I am just starting out with my woodworking business and would like to hear suggestions on getting deposits or up-front money before starting a project. One friend who is a contractor says he will not work with anyone who requires a deposit and another friend says he always gets at least enough to cover materials.
Any suggestions?
Replies
enough to cover materials should be fare for both parties, some people change there minds after a while why should you eat the whole thing
rooster ,
With custom work , I always take a deposit from 1/3 - 1/2 usually 1/2 . This shows committment on the clients behalf and they are less likely to bail on you .Besides there are expenses involved in overhead and supplies not to mention the materials and other hard costs. Some states have limits to the amounts of deposit allowed , check with local regulations . When a builder wants us to do his job without a deposit , it is as though we would be financing his job . I personally will not go down that road , nor can I afford to. Trust me the more they owe you the less control you have. Use a good contract and an accurrate layout or set of plans as reference , I get the plans signed and make a copy for the client.
good luck dusty
1/3 to 1/2 is standard on a decent job ($5,000 and up). If the customer balks find another customer.
Edited 1/20/2005 3:34 pm ET by cstan
You can't rely on the contractors practice. As a contractor (at least in Calif) you can file 30 Day Preliminary Notices at the start of the job and then file leans if you don't get paid. None of that applies to a non-licensed contractor. Get 1/2 or at least enough to cover materials and your time to procure them up front.
John O'Connell - JKO Handcrafted Woodworking
The more things change ...
We trained hard, but it seemed that every time we were beginning to form up into teams, we would be reorganized. I was to learn later in life that we tend to meet any new situation by reorganizing; and a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization.
Petronious Arbiter, 210 BC
CA law also limits deposits to 10% or $1,000 - whichever is less. I try for at least the materials cost and - if I can't get it - get a "progress payment" when I turn on the saw. - lol
I always ask for 1/2 up-front to cover the material. I'm sure, your friend, the contractor recieves a substantial deposit from his clients. How could he expect anything less from his subs?
If a client isn't willing to come up with a 30% to 50% deposit it's usually, but not always a client not worth the risk of working for. I'm not the clients' banker, and by not getting a deposit a contractor in this field is acting like one--- without the benefit of charging suitable interest rates.
Trust goes both ways, and in the custom furniture design and making industry the normal practise is to get a deposit, which is exactly what I've been doing for nearly the last thirty years. Generally, no deposit = no work. Slainte.
I just now checked out your website, fantastic work!
something like a chair, desk ect. (all the work is in the shop) i ask for 40% to book the job. if it is a built-in or the like (onsite work) i ask for 20% to book, 20% first day i set foot in house and the rest when we are all happy.
i had it pay off this week... took a job for far less money than it was worth ($600 for a all solid custom mantel). when i showed up the sweet old bag tells me that the finish is not to her standards... well mam, i would be happy to refinish the thing but you will pay extra... her response : well i don't want it, i should let you try and sell it... you should be able to find a buyer.
In the 20+ years I was in the contracting business I never once asked a customer for a deposit.
As a businessman it is your responsibility to pre-qualifiy your customer. It is not your customer's responsibility to finance your business.
If you don't have the financial resources to buy your materials upfront (cash or credit), you are under capitalized and better re-think your business plan.
_________________________________
Michael in San Jose
"In all affairs it's a healthy thing now and then to hang a question mark on the things you have long taken for granted." Bertrand Russell
"As a businessman it is your responsibility to pre-qualifiy your customer. It is not your customer's responsibility to finance your business."Some of the biggest corporations in america require deposits: General Motors, Boeing, Home Depot...
Edited 12/22/2004 11:17 pm ET by molten
"If you don't have the financial resources to buy your materials upfront (cash or credit), you are under capitalized and better re-think your business plan. "Of course I can afford the materials up front, but I can't afford to have clients not be committed and back out after all the work is done.
I have to agree with molten. It seems to me, the customer isn't financing your business, but rather, he is financing the project he undertook.
Sorry, if the deal is big enough to get into then it is big enough to have a written agreement. And if the deal is important enought to have a written agreement then it is important enough to know who the hell your client is.
Yes, I know Boeing and GM and IBM require deposits. I did not, and I never suffer a loss from not requiring a deposit, and that covers about $50,000,000 in sales over the the 20 or so years I was in business. I knew who my customers were, and what their requirements were and they knew what they could expect from me and when.
A "project" is your business, and your customers should not finance it by paying for work not done or goods not delivered ahead of time. Period.
