David Hendley on sun 2 may 99
As I've said before to the Clayart audience, I'd like to
point out that very few of us potters make a profit with
their business.
"Profit" means what is left over after ALL expenses are
paid. That includes labor expenses. It is not reasonable
to suggest that you work for free.
"Profit" is what a passive investor would receive without
doing any actual work.
What potters call "profit" is actually how much they made
as the result of their labor. That is why you must pay self
employment taxes (social security) from your tax form
schedule C.
I think using the proper terminology is important because
it affects how you think of yourself in relation to others.
There are plenty of "non-profit" corporations, foundations,
and groups that are awash in money. It is not unusual for a
director of a big group to make a high 6-figure salary, yet
the business is non-profit.
Remember the scandal a few yars ago when people were aghast
at the opulent pay and lifestyle of the head of the United Way?
Well, I like to keep that in mind. I'm more inclined to support
my humble local craftsman than contribute to the big salaries
of the people who run "non-profit" groups.
Concerning macroeconomic analysis, this has always been how
I've measured my business. I just call it my "ratio of expenses to
wages", not "ratio of expenses to profit". The best way for me
to make a living as a potter is to keep the ratio as small as possible.
There are other approaches, but that's what works for me.
What I end up with is a very small ratio, from 25 to 35%. That
means that 65 to 75% of every sale pays me for my time.
The ratio is so low because: I fire and heat the studio with wood
(no gas bills), make my own clay (about 7 cents a pound), don't
go to art fairs (no enrty fees and travel expenses), make most of
my tools and equipment, do my own repairs, etc., etc.
This also means that since I spend so much time doing all that stuff
that my output and gross sales are also low, so 75% of every sale
going to me is not as great as it sounds!
The macroeconomic approach makes more sense than trying to
figure up how much each mug costs. I really don't care how much
it costs me to make a mug as long as my "ratio" stays low. Besides,
when you try to figure out everything down to "3 cents worth of
glaze", it can't be accurate. If it's really 2 cents worth of glaze, that
means you are off by a whopping 50%! And then there's the cobalt
blue glaze that actually costs 40% more per gallon than the white
glaze. Do you have a separate price for white mugs and blue mugs?
This gets to be silly in a hurry.
Don't lose sight of the forest by looking at a twig.
David Hendley
Maydelle, Texas
hendley@tyler.net
http://www.farmpots.com
At 01:17 PM 5/1/99 EDT, you wrote:
>----------------------------Original message----------------------------
>Several astute readers pointed out that I forgot to factor losses to
>seconds in my original post. This is what I've added to my article,
>now available on my website at
>http://www.camasnet.com/~asondahl/potthots.html (I've also added 4 or 5
>other articles to this page).
>
>"Loss of pots as seconds must also be factored. Of 100 mugs, 7 became
>seconds (1 had a burnout, 1 had a glaze lump, 5 had bits of clay/kiln
>shelf stuck on them. Some of these can be refired to be mended, others
>will be sold at half price or less. The loss here is variable, and not
>included in the cost of the pot, as it is more related to the price
>charged.
>
> Also here is a way to do a macroeconomic analysis. Don't be scared
>off by the big word. It just means looking at it from the top down. If
>you take the cost of goods sold from your records (1040), plus the cost
>of business expenses (same source), and divide them by your gross sales,
>you will have a ratio of expense to profit. This figure will show you
>what decimal fraction of each dollar you receive is expense. In my case
>last year the decimal is an absolutely astounding .76, which is 76%. If
>you have a figure similar to mine, you may want to consider another
>occupation. It means that 3/4 of the value of whatever you make is
>going to materials, overhead, car expense, etc. So I checked back, and
>the figure fluctuates significantly. Two years ago, it was 34%, one
>year ago 49%. From extrapolation, it's clear I'll be out of business by
>the end of next year. :-) However, being a small business, major items
>like repairs can fluctuate widely from year to year.
>
> Even this analysis doesn't take into account the cost of taxes,
>since that's figured after the profit.
>
>I always knew I wasn't into pottery for the money, and now I think I've
>proved it...
>I developed a theory a year ago that every artist needs a designated
>responsible significant other, sort of like having a designated driver
>when out partying. I came up with the theory talking to a musician
>married to an artist. They have a tough time making ends meet...
