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THE BUSINESS OF BOATBUILDING

 

The major reason why many beginning boatbuilders fail, is they forget they are running a business!

About 400 boat builders go into business each year.  About 400 boat builders go out of business each year.  (The above statistic is based on my analysis of the USCG manufacturers database over ten years.)

That's a very sobering statistic. Many of those who go out of business never get through the first year.  Why? Because they get so caught up in the building of boats they  forget about the business of building boats.  They don't keep track of their costs and their income and simply don't make any money.  Most people go into this business knowing that they aren't going to get rich building boats.  But, also most boat builders think that they can make a living at it.  They can,  if they use a little business sense.

First, I recommend strongly that you go to your local community college and take a basic business courses.  There are terms you need to know. What is profit? What are accounts receivable and accounts payable?  What about taxes, licenses, and environmental regulations that affect your business?  You need to know business terms and practices so that when you discuss your business with the bank, an accountant or the IRS, you know what they are talking about.

Here are some basic business courses you should take:

Business 101: This is the most basic business course.  But it covers all the basics of running a business, big or small.

Accounting:  You need to know how to track the cash flow of your business. Do you know what cash flow means?  Do you know what a General Ledger is, and what receivables, and payables are?  Are you going to run your business on a cash basis?  This is the basic stuff of  money management, so you have some left over (profit) at the end of the day.

How to write a business plan:  Many colleges teach this as a seminar type course and it only takes a day or two, but it is vital for you to have a plan. You need to figure out what your business is, where you want it to go, how you are going to finance it, and when you want to break even (another business term you need to know)?  How are you going to price your product? What is your target market? All of these need to be in your business plan.

Marketing A basic course in marketing is essential.  Many builders get started by building a boat for themselves.  A friend or neighbor sees it and says "Will you build one for me?" Word gets around that you build a really good boat.  Word of mouth is very good, but after you've sold a boat to your friends and neighbors, how do you sell them to the larger world?  You need to know the basics of marketing your product to people who don't know you or your boats. You need to know where your boats fit into the world of boats. What is your market niche? You need to know how to differentiate your product from all the rest. Simply put, what makes your product different and unique from all other boats? You need to know how to position your product in the market so it will sell. Also you need to know that there is a big difference between marketing and selling.

Resources: There are lots of resources available to the small business person.  Some of them are:

Your local Chamber of Commerce.

Your local Community College.

Your local bank or financial institution.  If you take out a small business loan banks and financial institutions will help you with advice on running your business. They want you to succeed so you can pay your loan.  They also know that if your business succeeds it's good for the whole community. They have a financial interest in your business, so take advantage of it.

State Agencies: Most States have a department that assists small businesses.   Look on the internet for your state government web site. USA.Gov has links to all of the states and territories web sites.

Your library probably has a business section. They may also have references to local, county and state agencies that help small businesses.

The Small Business Administration.   Yes! Uncle Sam has something for you that you pay for with your tax dollars!   SBA has regional offices.  There may be one near you. They also offer SBA on-line training.  They have a site for developing a business plan. SBA Business Plan Web Site

If you are a woman the Woman's Business Center is an excellent resource.

If you are a minority SBA Special Interests is very helpful.

There is SCORE. They offer free business advice to small business.

There are Small Business Incubators.  Beware! These are businessmen and women, who will invest in your small business, and will help you get it going.  But they also have a vested interest and expect to make a profit on their investment.  So before you go to one of these make sure you think about it and know before hand what you are getting into.

Business Basics: stuff you need to know.

The very first thing you need to know about  is  money.  If you spend more than you make, you lose. Sounds basic doesn't it.  But many people who go into business for themselves have no idea how much they are spending.  They only see the in flow, not the out flow.

The following assumes you are working for yourself, and are not employing anyone else.

Profit = Income - Expense

Again, it sounds simple, but how do you know if you are making a profit?

Accounting:  You need to have a system to track how much you spend and how much you make.  Most start-up small businesses operate on a cash basis. That is they pay cash, and they take payment in cash.   They don't use credit.  Why?  Because there is a cost to credit. Credit card companies charge you, the business, when you accept payment by credit card. They also charge you interest when you pay by credit card. Cash doesn't carry any extra costs, or expenses. There are exceptions to this. Start-ups usually have to lay out large amounts for equipment or materials. They are usually purchased using a credit card or a loan.

The first thing you should do is set up a system of tracking costs (expenses).   You don't need a full blown accounting system. You can do this with a notebook or a computer.  Label the note book or computer file expenses. Whenever you buy anything for your business, get a receipt! Have an in basket or box where you put all of your receipts.  Mark on the receipt what you bought. At the end of the day write each expense in your book. Have a column for date, amount and item description.  You can also keep this information  on your computer using a spreadsheet or an accounting program.  By doing this you are tracking all of your expenses, or in account speak, debits. Include everything that goes out including sales tax if you have to collect sales tax for the State. Include your overhead costs.   Overhead costs are  utilities, rent, fuel for your truck, business supplies.   These are things that cost you but don't go into your product. Keep the receipts in a file.   You may need these for the IRS.

