All of the studies that I read show that cash is better if you can possibly do it.
Just my 2 cents.
Scott
Thanks to all who replied. Your comments and Scott, your willingness to share your experience, are appreciated.
I think that I am persuaded that debt adds too much risk, even if the purchased asset (tool) increases productivity.
Monte
Pretty much all the woodworkers I know started with litle debt and used machinery.
Hello MonteB,
I have enjoyed WWing for many years but recently have expanded my own personal work to include some "paid" jobs. In anticipation of retirement in the next 10 years, I have made some strides to build a small business making custom museum pieces to house special exhibits.
These jobs have taxed my resources such as machinery, shop space, skills and finances. In each contract situation I have asked for an significant advance to cover raw materials, machinery aquistition or expansion - this is usually in the 50% range.
In most cases, the advance has minimized all risk that I might be exposed too. The purchase of new machinery such as HVLP spray equipment, larger jointer, commercial router table and other specialized tools was purchased only if the contract required these items.
Having received an advance which covered my raw materials and any new specialized machinery has allowed me to expand my business without any personal financial risk. Growth has been slow but steady and I never have to worry about the next loan payment. I expect that after 4 years of building my small WWing business, that any further equipment purchases would be "wants" and not "neeeds". While the old adage of "Go big or go home" applies to some life instances, taking a risks in business should be based on common sense, reliable math and a good gut sense for danger.
In summary, unless you are presented with an unbelievable circumstance or potential contract - I believe it is best to proceed with available resources such as machinery, shop size and man hours and only expand based on net cash earned from current contracts.
Hope this helps.
Thanks to all who took the time to give your advice and speak of your experience.
I think that this is a "watershed" question which determines how any business will operate: to borrow, or not to borrow, that is the question.
Questtools, I am also looking to turn a hobby into a small business as I near "retirement" age, and am facing up to my limitations, one of which is the quality and extent of my tools. Your suggestion to buy tooling as needed from contract advance funds seems a good way to minimize risk.
When bidding on a contract, have you found yourself at a competitve disadvantage with others who bought "productivity" by purchasing machines on debt? Or would you say that your small overhead puts you at a competitve advantage?
Monte
Good Morning Monte,
I remember one wise "old man" who told me not to quit my day job! The pressure to make my living WWing has never been an issue. Machinery has never been an issue except for taking on one museum contract to make over 60 large display cubes of various sizes - my whole damn garage was filled with 2 lifts of MDF! I thought I would die.
That one contract taught me to bid within my resource limitations. Space is an issue as much as machinery. That large museum job taught me I was unprepared to finish that large volume of cubes with my small HVLP production equipment; therefore, I went out and purchased a large compressor, upgraded HVLP guns, filters, added copper lines within the garage to link compressor to spray areas - in short I put in a complete portable spray booth area based on a design by Jeff Jewitt.
The acutal museum contract could have been easily handled by a commerical shop - interestingly enough they were all to busy in our area (unprecidented growth and shortage of labour) so I ended up with the contract and a healthy margin. That healthy margin paid for some nice spray equipment that I would never have normally considered. It allowed me to bid on a second "cube" job that was easy to handle in light of the spray equipment purchase made previously.
By specializing in museum and high end art gallery work, I am called onto to build "specialized" pieces that require a significant amount of hand tool work that most professional shops will not want to touch. Try making a cradle or stand for a 7 foot mamoth tusk using 12/4 and 8/4 premium cherry with oil and wax hand rubbed finish. Nobody else was prepared to tackle it - I did and have since got many more specialized requests (commissions) for one of a kind pieces. The other thing I came to realize was where do you go to get information on Mamoth tusk cradles? Skill is something I cannot compete with professionals with 30+ years experience - but having said that when the piece was so unique that probably no one has built one recently - well now that leveled the playing field. :)
MonteB my suggestion is look for those "markets" that don't require you to buy expensive machinery. The large cube job allowed me to buy a great spray system that I use all of the time now - but it wasn't really to pricey and the contract left enough profit to keep me happy. The mamoth tusk cradle required me to buy several spoke shaves that I have used on many more projects. I have become the "go to guy" for several galeries when the project is "unique" and price has almost never been an issue - but then I never set out to gouge them , my price is fair and I show a detailed bid estimate.
My rate is $40 and $25 to cover shop costs = $65 per hour plus materials and I do add my time estimating into the bid. It has worked so far and please understand I have said NO when I believe that the job is ludicrous or not possible. My wife is an engineer and if we can't concieve of how it can be done we refuse to tackle the job as requested unless the desgin parameters can be changed.
I have been surprised how many times I have been able to use hand tools (which I have almost everything possbile) and my modest but functional shop machinery to complete most jobs. When space is the largest restraint - I honestly think twice now before I proceed.
