Labour... Is it expensive?


Picture framing generally crosses three Industry sectors: Retail, Services and Manufacturing. The last two of these tend to be very labour intensive and costly. We know this because at every opportunity we hear of manufacturing or services industries going offshore to lower their costs.

Businesses never say they moved offshore because materials are cheaper or production is more efficient, it's always because the cost of labour is lower.

Because framers create their frames locally and, in most cases, on a singular custom basis, they're burdened with the high costs of wages and business running costs (overheads) and these overheads need to be calculated into the price of every frame.

Now for the scary part... It's not commonly understood that, for most of the frames you make, labour accounts for between 70-80% of the cost of making the frame. Let me just say that again: Labour accounts for between 70-80% of the cost of the frame. If you're not sure of why this is, then read on.

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  What goes into the labour charge?

The labour charge includes all the costs of running the business (overheads), excluding materials used in the manufacture. Wages make up part of the labour charge, but it must also cover the cost of rent, electricity, telephone and insurance to name a few.
These are costs of operating the business and they keep coming in regardless of whether frames are being made or not, to recover these it's necessary to include the labour charge when pricing a frame.


  Where do I find my overheads?

Most businesses should be able to calculate their running costs from their annual budget supplied by their accountant or through accounting software. Last year’s profit and loss report gives last year's costs, but pricing should be based on budget costs i.e. expected costs for the coming year.

If you're a new business you should look at your recent bills and make forecast estimates.


  Should I include my own wages in the labour charge?

If you are a Sole trader or Partnership, you may take drawings out of your business. Tax authorities generally do not consider personal drawings a tax deductible business expense, but most small business owners need to live on money taken from their business whether it is taken as wages or personal drawings. You could therefore include a minimum living amount into your overheads to ensure your basic living expenses are being covered in the labour charge.

 If you operate a company and you are on the books as an employee your wages would generally be included as part of your business overheads (you should check this with your accountant).


  How do I build labour into the price of the frame?

To calculate the labour charge into the price of the frame it’s necessary to calculate an hourly rate. This rate allows the business to charge proportionally for the time required to make the frame. This is the same as a mechanic, plumber or accountant charging an hourly rate for their services.

In order to calculate the hourly rate, you need to know your annual running costs, as well as how many hours you charge out; you need to know how many hours your business actually spends manufacturing frames each year.

calculating an hourly rate

  How many hours do I charge out?

Here's the slightly tricky part...

It’s easy to fall into a common trap when working out time spent framing. Many framers calculate their hourly rate based on the hours they’re open. However, it’s not possible to charge out opening hours: Nobody is going to pay you just for opening the doors! You can only charge out for the time spent manufacturing frames.

The best method for working out the hours spent manufacturing frames is to look back at your past job sheets, this will help you calculate how many hours of work there were each week. It’s also worth looking at job sheets from different times of the year so busy and quiet periods can be averaged into your calculations.

Analysis of hundreds of framing shops has shown that a one person framing shop open 45 hours per week spends on average 16 hours per week manufacturing frames.

This can seem hard to believe at first, just sixteen hours per week! Have a look at last week's job sheets and see how many hours work there were. A lot of time can be spent on customer service, stock control, merchandising, cleaning and deliveries to name a few.

Busier shops with extra Staff will have more manufacturing hours. However even a person engaged only as a framer won't spend all of their time manufacturing frames. Even where a framer is employed only to frame and not tasked with answering the telephone, taking deliveries or sweeping up; at most this framer may only spend 80% of their time actually framing. Let's face it... people aren't machines!

Good pricing software will be able to record how many framing hours you actually bill out. This will help you to refine your hourly rate as accurately as possible, so you're confident that overheads are being covered.

Be conservative when working out the number of hours actually spent manufacturing frames, as over-estimating will decrease your profitability. Be mindful though of what your potential framing hours are, if you have the ability to frame 16 hours per week but choose to frame for only 10, your hourly rate is going to increase considerably and there is a risk you may price yourself out of the market. Businesses do need to have turnover to be competitive.


Here's something to think about


Jane's business overheads work out at £35,000 per annum, she works out that she frames for 20 hours a week (1000 hours per annum), she therefore calculates an hourly rate of £35. However, Jane has over estimated how many hours she frames for. Her actual billing time is 17 hours per week (850 hours per annum), her correct hourly rate is £41. Jane's profits are being severely eaten into by overestimating her billing hours.

Framers often consider individually billing customers for time spent on the front counter. However... if you accurately work out your correct billing hours (hours framing), this service time is correctly calculated into the hourly rate. In retail, some customers take longer to serve than others, but all pay the same price for the product. This creates consistency and confidence for the consumer.


  Let's look at a practical example

figure 1; below, shows a journal with typical overheads a business may incurr. Figure 2; shows the number of framing hours billed out. By dividing the total annual expenses by the annual hours worked (billing time), the hourly rate has calculated at £46 per hour.


Figure1. Total annual overheads £36,800 per annum.
Figure2. Hourly rate of £46 per hour.


It’s costing this business £46.00 every hour they’re manufacturing frames and this cost needs to be proportioned into the time it takes to manufacture each and every frame.


 Note

Your hourly rate is fixed to your business, the only way to change your hourly rate is by reducing your overheads or increasing your frame output whithin your normal business operating hours. You can choose to charge above your calculated hourly rate to return a profit, but to charge below it will just eat into any markup you have applied on the frame and therefore reduce your profit.


  How do I proportion the hourly rate into the price of the frame?

We now know what hourly rate to charge and this rate can now be proportioned into the time it takes to manufacture varying frames.