>--
>Brad Sondahl
>http://www.camasnet.com/~asondahl/bradindex.html
>Sondahl homepage http://www.camasnet.com/~asondahl
>Original literature, music, pottery, and art
>
Andrew Buck on mon 3 may 99
Thank you, David, for this clearly written post. Definitions of terms are
important when communicating. Knowing the difference between a wage and
profit are very important in this case. It is evident that not enough
people are being exposed to business and economics courses in their
education. I know that I was one of them. It took me a long time after I
got out of college to learn accounting well enough to run my own business.
I kick my self every once and a while for not taking more time in school
to learn, particularly, cost accounting. Knowing how little money there
is tied up in the materials (clay is after all dirt cheep) (pun pun) is
just the first step. Even the labor to produce a mug can be a minor
factor in the cost. Overhead is often the biggest expense in any business
and is usually the cause of a businesses demise. One does not have to
learn this way of looking at business by going to school, if one is
relatively intelligent and observant, but it sure does make the lessons
less traumatic. Hopefully, this discussion will help people understand
why some mugs SHOULD be priced at $20.00, or more, and some should sell
for less.
Andy Buck
Rainceek Pottery
Port Orchard, Washington
On Sun, 2 May 1999, David Hendley wrote:
> ----------------------------Original message----------------------------
> As I've said before to the Clayart audience, I'd like to
> point out that very few of us potters make a profit with
> their business.
> "Profit" means what is left over after ALL expenses are
> paid. That includes labor expenses. It is not reasonable
> to suggest that you work for free.
> "Profit" is what a passive investor would receive without
> doing any actual work.
> What potters call "profit" is actually how much they made
> as the result of their labor. That is why you must pay self
> employment taxes (social security) from your tax form
> schedule C.
>
> I think using the proper terminology is important because
> it affects how you think of yourself in relation to others.
> There are plenty of "non-profit" corporations, foundations,
> and groups that are awash in money. It is not unusual for a
> director of a big group to make a high 6-figure salary, yet
> the business is non-profit.
> Remember the scandal a few yars ago when people were aghast
> at the opulent pay and lifestyle of the head of the United Way?
> Well, I like to keep that in mind. I'm more inclined to support
> my humble local craftsman than contribute to the big salaries
> of the people who run "non-profit" groups.
>
> Concerning macroeconomic analysis, this has always been how
> I've measured my business. I just call it my "ratio of expenses to
> wages", not "ratio of expenses to profit". The best way for me
> to make a living as a potter is to keep the ratio as small as possible.
> There are other approaches, but that's what works for me.
> What I end up with is a very small ratio, from 25 to 35%. That
> means that 65 to 75% of every sale pays me for my time.
> The ratio is so low because: I fire and heat the studio with wood
> (no gas bills), make my own clay (about 7 cents a pound), don't
> go to art fairs (no enrty fees and travel expenses), make most of
> my tools and equipment, do my own repairs, etc., etc.
> This also means that since I spend so much time doing all that stuff
> that my output and gross sales are also low, so 75% of every sale
> going to me is not as great as it sounds!
>
> The macroeconomic approach makes more sense than trying to
> figure up how much each mug costs. I really don't care how much
> it costs me to make a mug as long as my "ratio" stays low. Besides,
> when you try to figure out everything down to "3 cents worth of
> glaze", it can't be accurate. If it's really 2 cents worth of glaze, that
> means you are off by a whopping 50%! And then there's the cobalt
> blue glaze that actually costs 40% more per gallon than the white
> glaze. Do you have a separate price for white mugs and blue mugs?
> This gets to be silly in a hurry.
> Don't lose sight of the forest by looking at a twig.
>
> David Hendley
> Maydelle, Texas
> hendley@tyler.net
> http://www.farmpots.com
Michael McDowell on tue 4 may 99
I've been trying to stay out of this discussion, for I fear I have nothing to
add that won't sound pedantic. Still, there are a couple of terms that are
being thrown about, and one that isn't, that I'd like to comment upon.
First, nothing in any of the discussions have touched upon "Macroeconomics" as
economists define the term. This has been strictly a "Microeconomic"
discussion. Economists use the term "Microeconomics" to refer to analysis
relevant to the determination of value, cost, price, and quantities purchased
and supplied to "the market" from the level of the individual decision maker,
on up through the market, or industry level. "Macroeconomics" is reserved for
analysis which aggregates across markets and industries to the level of "the
economy as a whole". Microeconomics concerns itself with all the issues that
we've been discussing with regard to determining our costs and the prices of
our wares. Macroeconomics is used to address questions about the issues of
economic growth and recession, i.e. the business cycle.