I billed for time, material, overhead and profit monthly. If you can not afford to carry your business for at least one month, using either internal or borrowed funds, RE-THINK YOUR BUSINESS PLAN. YOU WILL NOT LAST!_________________________________
Michael in San Jose
"In all affairs it's a healthy thing now and then to hang a question mark on the things you have long taken for granted." Bertrand Russell
I agree with the ethics, however, you didn't state earlier in your first reply that you billed monthly, and in my opinion, that constitutes a deposit.
MichaelP
The nice fella who started this post stated pretty clearly that he was just starting out. He did not state that he was doing $50.000.000 over 20 years. Good for you!! But your advice to him is poor. I own 2 businesses. I've been a mudjacking contractor (concrete raising) for 19 years, and my passion in life is my woodworking/furniture business. In my mudjacking business, we do not take deposits, because we show up, do the work, and get paid when we're finished. When you're talking about doing work in your shop, and it could take weeks and months to complete, with a substantial up front cost for materials, it is EXTREMELY reasonable to ask for a deposit for the cost of the materials, at least. I earn a mid 6 figure income with my mudjacking business, and I still get 1/3 up front for the furniture that I build for my customers. The poor lad can't be having his customer changing his or her mind after he poured his heart and soul into a custom piece for them. Let's give sound advice here to help the new people, not beat our chests about millions in sales. If your way were the only way to go, then most finely gifted new craftsmen (and crafstwomen) would never be able to keep the lights on for more than a month or two. I've got a 26 year old very talented guy who comes to my shop to use my jointer and planer because he can't flatten boards on his 6 incher. You should see his work. I'd hate to see a guy like that not craft because he can't get started.
And, to Rooster, take 1/3 up front, it's been the industry standard for as long as I've been in business. P.S. I'm not in California, and don't know the laws there.
JC
Edited 12/23/2004 3:56 pm ET by JC
I've just got to agree with your comments......Michaelp clearly has ways of getting his money....Someone starting out already has sizable overheads and is likely to have 'unknown' clients, he needs to transfer the commercial risk by way of deposit/staged payments and also prove his value to, and gain the commitment of the buyer, frankly there is no better qualification.
lain
You hit it on the head. I've been working wood for 25 years, 20 selling my craft. Luckily, my other business has been very good to me, because I worked my tail off. Still, I treat my woodworking business as its own entity, and I never rob Peter to pay Paul, so to speak. I just finished building my new shop, 1620 square feet. I haven't finished the interior, so I haven't moved in yet. I've already invested $40k in the building, and did all the work myself, with some help setting the trusses from 2 of my concrete guys on a weekend. That doesn't include all the money I've spent on all my tools, an accumulation over the years. Until you have an established client list of repeat customers, you've got to keep grinding, and that takes $$$$$$$. For every success story, there's a 1000 failures. Unless you have that monster trust fund to fall back on, which I'm sure most of us don't, you've got to build trust with the customer, and trust is a 2 way street. All of my business (woodworking) is from repeat customers and their referrals. I don't spend a nickel in advertising, because I work the referral business hard. I offer discounts to my customers through their referrals, and it works for me. It took a long time to get to that point, though. If you invest all your money up front in a modestly equipped shop, sell a couple of commissions and build them with only your money, getting paid only on delivery, it's gonna be a long while, if at all, before you get ahead of the game. Just my .02 worth. Actually, looking back, it looks like 10 cents.
JC
Edited 12/23/2004 3:59 pm ET by JC
shop that size?...whatcha building....aeroplanes...
lain
I've got 4 foot itis already, and I haven't even't moved in yet. My old shop is 25 x 25, and it wasn't half as big as I needed it to be. Most of my tools are large old cast iron machines from the days when they didn't skimp on the cast iron, and I want to get a few more, so I needed more space. I sometimes build large library runs and entertainment centers. Where I live, northwest of Chicago, the houses seem to get bigger and bigger, and the ceilings get taller and taller, so I wanted to be able to set them up for a full view, especially if a client drops by to check on progress, which for me, happens with almost every project. Believe it or not, 36 x 45 doesn't go as far as you think it would. Anyway, I'm stomping on poor old Roosters thread here, so I will post pics when it's all complete in the spring.
JC
I think a guy called Michael Gerber did a bunch of research that suggested 80% of start ups fail/close down within 5 years....true or not its a fairly sobering thought.........I think roosters got some bottle and good luck to him. He should take heed of the scare tissue carried by many and not the 'ideal world' love and trust brigade, frankly it'd be nice if the latter worked, but it doesn't. I'd love to take the plunge just like rooster but to be honest I'd first need to seriously change my life style. Starting out fresh with sensible aspirations just could'nt support where I am. So I content myself with turning out smallish paid for pieces that support my 'hobby' plus a little extra in my 20x20 shop and sigh and dream.
