CM Perspective: Getting Your Hands Dirty to Understand Your Costs

Pricing is a delicate subject for anyone in the manufacturing business. It’s basically taboo for competitors to discuss and can lead to potential legal trouble. As SBCA members we are subject to Anti-Trust Law & Conflict of Interest Policies when we meet at formal and even informal meetings. It’s a fun topic to think about, nevertheless. An even more interesting concept is its ugly cousin, cost! Most of us think we know our true costs, but do we really? If you had to guess, how many operations know their true costs? Half? Three-quarters? I bet if we had a sneak peek into the financials of all CMs, we might be surprised to learn that there are quite a few of us who “think” we know our costs but actually are a little more lost in this area than we should be.

Let me be very transparent here. I’m no expert and don’t pretend to be. This is a topic that I’m interested in and want to learn more about. I love numbers and enjoy a good challenge, both of which are paramount in manufacturing components. What I have learned from being in this industry for over 25 years is that knowing your true cost takes a tremendous amount of time and attention. Let’s face it, for years our industry has used the metric o f board footage to measure everything. 

Rather than getting into those weeds, let’s simplify it even further. How many of us are running a monthly profit and loss (P&L) statement? Do you run a managerial P&L to give you insights into your operational benchmarks? Is your P&L format adequate to provide insights needed to guide your manufacturing business? These are all interesting questions that make for great conversations. But honestly, it’s such a sensitive subject that most people refuse to discuss it or they may embellish a bit if they do. My goal is to encourage our CMs to begin to think about the importance of understanding their true costs for each element of the manufacturing process. It should be one of the most important things that we do each month.

Let’s dig into my dirty laundry for a minute. During the last recession it became necessary for us to run a monthly P&L. Prior to 2008, we always made a decent return for a family-owned component operation, so a quarterly P&L was all that was necessary. At least that’s what we thought. Our P&L had also been set up 50 years ago by a tax accountant who knew nothing about manufacturing. You could see simple things like gross margins, percentages of various items against revenue and of course the bottom line. But nothing that got into the weeds. 

We also have two divisions of our operation. One produces wood components, the other light gauge metal components. We had both divisions wrapped up inside of the same P&L. Major mistake. 

So, what did we do? We got our hands dirty. It was excruciating and tedious, but so worth it. For starters, we changed the way our P&L was structured. I enlisted the help of several friends in manufacturing, added the help of our accounting firm, and finally used some common sense to create a statement that was easy for me to read and understand. I am from Louisiana after all. 

Some outcomes from this transition were really eye opening. I was able to quickly see profit or loss of our miscellaneous items such as beams and hardware. We were able to see our cost of sales, design, and other departments. And wouldn’t you know it, we were able to see how the two different divisions were performing each month independently. 
As you look to make improvements in the way you manage your P&L, I encourage you to reach out to SBCA. Why can’t we create a model P&L for component manufacturing and associated best practices to give our members insight to their costing metrics? We can and we are working on that, while at the same time ensuring we do not land on the wrong side of federal laws. I know I’ve benefited from the services offered by SBCA, even during one of the darkest times in our business. We need to come together as an association and help each other better understand all the key elements of our costs!