Question
I was wondering how many of you shop owners have taken your business to a place of financial security for you and your family. I know two shop owners who have become millionaires through woodworking. I know several general contractors who have done very well for themselves. I am looking for input on a route to financial security, commercial wood shop or general contractor, as I don't know which one to pursue.
Money is not everything to me, so I am not looking for the starving artist argument. What works for you? What has helped you turn the corner most in terms of finances?
Forum Responses
(Business and Management Forum)
From contributor T:
Read everything by Dave Ramsey, listen to his radio show, and apply it to your business and at home. I read his book in July, and have paid back over 40k in loans and increased my bottom line 45K. I can't believe it myself.
Debt is the biggest obstacle to saving and really getting ahead, whether it is business or personal. Think about the things the average person pays on monthly... mortgage, cars, credit cards, student loans, etc. Add them up, and then multiply by 12. In most cases, this is tens of thousands of dollars per year. The quicker you can retire debt, the more and quicker you can save.
This is common sense, yet most never really act on it. Life intervenes and we stay on a treadmill due to lack of a plan. That plan should include your endgame. When do you want to retire, and with how much? You need to work backwards from there.
Commercial shop or contracting... It doesn't matter which you choose; what matters is what you can extract from the business. Stick with the one you know best, and build from there.
My neighbor just bought a used vehicle that was a good deal at $11K. She had $2500 cash on hand for a down payment. I suggested that she could get a decent used car with that cash, and own it. Then instead of a $300+ car payment every month, she could save that $300+ per month, and at the end of the first year have more cash on hand than she has now. But the car was a "good deal" and it was a nicely maintained car with $50K miles on it, so she bought it anyway... at 29% interest! I can't fathom giving them the satisfaction. So she will now fork over $6000 in interest alone because she couldn't see herself waiting a year or two to have the cash on hand plus a trade. This scenario plays out all across the country everyday.
This same scenario can be applied to business. Save to buy your machinery. This way, no payments. (Some make the argument that payments are like an employee, but payments cannot be laid off in tough financial times, and become an albatross, which leads to many shops closing up.) So...
1. Define your endgame, and plan backwards from there.
2. If you have debt, put yourself in a position to have cash reserves for your business and emergency personal funds, and then plan how you will retire your debt, whether business or personal, and what you will do with the income after. The reason I say cash reserves and emergency fund first, is life's third cousin has a way of intervening at the most inconvenient times (some call him "Murphy") and can throw you off track if you are not prepared.
3. Determine which business you want to use to extract the money from - commercial shop or contracting - but I would encourage you to stick with what you know.
Money is just a tool, but like the machinery in most of our shops, you have to know how to use it properly to avoid mistakes while using it.
If you have a proven advertising program, that is a reservoir that should be used, as it will expand your business. If you put a certain percentage of your income into advertising you will get a compounding of income.
In inflationary times we instinctively buy things that won't lose value. In deflationary times it is the opposite. I think this influences our thinking on a subconscious level willy-nilly. If you are in an expanding market (I know - huh) it makes sense to buy on credit to gain market share, as you will have the benefit of the machinery now; if you save up you will be saving for a long time, during which time your competitors who did buy on credit will take market share. As far as laying off people, sometimes you don't have a choice, but it is the last thing you are going to do because they are too hard to find.
I have to disagree with this. For most woodworking shops, if there is an actual profit built into their pricing structure, and their average annual sales are in the $300K range, there aren't many machines that can't be saved for within a one to three year period. The main difference here is the pattern of saving the money. If you can't save the money, how do you expect to make the payments? That is why a lot of shops get dragged down. I've seen this time and time again, and we almost went down ourselves... buying into the argument of debt service, only to be put out of service.
My point about laying people off was that some make the argument that debt is like an employee, however in tough economic environments, you can lay off employees if you indeed have to, but can not lay off payments.
Steady, consistent growth yields a much better market share, because the ones who financed their way to the top inevitably sink pretty quickly on the downside. If you grew your business without financing, you will be in a much better position to pick up the pieces (of marketplace and machinery at a discount rate) on the downside.
Don't finance purchases on the way up that stick with you and drag you down when things go south (and they always do), but rather buy with cash at the bottom. Save money on machinery purchase and financing.
Again, if you are considering financing a purchase, ask yourself, do I really need this right now or can I wait a year or two after I saved the money to buy it cash (which also puts you in a better position at the time of sale). This requires a long view of your business career.
Timing or discerning what is needed and wanted is at the core of this and the free market. To me it is a baseball analogy - do you steal second or stay close to first base? If this situation is right, I say steal second. You're saying stay on first base no matter what. I disagree.
One downturn, and it is hanging from them like an albatross... and the inevitable result is obvious.
You are assuming if they want to use a CNC that 1) they don't have other options to achieve the same result while they save the money, and 2) they can't find another product that will meet their needs for a more austere price. Personally, I can't see a shop with annual gross revenues needing a $50K edgebander.
"Divide this by 2 in the current market if you buy used. If you have a 10% profit on 300k that will take you 7 years to save the money."
If you divided it by 2, it would be three years, and here is where it makes all the difference. Save for three years and buy it cash, while using alternate production routes to achieve the same result, and you are free from another 7 years of payments.
If you plan from the end result, it all becomes a more obvious path over a career. But I would argue a lot in our industry won't be here 5 years from now, which is why they see no benefit to planning long-term.