Aside from the pleasure of working in a larger shop (ya lucky dog) there's a very positive message in your post for rooster. Your business has been sufficiently successful to support growth, be that based upon solid projection or history its a great story. Rooster should also consider the value of specialisation that will be a differentiator as his business grows.
catch up
Iain
lain
If I had to guess, I'd say 80 percent failure is probably on the low side. I've known many over the years that had to go back to their 'day job' because of under capitalization, too much initial stress, or even bad timing. If you decide to take the plunge and start making dust fulltime, right ahead of a bad economy, you'll find yourself in a world of trouble. On the other hand, if you started up, say, in 1994, you would have had 10 awesome years of economic growth. I believe I could have made a living selling used banana peals during the last 10 years, at least in the midwest. 2004, however, was a different story. I'm cautiously optimistic about the upcoming year, and I think Rooster should be, too. The most important issue, IMHO, is whether or not a person is willing to work harder for themselves than they ever did for someone else. If that person puts in the 80% half @$$ effort that they usually give on a daily basis at the "job", which stands for just over broke, they will not succeed. I remember raising concrete in the pouring rain with a 102 fever, just to get the jobs done. People laugh at that, but that's what it takes.
Happy Holidays to you, and to everyone else here, and I'll look forward to chatting with you in the New Year!!!
JC
It ain't just about working harder.....Its got to be about working smarter....forgive me but I think that the woodworking skill whilst mandatory ain't worth zip if you can't get its results into someone's space.
That means rooster's gonna have to learn a bunch of additional skills... health and safety, customer care, sales, administration, accountancy, stock control, logistics, HR, employment law and that's just what comes to mind right now.
Maybe controversial, but I think blaming failure on economic conditions is an easy out, sure in a growing economy it should be easier to market, sell and make, but any right minded business wo/man should have a weather eye on their market, understand their businesses exposure, spread risk and spot the points at which to specialise or diversify ensuring success irrespective of the economic conditions. I mean you're a living breathing example....why run two businesses....take care.....Iain (a less than content wage slave)
That means rooster's gonna have to learn a bunch of additional skills... health and safety, customer care, sales, administration, accountancy, stock control, logistics, HR, employment law and that's just what comes to mind right now.
Just about ANY business ya get into I think!
Will
.....might sound a bit mom and apple pie but my intent was to highlight a few of the many issues demanding some form of consideration and finesse in a startup, this, within the confines of general business discussion....I guess the McKinsey stuff comes later....good luck to the guy....iain
The percentage of failures you mention is very close...
New business owners tend to:
Focus on the core competency of their new company, and not the "business" end of the business.
Start undercapitalized. (you saw that coming)
Underprice; thinking they will gain marketshare in their defined target market; when in reality they typically call into question the quality of their product, or the stability of their operation to potential customers and clients. (Custom Furniture - Buy a chair, get the couch FREE! yea)
Use giveaways to lure clients, not in line with their business plan's marketing budget. Clients many times will take the freebees with no intentions of changing their major source of supply. After giving too much away, financial stability is weakened. If a major influx of buiness doesn't surface, the business usually runs dry of capital.
Do not have a business plan. Many do not even understand what elements make up a good business plan. The ones that do have a plan, a high percentage use flawed financial projections, underestimate marketing resources needed, overestimate initial revenues, and misjudge the reaction of existing and financially established competition.
Business is the most fun you'll ever have pulling your hair out. What a gas.
scottd.scottdDamschroder Scott Furniture[email protected]A craftsman needs three things: Accuracy, Technique, and Quality. Accuracy can be set; technique can be learned; but quality must be bought and built.
"Business is the most fun you'll ever have pulling your hair out. What a gas"
You're not wrong there......I work as a salesman in high end IT/BP outsourcing, itself a fiscal juggling match between the competitors and client....invariably spanning many months and in some cases years...My experience tells me that you've got to quickly turn the deal into an emotional experience for the recipient/s, empathy, rapport and risk management both ways, being fundamental to any transaction be it a piece of furniture, or a multi£M IT/BPO. Find the buttons and start pressing... trust, pride, politics, what ever..its the worst when you lose one...but I tell ya winning one makes you real popular at home.. now where can that big felder go....take care...Iain
As usual Mikie P lives in a dream world. It s not about a business plan or undercapitalization..its about holding the other guy to the deal! Same as a contract holds you to a deal.
Home depot all money upfront for any order, Lowes same thing, Any non-stock item deposit required or account required from any supplier. In the last 15years I still have not found a home for 2 skylights, 1 garage door, 2 windows, 200 feet of custom trim from checks that bounced or lack of deposit at the getgo. Yes my business is doing your projects for you, why should my money/credit also be working for you?