Have another notebook or computer file labeled income. (money paid to you).  Whenever you receive a payment put it in the book. If they pay by check make a photocopy. Keep the photocopy in the income file.  Give the customer a receipt. You can buy receipt books that have your business name and address imprinted on them at your local business supply store. Keep the copy of the receipt of payment in the file.  You are now tracking all your income or credits.

A note about receipts. There are duplicate and triplicate receipts . The original is white, generally there is also a yellow and a pink. When you buy something they give you the white or the yellow.  The pink is the business's copy. So it's easy to keep track of what is expense (white or yellow) and what is income (pink).

At the end of the month (or whatever period you want to do it, such as weekly) add up your expenses and your income.  Subtract Expenses from Income. If Income is more than Expenses, you made a profit.  If Expenses are more than Income you spent more than you made. Caution! Most startup businesses take a while to BREAK EVEN.  Breaking even is the point at which you start making more than you have spent. This is because there are usually start up costs, and those have to be paid before you can be considered to be profitable. This may take six months, a year, or more depending on how large your start up costs were.  You have to pay off your startup costs before you are profitable.

At  the end of the year you will have all the records you need to file Income Tax returns and itemize your expenses.  However, I suggest you hire a tax consultant to help you, so you do it right.

Resist the temptation to have a PETTY CASH FUND.  That is simply a box you keep cash in to pay for incidentals.  It is too easy to dip into the petty cash fund for things not related to your business, such as for a night at the local pub, or a case of beer for the boys! Also it is too easy to dip into petty cash to buy something and forget to enter it in expenses.

Small Business Accounting Basics  This is a basic intro to accounting.

Do you need an Accountant?  Not necessarily, especially if you are a one person business. But if you have employees, or are incorporated, then you should have an accountant come in occasionally to check your books for errors.  They will be able to tell if you labeled something as income when it was not or an expense when it was not.  They can also help you to understand and keep the books.

If you get bigger, have several employees, begin building a lot of boats, you may need to hire an accountant or at least someone with accounting experience to keep the books, make payments, take payments for you, do purchasing and track your inventory.  In other words do all the financial stuff.  However, if you do this, make sure you specifically assign yourself or someone else that you trust the duty of authorizing all payments,  This person does not have to be an accountant.  This is standard business practice and minimizes the risk that someone will have their hand in the till.

Purchasing: Not everything you need may be available locally. Sometimes you have to order business supplies over the internet or by phone. Many businesses that supply the materials you need offer discounts if you buy in volume, or if you pay cash or pay within a set amount of time.  Make sure you ask your suppliers about this. It will save you money.  For instance suppose you are purchasing boat nails.   If you need a gross of boat nails for one boat, but know that you're going to be building ten, you will save a lot of money if you buy 10 gross and get the discount.  Also, repeat customers are often given a discount so try to establish a steady relationship with your suppliers.  Also, if you register your business with the state (the requirement varies from state to state, but it's good thing to do anyway) then you will be assigned a business tax number. With that number you can buy wholesale from your suppliers and not have to pay sales tax.

Purchasing and cost control for Small Business:  A web page about purchasing.

State Registration of Business Name and Licensing:  Why should you register with the state?  Because then your business name becomes yours.   No one else in the state can use the same name. You can get it trademarked with the Federal government and then no one else in the USA can use it. 

Some states require collection of sales tax. If you sell the boats yourself then you must collect the tax.  If you sell them through a dealer, then the dealer has to deal with the tax. This is not the same as a business license.  Many cities, counties or states require you to have a business license for certain types of businesses. Mostly this is for retail sales but it varies from state to state. Again, check your state government web site.

Warranties on your product:  If you offer a warranty on your boat you should know about the Magnuson-Moss Warranty Act.  It is a Federal Law that states your responsibilities as warrantor. Basically it says that if you offer a warranty you must honor the terms of the warranty.  The warranty must be in writing and you must give a copy to the customer. This sounds obvious but unfortunately the boating industry is notorious for how badly it handles warranties.

You also have a responsibility under Federal Law that requires you to correct safety defects or defects that create a substantial risk of injury.  See the link to Defect Notification Recalls.

There is an article in Professional Boatbuilder Magazine Number 103 Oct/Nov 2006,  titled Fine Product. Failed Startup.  See Professional Boatbuilder. This is a good example of someone who is a great boatbuilder, but didn't take all aspects of business into consideration. The state of North Carolina has a very good guide to starting a business.  Much of what is in it applies anywhere you wish to start a business.