Contracts have grown steadyily now over 4 years and I have replaced 50% of my professional income and I hope to replace 100% of my "day job" by the time I reach 55 - then I will make a decision as to what I want to do. Choices are nice!
Make an inventory or your machinery and hand tools and decide what you can build and what jobs you would enjoy tackling. Why make cabinets when the professional shops have all of the advantages. That leaves stand alone furniture, one of a kind jobs, and ????
Lastly I invest in one major and 3 smaller wood working education courses annually. I have never been too proud to say "I don't know"! Every course has taught me volumes and challenged my skills sets and taught me good tools are an investment and not a cost. I love educational CD's and books. If I can see it built on a CD I can build it!!
Sorry to ramble on but when you look at your shop, tools and skills you would be surprised how much you are capable of building. DOn't worry about the money it will come.
There is one principle in business you must never forget:
BUSINESS IS NOT ABOUT MAXIMIZING PROFIT - IT IS ABOUT MINIZING LOSS!!!!
Live long and prosper!!
Bob
Bob, thank you for your thoughtful reply.
It sounds like you've found your niche market which no one else is able or willing to serve.
I would like to build quality, hardwood furniture (beds, tables, bookcases) at a price that the average family can afford.
Perhaps I am looking at the wrong market. It seems that woodworkers who build one-off pieces need to price their work to the higher end of the market. Small-run production would seem to require more and better machines than I have available to me.
If the time comes for me to sell my work rather than to give it away, I am persuaded not to take on debt in order to do it.
Monte
I think its clear that "affordable" furniture is not a market where an individual craftsman can compete. IKEA for example, can sell solid pine bookcases at prices that would not buy the lumber in less than 1000 bdf lots (or so it seems). Kitchen cabinetmakers can compete at the high end where custom cabinets for high end houses are called for. But if you try to match even the higher line prices at HD or Lowes you will quickly go broke. Look at prices from higher furniture lines, such as Thos. Moser and add something like 25%. If you can sell enough simple furniture to stay busy all year at such prices you can make a decent living if you work efficiently.
Steve, thanks for the reality check.
I must admit that for a year or so, I worked for a start-up maker of children's bedroom furniture. The designs were attractive and the "Mattress Maid" feature was patented. But the owners underpriced their product to the extent that they could no longer remain in business after their borrowed money ran out. I really don't want to repeat this mistake.
I suppose that I have been thinking of going after the middle income market because I am being more realistic about the value of my work. Unless and until I can improve my work to the point that it can command several thousand dollars to own it, I need to give my work away.
Monte
MonteB
Tis a noble objective to want to build quality crafted products that the average person can afford. The point however is not what can be afforded, but what a potential customer wants for his dollars. Some want the lowest possible price, some want quality, and some want special features. It is of course possible to be the low price producer, but it is unlikely that you will achieve that status unless you can get labor for less than $2 per day. This leaves you with the task of finding something that potential customers will value above the additional cost.
I have been selling service all of my life and started in a small town in the middle of America. Over 40 years of experience has taught me what Robin Hood knew, you can't make a living stealing from the poor. On the other hand, you can't identify poor or rich by the kind of car they drive or the house they live in. Design a pricing structure that will provide you with a reasonable income, and if you can't sell within that structure the problem is not prices, but rather marketing. Either you are trying to sell into the wrong market, you are trying to sell what the market doesn't want, or you are not marketing.
By way of reference, our studies indicate that on actual service time you neet to earn someplace in the area of 2.5 to 3.0 times you desired income. Thus, if you want to make $20 per hour ($40,000 annually) you need to be billing at $50 to $60 per hour, and this relationship moves up with more specialized applications because you spend more time marketing and less time producing.
Borrowing money is not a sin. Running out of cash is what causes you to go broke. If you don't have any rent, don't have debt, and don't have to buy groceries this month all you need is enough cash to buy materials. As liabilities grow, the need to have larger amounts of cash to carry you between job completions. So, the more debt you have, the more cash (reserves) you need.
Bill
Bill, thanks for the directions.
I am re-thinking my potential market. There must be a reason that the web pages of all of the individual craftsmen I have seen list prices in the several thousands of dollars.
I started this discussion by wondering if borrowing money to upgrade tooling is a good idea. To complete the thought, my intention has been to upgrade tooling in order to be able to compete for the middle class market.
I've been disabused of both ideas.