AMEN to that,
Those are some rather large numbers that floated freely from good old MICHAELP's post . So he did over 50 mil and never took a dime up front, I wonder how man times he got burnt ? Maybe he had some great clients or perfect clients and he should consider himself very fortunate . But for the masses not asking for a deposit may not be in our own best interest. IMHO I would say no deposit would be the exception not the rule , maybe we should take a poll and find out . If he told us he never had a problem with payment I would be rather surprised.
dusty
dusty
I don't have a doubt in my mind that MichaelP's numbers are attainable in business, because they are. In 19 years in the concrete business, collecting over 1500 checks a year for the last 10 years or longer, I've never had more than 3 bounced checks in a single year, and, I swear it to be true, only one lady didn't make good on the check. All that nonsense aside, his advice to Rooster just isn't the norm for the woodworking and furniture business. My neighbor builds houses $750K and up, and I mean up. It takes him between 6-9 months to complete a house. He gets paid as he goes, unless it's a spec house.
But, in my concrete raising business (mudjacking), each crew does 4-5 jobs a day. I'm booked out 4-6 weeks in advance. When we finally schedule the job, and go do it, the customer pays on completion. C.O.D. I don't take deposits, but I also don't have $3000 invested in Curly Cherry to raise their patio, either.
Furniture/woodworking is totally different. As I believe we all agree here, there's nothing wrong with getting a firm commitment from the customer up front to cover the costs of your supplies and material.
Merry Christmas to all of you!!
JC
I have read this forum off and on for some time, but never posted. I just couldn't let this go.
So you have done $50 million over 20 years. That avgs $2.5 million per year. Lets just call it $2.4 for easy math. That means you are turning out about $200,000 worth of work every month. A general rule of thumb is the cost is about 4-5 x the lumber cost. Let's give you credit and say your work is superb and you charge 10x. So now you have $20k worth of lumber delivered to your shop every month (or so). You would have a significant overhead in time and/or equipment to handle that much inventory. It didn't sound like he was looking at this type of volume type work.
Maybe your comparison and experience is not really relevant for this type of situation.
I always get estimated material costs (plus a little cushion) up front. When I give the customers an invoice with the materials itemized and show a credit applied towards the labor...they light up! Even if it is only a few dollars they are really impressed. This practice has led to some big tips and high praise.
rooster
Don't let Michaelp's comments deter you. Read my post to him. That's my opinion.
JC
I get tthe impression Michaelp is a general contractor who subs out the majority of each project, thus, it's fair to assume, without any further information from him, that it really is the subcontractors that are financing their ends and billing michaelp, who in turn bills the client. I wonder how many projects he has completed with a missed payment or two.
20% nonrefundable before I will talk. 100% nonrefundable before I will work.
Unless you want to be sitting there with his piece and be out your materials costs AND your labor.................dont require it. Sure as shootin' if you give someone a way out of a deal ( no money down) he will have second thoughts as soon as he leaves your shop. He will say to himself " oh he can sell that to someone else" eventhough it was designed for his requirements. the General Rule is.......the public has very little appreciation for your time and costs. Everyone I know who deals with the general public says it sucks. The best you can hope for is to level the playing field
rooster,
MichaelP is out of line with his advice to you. Here is the real world:
Say you sell a $2400 job that requires $300 worth of materials. (I'm not even counting overhead.) You take a 1/3 deposit or $800. Once you buy the materials and work two days you already have more than $800 into the project and you have started to give the customer credit. You continue to give him/her credit, with each hour you work, until you receive your next draw. You finish the job then finally get paid, and everyone is even. The whole process involves trust as one party, then the other party, is giving the other one money or services (again, credit).
There is no sense in providing all of the capital for a project, even if you have it. You are not a credit card company. You are a woodworker. Follow the advice of the majority of posters.
With each contract/project that I do, the draw schedule is clearly outlined.
Cheers
Kyle
Here's the real world Kyle - if a job bid at $2,400 requiring $300 worth of materials takes you more than four to seven days to build you're going out of business regardless of the amount of up-front money you get. A third down payment is more than enough on a job like that because it gets delivered in five days anyway. If it's a machine run, plywood commission it out to be in the finish room on the third day, dry(ing) on the fourth, and delivered late on the fifth day.
If you're running backlog and using deposits to qualify clients and schedule work then get half. The scenario that you described of "having extended credit by the nth day of production" is ridiculous because once you start on a piece of work that size you ought to be able to slam it out the door.
