You know, I really look forward to these posts every year. I hope that anybody at all reads them. Particularly on a year like this one. I haven’t calculated the numbers yet, so I don’t know how it stacks up financially. However, from a business development standpoint, it’s definitely my most successful. Here’s all of what went into me saying that.
Volume starting to justify real efficiency improvements.
Lets face it, in the past I was basically a ‘semi-custom’ shop. Everything was made by hand, with an iron, and that made thru-hole parts the better choice. It made me flexible and the cost of entry was low. It was inefficient but it let me get in the game.
Well, things are busier now. The cost pressures are somewhat relieved. However, I am really struggling to keep up. Parts costs are higher, labor costs are higher. Most importantly labor TIME has been badly holding me back. I can only solder so much. I don’t turn enough volume to really see a benefit of outsourcing, and don’t have the liquid assets to afford it.
So I scrimped, and saved, and pinched pennies for a while. Not easy in a year with a big income gap in the middle. I finally brought in a surface placement machine. Last year I had started doing a few select, simple, assemblies in surface mount. These were just a warmup while I built up equipment. The equipment is now here.
What are the advantages? Lots of them. It cuts down labor time massively. What would take me days to do by hand, I can do in a few hours. I just ran 120 pieces of the new solenoid testers in about 2 hours, with surface mount resistors and LED’s. This would have taken me days to do in the past. And this is with a very basic, entry level, limited component machine. As time goes on, and I need to order new PCB’s, I’m going to be eyeing surface mount as extensively as possible. It’s the ONLY way I can continue to grow.
Surface Mount Technology Improving Margins.
Small secret. In the past, in the best of years, I barely turned any profit. Most years I’ve actually been losing money running this business. This is unbelievably common for new businesses, and I was mentally prepared for that situation. If you want to have a successful business it’s just the nature of getting started. Success takes time. I’m all out of generic platitudes now, so lets start talking about the future.
Going to surface mount tech has been a long term goal for me, because it will have a massive effect on profit margins. Not only does it significantly reduce time and labor expenses, it also has an equal effect on component prices. For some designs the PCB will cost less too, either due to smaller size, or because of less drilled holes.
As an example here, we’ll look at a generic 1/4w resistor. Absurdly common in everything electronic. Average price, if you order by the thousands, is going to be 3 to 6 cents each for thru-hole. A SMT resistor? About 0.7 cents each. That’s about 85% or so of a reduction in component cost of resistors. Which are much faster and easier to assemble too. Not EVERY component see’s that big of a price drop, logic chips can be about 10% to 40% less expensive, depending on the part. Still adds up though, that’s for sure. Oh, and the shipping costs go down too, since SMT resistors are much lighter in weight.
This means that some things I may actually turn profitable for me. The new bench displays are a great example. I was losing money on every piece I sold with the old version, after factoring in the labor time. The new version? I won’t give exact numbers but profits on them are pretty darn good now.
Solenoid/Special Solenoid testers are another one. I’ve sold a lot of them. They haven’t generated much of a net income in the past. Hoping that changes here.
Digging out of debt
I know, #1 question, will this mean reduced prices for customers? In some cases, maybe, in the long term. Right now it’s helped me hold the line to eliminate price increases. I have a fair amount of business debt that I’ve accrued in the past few years, which I need to pay down. The nice thing is that I actually AM paying it down now instead of increasing it. The rate of payoff should increase too, as profit margins continue to improve.
But I honestly cannot afford to lower prices right now. For the time being I’m just happy I don’t have to put parts on the credit card all the time. The more I can pay for expenses out of the bank account, and see the balance increase, the better shape I’m in. I’d love to make things cheaper for everybody but I haven’t reached that point yet. The truth is that as I continue to grow, my expenses are going to start increasing.
Within a couple of years I have a feeling the business will be moving out of the house and into a dedicated location. Then things will get really interesting. So I need to get my finances as solid as I can until then.
Now that 2017 is gone, and 2018 is here, there’s more things I am doing to improve the business. That’s for another post in a couple days. I’ve got boards to make.