Remember this.  A boat builder thinks he is in business to make boats.  But, a business man knows he is in business to make money.   If you are not in business to make money, then you are not going to be in business very long.

Other Business Considerations:

Paying yourself and others:  Now that you have made a profit, you have to consider what you are going to do with the money.  The first consideration is, are you going to pay yourself? How much are you going to take out as salary? Obviously you have living expenses, especially if you have a family. Like all of us, you want to provide for them, and save something for your future and your children's future.  But, is it better to take it out now or to reinvest it into the business to make it grow?  This is something only you can decide. You have to take into account your financial situation and decide the best course of action.

On the other hand, if you want your business to grow, you need to reinvest in the business. Maybe you need a bigger space, or a piece of equipment that will save you labor? Maybe you have an order for a bigger boat and need materials, supplies and equipment you don't have?  Possibly some piece of equipment has worn out and needs replacing.  All of this has to be taken into consideration.

Taking on employees:  Now you're business is growing.  You can only  fill so many orders, and you have more orders than you can fill?  What do you do? Do you hire labor to help? If you do, then you need to know the following.

What wage will you pay?  How much is labor going to cost you and will your business still be profitable? Do you know the fair labor laws in your state? Many states have laws about hours, overtime, breaks, what you can and can't ask an employee to do, and some states have laws about wages.  In addition to that there are the Federal Minimum Wage laws.

How will you pay Social Security and Medicare taxes for yourself or for an employee?
Self Employed: http://www.ssa.gov/pubs/EN-05-10022.pdf
Employees: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employment-Taxes-2

Will you be able to offer them any benefits such as life and medical insurance? You should be aware of your responsibilities under the Affordable Care Act(ACA):
http://www.sba.gov/sites/default/files/files/SBA_ACA_201_Deck-Updated_July_2013.pdf. If you have less than 50 employees you are not required by the ACA to provide medical insurance, but if you do then there are provisions of the act you must comply with.   If you offer medical insurance you may need a National Standard Employer Identifier (NSEI) from the Department of Health and Human Services.  See also Affordable Health Care Act http://www.healthcare.gov/.

You will need to find out about deducting Federal and State taxes and how to report them. You may need to get a Federal Employer ID Number.

If you decide to hire immigrant labor how do you make sure you don't violate laws on hiring immigrants?

Pricing your Product:   If you have been tracking your costs, then you have a pretty good idea of what it costs to build the boat.  But did you keep track of your labor?  How many hours of your time went into the actual building of the boat?   Most businesses also add overhead costs to the cost of producing a product.  How much of that are you going to add.

Your cost   =   Materials + Labor Cost + overhead.

Your price  =  Your cost + markup for profit. Only you can decide how much a markup there should be for profit.  This is known as Profit Margin.

Typically in a volume production fiberglass boat manufacturing business, profit margin is about 5% to 10%.  The smaller the business and smaller the volume the higher the profit margin must be to make any money. Do you add 50% or 100%?  You have to decide what you can live with.  Profit Margin is how you earn money on your product, so give this serious thought.  Ask other builders how much they markup their boats.

While you are thinking about how much you will charge, also think about how you are going to collect payment. Too many boat builders have lost money because a person ordered a boat, and then changed their mind after it was built.  That is money out of your pocket.   Are you going to ask for cash up front?  Many boat builders ask for half up front, and half on delivery.  Make sure you get the terms of the deal in writing. See Legal Considerations.  In the contract, provide for any changes the customer might make while the boat is being built.  You need to specify how these changes will be paid for.  Have an attorney draw up a contract for you.  Or if you are brave enough, there a simple contracts available online that you can modify and use.  

Paying Loans or Credit:  Where are you going to get the money to start your business?  If you get a loan to finance your business, part of your cost of doing business is repaying the loan. Obviously how much this is depends on the amount of the loan, the interest rate , and how long you have to pay off the loan.  Some people mortgage their homes to get business loans.  This is not a good idea. If the business fails you are still held responsible to pay off the loan. If you can't make the monthly payment, the bank can take your house.  So be careful about getting loans. If you need collateral to secure the loan, try not to use your home as collateral.  Try to get what's called a signature loan.  A signature loan does not require collateral.   You still have to pay it, but you won't lose your home.  Many small businesses finance the startup of their business with credit cards.  They usually end up maxing out their credit.  The interest rate can be considerably more than a bank loan but they won't ask for collateral. But, you may spend many years paying off the credit card debt.   If you do use a credit card for your business, use it only for your business! Never use it for personal purchases!  Keep your business credit separate from your personal credit.