In the example below the framer estimates this framing job will take 45 minutes to complete. By dividing the hourly rate of £46 by 45 minutes; the labour charge for this job calculates at £34.50

Figure3. material and labour costs, labour accounts for 71.8% of this job

Looking at the cost breakdown you can see that for each component the labour cost is far higher than the material cost. In this example the total labour cost is £34.50 and the material cost is only £13.50. Labour accounts for over 70% of the cost of manufacturing this frame.

With this understanding we can see why it's so important to include labour into the cost.

It’s also worth noting that in many circumstances small frames take only slightly less time to manufacture than larger frames, which is why it is important that the correct time is calculated into every job to maximise profitability. Bespoke framing businesses rarely have the volume of turnover to afford to lose money in any area of framing.

Clearly any pricing scheme simply based on multiplying material costs by a factor, gives the illusion that there is a very healthy profit being made, when in fact the most costly part of making the frame, labour, has not been accounted for.

It’s only by correctly costing labour and then combining your material costs that you can be confident that every frame you price covers its costs. This lays a firm foundation for profitability and provides consistency in price for the customer.


  Three real life cases

Scenario 1  sole trader working 45 hour week

Mary is a Sole trader and works by herself, renting a small retail store just off the high street. Her store is open Tuesday to Saturday and is open later on Wednesday and Thursday to accommodate people who can’t make her shop in normal hours. In total her store is open 45 hours per week, 50 weeks per year; a total of 2,250 hours per annum. Mary takes two weeks off for holidays in summer when framing is quieter.

Mary tries to limit manufacturing her frames, along with all the other tasks of running the business, to normal business hours, allowing her to get home and spend time with her family. She takes book work home with her on a semi-regular basis.

Mary’s total fixed costs are £23,000 for the year, on top of which she is including a £12,000 minimum wage as part of her expenses.

Mary generally manufactures 20 frames per week, which works out to be approximately 16 hours per week manufacturing time (800 hours per annum), also referred to as billing hours.

Notice that her billing time of 800 hours is much lower than the 2,250 hours that the business is open.

With this information we can work out Mary’s hourly rate.

Overheads (not including drawings)

£23,000   

Drawings (minimum amount to live)

£12,000   

Total overheads

£35,000 ÷

Total annual billing hours

800 =

Hourly rate

£43.75   

Scenario 2  sole trader working overtime

Phil also works for himself in a situation very similar to Mary. His expenses are very similar and the store opening times are identical to Mary’s. Unlike Mary, Phil wants to earn more and is prepared to shut the door and work an extra 10 hours a week overtime, manufacturing an extra 10-12 frames per week. Because Phil is prepared to stay back and work the extra hours manufacturing frames, he calculates that his total billing hours are 26 compared to Mary’s 16 hours.

So if we look at the comparison for Phil we see a different number for billing hours and hourly rate.

Overheads (not including drawings)

£23,000   

Drawings (minimum amount to live)

£12,000   

Total overheads

£35,000 ÷

Total annual billing hours

1300 =

Hourly rate

£26.90   

We can see that Phil’s hourly rate is much lower than Mary’s (almost £17.00) which is great for Phil’s customers because his frames are cheaper. Has Phil done the right thing for himself though? If he is prepared to keep manufacturing frames for the extra 10 hours per week he will make much the same money as Mary, but does Phil want to keep working those extra hours each day, week and year?

Everyone knows working long hours make you tired, then grumpy and then disillusioned. The level of service begins to drop and customers start to decline. At the very least, the more discretionary customers will look elsewhere for better service.

Any profit Phil makes above his costs are eaten up by not charging the correct hourly rate. What Phil should have done is like Mary, worked out what capacity of manufacturing is possible in a normal working day and calculated his hourly rate at this. Any overtime he worked would then cover his extended labour and also reward him with more profit. After all, isn’t that the purpose of overtime?

Scenario 3  framing business with multiple employees

John owns a large framing business in a commercial premises just out of the main shopping district. John’s business is set up as a company and both he and his four staff are employed by the company.

Opening hours are Monday to Saturday and open late on Thursdays to help accommodate working people, meaning John’s business is open for a total of 55 hours per week, 52 weeks of the year giving a total opening hours of 2,860 per annum.

Staff are tasked with the following duties.
John:    Management, marketing, picture framing and advising customers on framing.
Kelly:    Front of house, advising customers, cleaning store front, merchandising and some book work.
Lisa:     Picture framing, cleaning workshop and helping out the front advising customers when it gets busy.
Tom:     Production manager, picture framing, organising work flow and managing stock.
Peter:   Picture framing and keeping workshop tidy and organised.

The combined normal staff working hours per week are 200 hours (10,400 hours per annum), with the framing staff making up approximately 130 of those 200 hours (6,760 hours per annum).

They normally manufacture about 130 frames per week, equating to approximately 100 manufacturing hours each week (5,200 manufacturing hours per annum), much less than the 6,760 hours the framing staff are paid for. This is because each framer is tasked extra responsibilities besides making frames and these need to be costed into the manufacturing time (billing hours).

Notice the billing time of 5,200 hours is much higher than the 2,860 hours that the business is open, but far less that the total staff hours of 10,400 per annum.

John’s overheads are much higher than Marys and Phils, but so too are his billing hours.

Overheads (not including wages)

£80,000   

Wages (including John's)

£140,000   

Total overheads

£220,000 ÷

Total annual billing hours

5,200 =

Hourly rate

£44.20   

One last point!

It’s interesting to see how similar John and Mary’s hourly rates are. However, John’s business will return a far greater profit than Mary’s because he is manufacturing a greater volume of frames (over six times more). For this reason larger businesses generally have more of a buffer if things go wrong. Costs and profit margins are far more critical for smaller busines who have less turnover. It is these businesses who crucially need to think carefully about pricing.