Monte
wellis:Excellent reply! I saved that one and will reuse it with your permission.Monte;
There is a guy in town who recently retired and is trying to get into the custom furniture business. I don't know much about him or his background, economically speaking. He's just built a 5000 sq.ft. shop, outfitted it with industrial grade equipment, state of the art dust collection, and every tool you can imagine. Easily into six figures, perhaps well into it. If he had to finance this, I don't think there's any way he's going to make it as a one-man custom shop. Maybe that was not his intent. Maybe he just set up the business to expense and depreciate the cost and will revert to an expensive hobby for himself.The recurring comment here is some times you have to spend money to make money. If you are going to open, say, a retail store, you are going to have to spend money on fixtures, back office and inventory. There is simply not a good way to bootstrap yourself up without it. The same could be said of any capital-intensive enterprise. Farming also comes to mind. Typically, unless you're born into it or extremely wealthy, you are not going to make large-scale agriculture.(Old joke about the guy who inherits $50 million and says, I'm going to get into farming and do that until it's all gone.)
You may reuse my observations on this subject as often as you want. One of the saddest parts of my profession (CPA) is reporting the history of an ill-advised business venture. However, the most satisfying part is watching successes. Often the difference is not talent, but staying power.
Bill
I have always said that business is about money in the bank. If your price is too high you will have less customers. If your price is too low you may have more customers but the price to produce the product may be too much for the profit you get in return. There is a point where the most amount of money can be made with the least overall cost. To determine that, the market must be analyzed. Most businesses because of being under capitalized and/or the wrong timing.
If you REALLY listened to Dave Ramsey, you wouldn't have asked that question. Debt adds Risk, and that's one thing that a start-up doesn't need. Even when established, a debt load can be a serious pull on cash flow just when things are going south. Debt in two businesses made me very uncomfortable for quite a while, and limited my options. Save your money, prioritize your tool purchases, and develop an overall strategy to work with what you have (even if it seems to limit you for a while) and let yourself breathe.
Been there, done that, got the t-shirt.
Fussy, thanks for speaking of your own experience.
Yes, I do listen to Dave on my way home from work. He is without peer when it comes to preaching the debt-free lifestyle, although I do find it strange that he "allows" a "manageable" debt for purchasing a home. This seems to be an inconsistency and even provides a basis for justifying other kinds of "good" debt.
The reason for my question is to hear from actual woodworkers who are willing to share their personal experience, good or bad, either to reinforce Dave's "common sense" or to refute it.
Monte
Not all debt is bad. My degree is in economics and I do regular consulting with agricultural businesses.
In very simple terms consumer/personal debt for family living and toys is usually bad.
In a business however, debt can be very good or very bad depending on your profitability and interest rates. At the point a business becomes unprofitable debt works against you and pulls you down faster.
However, if you're making a %profit greater than the %interest you're paying than your debt is actually working for you and you're making money on every dollar you have borrowed.
The more equity you have in your business (ie the lest debt) the longer you can weather the downturns when they occur, but you're not leverageing yourself to benefit in the good times.
There is no perfect answer but industry typically accepts and even targets specific debt to equity ratios. In general it is safe to say many companies are comfortable with a .6 to .7 debt to equity ratio.
Should you take on debt make sure you shop around and get the best terms you can.
One other point is that if you're considering large, industrial machinery, some companies will lease it to you with an option to buy. You're not on the hook for the whole amount and if you watch your other expenses/income/debt and don't allow long-term receivables to kill your cash flow, you can add to your shop without killing your profit and getting upside-down. If you need a machine for a couple of big jobs, it may be better to farm that portion out and do the rest yourself. Nothing worse than a big investment sitting there because nobody cares that you spent a bundle on it and there's limited demand for what it does. Sure, you can write off the depreciation but it still messes up your cash flow.
I live very near a large Amish Community, And they believe, Owe no man anything. They are frugal people, work very hard and long hours. And when savings permit, Buy what they need.. You should see their shops! Wonders to behold. 12" planers, 32"band saws, 12"Unisaws,24" planers all running with air motors that are feed by Giant Diesel air compressors.
Work Safe, Count to 10 when your done for the day !!
Bruce S.
I started my shop like most others. No loans, no debt. It was easy for me because I already had/have a remodeling buisiness. I just started collecting machines and after a year and a half I was ready to lease a building and get more serious about the cabinets.
I agree with another poster that borrowing money to start off with a good shop can be very very smart. I have seen a few shops start off by buying 40,000 worth of machines and jump right into the big leagues. But those guys were not woodworkers. They were business men who saw an oportunity. I cant stress that there is a HUGE difference. If you are already a wood worker and do not have a REAL history of running a buisness then you should look for help.
I am hopeing this year to get a 90,000 dollar loan to get a CNC machine. That will be going against every thing I have done to this point (low overhead buisness practices). But the potiential is too big for me to ignore.
So getting a loan to start off right is not a bad idea. But you better have a serious business plan, honest market research, and clients lined up first. You also better know how to run a cabinet shop, or find someone who does.
Good luck.
Pardon my spelling,
Mike
Make sure that your next project is beyond your skill and requires tools you don't have. You won't regret it.
This forum post is now archived. Commenting has been disabled