Others have financed their startup by borrowing from family and friends.  If you succeed, this can be a good way to get started, but if you fail it's a good way to lose family and friends. Only you can make these decisions.

Inventory and Inventory cost:  One thing that any manufacturing business must consider is how much inventory to keep on hand. There are two kinds of inventory. One is the materials, parts and supplies you purchase to make your product.   The other is the product you make, called finished goods.

Materials, Parts and Supplies: Most large companies today keep minimal inventory on hand, only enough to get them through an emergency for maybe a day or two.  This is called Just-In-Time inventory management.  It means that they place orders that arrive just in time to be used up until the next order arrives.  Inventory arrives on a daily basis.  This allows them to eliminate storage and management of inventory.  However this is hardly practical for a small business. Is there a better way?

Many small manufacturing businesses and job shops use bins.  You have two bins for each item in inventory. When the first bin (the working bin) is empty you place an order to fill that bin and work out of the second bin. Now bin 2 is the working bin. When the order comes in you fill the first bin, but keep working out of the second bin until it is empty. Then you order more to fill the second bin and go back to working out of the first.  You can do the same thing by having one bin and ordering when it is half full but it's easier to know the order point  if you have two bins.  Over time you will learn how long each bin lasts and can adjust so that your order comes in just before the working bin runs out.  This way you can reduce inventory cost by purchasing only the amount you need.

Another way to reduce inventory cost is to reduce the amount of waste.  Waste is simply what you don't use.  There are hundreds of ways to reduce waste and most of these just require a little thought. For instance, if you are building a boat using plywood panels, how many pieces can you get out of each panel?  If you are working from someone else's design they may have already figured this out. If it's your design then it will save you money to spend some time determining how you can use all of your material. If you are building fiberglass boats you should have already determined exactly how much glass and how much resin goes into each part of the boat. Resin price fluctuates with the price of oil so it is best to know just how much you need. If you have left over wood, don't toss it out. You may be able to use it for small parts in the boat or in another boat.  You might be able to sell left over wood as scrap to someone else.  The point is to think ahead and purchase only what you need to keep on working.  You don't need to be standing around, or have workers standing around doing nothing for want of material to do the job. So make sure you have only what you need, but also know when to buy more so that you don't run out before the job is finished.

Finished Goods: Another kind of inventory is the product you make. If you only build to order, that is, you take an order before you build, then you would not have unsold inventory at the end of the year.  But if you decide to do production line manufacturing, it is likely you will have unsold inventory at the end of the year. The best practice is to not have any unsold inventory if possible.  Some manufacturers who sell through dealers, have dealer meetings in the winter and take orders from them for the next year's production.  This minimizes unsold inventory.  But if you sell factory direct, that is you have your own showroom and sales staff, then you must learn by trial and error how many boats you will sell each year and try to project ahead so you minimize the amount of unsold inventory. Why?  Unsold inventory takes up space and there are costs associated with storing it.  It must be listed as inventory on your taxes.  It is also money you have spent but have not recovered by selling the boat.  So it is best to keep unsold inventory to a minimum. Of course, if you have your own showroom then you are going to have some unsold inventory, at least the boats that are sitting on the showroom floor. Inventory management is another thing you can learn by taking business courses.  Most basic business courses include an overview of inventory management, and there are college courses that teach only inventory management.

Offsite Links Referenced in the Text
Small Business Accounting Basics http://www.myownbusiness.org/s7/
Small Business Administration http://www.sba.gov/
SBA on-line training http://www.sba.gov/training/
SBA Business Plan Web Site http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/writing-business-plan
Woman's Business Center http://www.sba.gov/aboutsba/sbaprograms/onlinewbc/index.html
SBA Special Interests http://www.sba.gov/content/minority-owned-businesses
SCORE http://www.score.org/
Small Business Incubators http://www.smallbusinessnotes.com/starting/busincubation.html
USA.Gov http://www.usa.gov/Agencies/State_and_Territories.shtml
Purchasing and cost control for Small Business http://www.businesstown.com/accounting/purchasing.asp
Federal government http://www.uspto.gov/
Magnuson-Moss Warranty Act http://www.business.ftc.gov/documents/bus01-businesspersons-guide-federal-warranty-law
Professional Boatbuilder http://www.proboat.com/
guide to starting a business http://www.sbtdc.org/pdf/startup.pdf
some states have laws about wages http://www.dol.gov/esa/minwage/america.htm
Federal Minimum Wage laws http://www.dol.gov/whd/flsa/index.htm
National Standard Employer Identifier (NSEI) from the Department of Health and Human Services http://aspe.hhs.gov/admnsimp/faqemp.htm
You may need to get a Federal Employer ID Number http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online
laws on hiring immigrants http://www.dol.gov/compliance/laws/comp-ina.htm

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