Do you really have a draw schedule (during actual production) for jobs this tiny?
Edited 1/20/2005 3:16 pm ET by cstan
cstan,
Arbitrary numbers for easy math. My point is that just because someone gives you a deposit does not imply you are actually "ahead of them" indefinitely. Once you buy materials and work for a little bit, you will have more into the customer's project than the deposit.
You're right, on a small project that is not a big deal.
Kyle
Cool.
I'm not sure one can impute contractor-style billing to a custom furniture operation (stand alone furniture, not plywood built-ins and kitchen cabinet jobs). A deposit requested by a custom furnituremaker is as much about establishing the bona fides of the customer as it is anything else. You should be well-capitalized enough to be able to afford the raw materials for the job without a receiving a deposit, although in practice you may never have to actually do so.
Sure, you're getting a third to a half of the total commission and I would say if one is getting half some portion of that is profit if the job was priced right (unless one is abnormally slow getting work completed). If a deposit of half only covers raw materials then that job has been priced too low in my opinion.
I went to a client one time for a 'progress billing' after having received a deposit early in the job. This did not go over well. There was absolutely nothing wrong with the client - plenty of money, plenty of motivation. It just didn't go over well, what can I say. It was a big commission and some things went wrong on my end and I really shouldn't have submitted a progress billing, although my deal paperwork has boilerplate language allowing me to do so. I haven't done it since.
If I was a homebuilder of course I would take draws. This is customary and to be expected. And if I ever ran across a custom furniture commission that ran the amount of time it takes to build a custom home I'm sure I would do draws in that scenario too. Other than that, not again.
Edited 1/21/2005 2:09 pm ET by cstan
Rooster,
Contracting and custom furniture building (or custom woodworking, whatever the piece) are two different animals. The business practices of a contractor are not suitable for a custom builder, nor are the clientele that make up your customer base the same. Most contactors work for established companies, or clients that are established businesses. It very easy to recoup project fees from these clients. Your case is totally different.
A deposit is doing several things:
It commits a client to his/her order, as custom designed (and eventually built) for them;
It covers your labor rate for the man hours invested in the project until your final payment;
It covers your overhead and shop expenses as you build the piece (elec, gas, lease, water, etc);
It covers the maintenance and upkeep of your equipment as you work;
It can help with cash flow of a newly established business, although this is the least important part of a deposit. You should be capitalized sufficiently, but we all started somewhere. Cash flow in business is king. Read that last sentence twice.
In the custom business, you are in business. All those expenses happen because a client has engaged you, and your shop, to build a piece to their individual spec and design. The deposit is to protect your business from a change in the clients decision to purchase. If they decline to complete the transaction, your business expenses related to the work invested in their order, are covered.
You may then, as the business owner, decide to complete the piece on spec and sell it to another client in the future; or scrap it for materials without undue financial stress on your business operations, based on the clients failure to buy the piece.
Especially when you are new, your salary should be set at a given level. As well, your labor rate to estimate project pricing should include not only your salary, but the other overhead expenses that allow you to work, as well as many other factors including profit.
But what's important is that in your pricing, you should know what percentage of a project is expense, and what percentage is profit.
You use a deposit to cover expense risk. Since most of your projects will be successful, your percentage of risk to cover will depend on the number of projects flowing through your shop. Initially your deposits may be higher, since your expense will be higher and your profit lower. Once established, those ratios will tend to change.
When you accept a commission, you are engaging all these investments (overhead, man hours, equipment, materials, and skill level) into a project specifically directed by the taste and will of your client. Protect those investments because they allow you to continue, unhampered by the will and changes of your customer base.
When a vendor stamps a custom part for a client, a tooling deposit is required to cover those costs. If you don't want the part, they don't care, expenses covered.
My brother-in-law builds very high-end custom homes. Guess what happens before his draftsman sits down to adjust standard plans, or before his designer sits with a client to formulate a custom plan... right, they write a check. Labor and expenses covered. Oh, you don't want the home... OK. Next client.
Run your business like a business. Like every other business, protect your investments. Look at the custom builders on this forum, many of which work at high levels, and emulate their practices.
Do not make the mistake of comparing yourself, or your new company, to a contractor; or to a large company offering established clients billing without a deposit. You will risk your companies financial future, and your longevity in this business.
Keep up the good work and continue asking the business questions you need to. If the business end of your shop fails... well you get it.
thnx
scottd.
scottd
Damschroder Scott Furniture
[email protected]
A craftsman needs three things: Accuracy, Technique, and Quality. Accuracy can be set; technique can be learned; but quality must be bought and built.
Edited 1/20/2005 9:43 pm ET by scottd
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