Second, "profit" has specific meaning in economic, or cost analysis. David
Hedley was correct to point out:
"'Profit' means what is left over after ALL expenses are
paid. That includes labor expenses. It is not reasonable
to suggest that you work for free."
But he does not go far enough when he says:
"'Profit' is what a passive investor would receive without
doing any actual work."
Actually this return for passive investment is not profit either. This is
"return on investment" and is actually calculated and included with costs.
There it is called "the OPPORTUNITY COST of funds invested". Only if the
returns on a passive investment exceeded the return available on other
investments of similar maturity and risk would the excess return be counted as
"Profit".
"Opportunity Cost" is a concept that would be good to apply to the
determination of the hourly "cost of labor" that one should be using to arrive
at "true cost" for any piece of pottery. Take another look at that t-shirt
with the logo "A Potter is..." and goes on to list all the skills and talents
that so many of us bring to this work. Were we to bring this level of ability
to the general labor market we could expect significant financial rewards. It
is costing most of us a great deal to make our pots in the form of "INCOME
FOREGONE".
If we were to be truly honest about valuing our labor at the value it could
bring in other pursuits, counting all the time we devote to our "professional
development", and figuring a reasonable return on our investments in skills,
equipment and space devoted to our craft, few of us would be able to show that
we were pricing our wares high enough to cover these "true costs". Still such
a determination can be a valuable exercise. What each of us would find from
making such calculations for ourselves is just how much we are paying, mostly
in the form of wage and investment income forgone, to follow our heart's path.
I was discussing Dannon's fee for putting on a workshop here this summer. At
one point she volunteered "If I was just doing it for the money, I'd be doing
something else entirely!"
Ain't that the truth!
Michael McDowell
Whatcom County, WA USA
mmpots@memes.com
http://www2.memes.com/mmpots
David Hewitt on wed 5 may 99
I suppose that I price for as much as I think my market will stand. With
this in mind I work out how much I am giving myself per hour and see if
this is acceptable. This I do as follows:-
Apart from using Quicken Intuit for conventional accounting records I
also use MS Excel spreadsheet for costing out how much I might make on
each different item I make.
One sheet in Excel has a list of the raw materials I use, a typical
annual usage, and the current cost. When my suppler brings out a new
price list I can enter the new figures and it automatically tells me the
change and the % change so I can easily judge what in general I need to
alter prices.
Another sheet in the same workbook lists the different glazes I use and
the recipes and costs out a kilo of glaze. The raw material prices are
automatically updated from the first sheet.
Further sheets cover each design I regularly make. For each design there
are listed the materials used and quantities, glazes used and estimate
of quantity used, electricity and estimate of usage and the time taken
to make and glaze. The prices of each cost item are automatically
updated from the first sheet. I then put in the selling price and
calculate what rate per hour I am potentially getting. Sounds
complicated perhaps, but once set up is very easy to maintain.
the time to make and glaze that I put in does not cover all the extras
of selling and clerical functions or reading and replying to Clayart
etc..
David
>> ----------------------------Original message----------------------------
>>
>> The macroeconomic approach makes more sense than trying to
>> figure up how much each mug costs. I really don't care how much
>> it costs me to make a mug as long as my "ratio" stays low. Besides,
>> when you try to figure out everything down to "3 cents worth of
>> glaze", it can't be accurate. If it's really 2 cents worth of glaze, that
>> means you are off by a whopping 50%! And then there's the cobalt
>> blue glaze that actually costs 40% more per gallon than the white
>> glaze. Do you have a separate price for white mugs and blue mugs?
>> This gets to be silly in a hurry.
>> Don't lose sight of the forest by looking at a twig.
>>
>> David Hendley
>> Maydelle, Texas
>> hendley@tyler.net
>> http://www.farmpots.com
>
--
David Hewitt
David Hewitt Pottery ,
7 Fairfield Road, Caerleon, Newport,
South Wales, NP18 3DQ, UK. Tel:- +44 (0) 1633 420647
FAX:- +44 (0) 870 1617274
Own Web site http://www.dhpot.demon.co.uk
IMC Web site http://digitalfire.com/education/people/hewitt.htm
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