Go through this exercise of planning from the end result, and you will come to one of two conclusions... 1) "Dang, I need to make more money!" and you will start to look at what you are charging in a different light, or 2) you will lower your expectations. Either way, you will know where you really stand... and there is a certain sense of security in that (and some personal challenge).
Employees are in short supply. An employee worth having that you could lay off is a luxury. The machinery does replace the less reliable employees. From this point of view, you do pay for the machines by replacing the less reliable employees, especially with an edgebander and a drum sander that you own and do not cost an ever increasing wage while remaining static in their skills. (This is not the case with skilled employees.)
Some markets require the machinery as an ante. Architectural millwork, store fixtures, trade show exhibits, making cabinet parts, etc. require CNC. These markets put you above the commodity level work and are more likely to be long-term symbiotic customers. Unlike some residential work.
Again reverse engineering to the goal. One goal is your personal goals. One goal is the company's goals. One goal is the customer's goals. If you don't align with your customers goals, you will lose income.
Reverse engineering again - how much income is lost by lost opportunities? This is a volatile industry that cuts both ways - those opportunities don't come around everyday. Or lost income by lower levels of production. This requires good judgment and whether to steal second or stay close to first base.
I ran a small shop for 38 years before retiring at 55. I actually started my shop twice. The first time I was in high school, still living at home, and had no real living expense. After graduating from college, I owed the military 4 years for my education costs, so my equipment was shoved to the back of the shop and I sublet till my return. Now I was restarting my shop, had some very old equipment, remnants of a good reputation from prior customers, and a wife and child to support. From the start, we took a minimal amount of wages out of the business, and reinvested everything else in progressively newer equipment. Progressively newer equipment did not include 4 wheel drive trucks, boats, fancy cars... you get my drift. We did not live in poverty, but we watched every dime, and the wife had to save something each week from the take home pay. Home and business were separate monetary units.
As my business expanded, newer equipment was bought that would keep more of the current sales under my roof. Items that were outsourced came in house. A $10,000 finishing job became an in-house job that cost 2 weeks wages (about $1000) plus $300 in materials and added $8700 to the profit. Doors became an in-house project and cut days off my delivery times. Eventually, the only thing I spent money on was materials and labor... no profit lost to outside sources. I was consistently making middle six figure annual profits with 3 of us working. My employees were paid at the top end of the scale in my local.
I wasn't any economic wiz. Actually what got me going was when we were signing the papers for our first home in the late 70's there was a big "truth in lending" thing going on (sorta makes you laugh now). I was getting a 30 year $70K loan and I asked about the total repayment. The loan officer looked at a table and said I would be repaying a total of $240K. That scared the crap out of me, and was the last time payment I ever engaged in. The interest was 3 times the amount borrowed.
There out I paid cash for everything. I drove what I could pay cash for. I paid cash for my next home. I paid cash for all new business equipment. It can be a little discouraging for brief moments here and there. I didn't get to buy any real toys till I was 40; but there comes a payback. My new 40 ft yacht looks a hell of a lot better than my buddy's 18 foot trailer boat does, as he is making the last of his 180 easy payments.
Best advice I can give:
1. Avoid all forms of debt. Live within your means. If the item isn't life saving, you can afford to wait. Without monthly debt, you can wait out the cycle of good and bad times.
2. Buy your shop building. Pay to own, not to rent. When you quit working this will be an excellent source of continuing income.
3. Don't buy new business equipment until you have absolutely outstripped the capacity of your existing machinery. New equipment will do the work faster, but doesn't bring in any additional work on its own. Don't buy first version equipment. That $200K CNC on the market will be $100K in 2 years and have much greater capacity. The more automated the equipment, the faster it depreciates.
4. Save and invest wisely. There comes a point where your own business will not be your best investment. This is hard to learn, but true. Know your tax situation and invest accordingly.
5. Realize you must be self supporting in retirement. Forget Social Security. It may or may not be there for you and it's not enough to live on by itself. In today's dollars you need to have your home paid for, and about $3 million to retire. That amount will give you about $100K a year to live on. The more, the merrier.
6. Find yourself a good financial planner - not one who sells you product, just advice. Plan to eventually have your money work for you, not you working to get money. Woodworking is a means to get that money initially, not the eventual end, unless you want to be working till you die.
7. Look around yourself at the job sites and read the posts here. They won't tell you what to do sometimes, but the mistakes are usually obvious. For example, when you work in an urban area exclusively, you probably could save 30K by not driving a quad cab 4 wheel drive pickup to the job site. When looking for a mitre saw, will the numerous $350-$500 models do, or is that $1300 green thing a necessity? These things all add up to more than you'd think over 40 years in business. That unnecessary $1000 you spent at age 30 is $3000 by the time you are 65.
I totally agree with you that money isn't everything. I have always enjoyed my work. But I have to tell you that there is no feeling in the world like getting to the point where you don't have to work. I still do a kitchen or so a year for one very well liked customer, purely as a hobby affair. You haven't lived until after a conversation with a plumber or electrician about how he roughed in something that doesn't suit your way of doing things, you overhear one of the other guys telling that person " don't F*** with him, he doesn't need the job."
I built up my business as an installation company because I didn't have the capitol to buy all the equipment/space it takes for a shop. Worked my way up to doing very high end commercial and residential installations and had a ten man crew creating a good revenue stream. About a year ago did a very large job and did not get paid the final payment for 8 months. Not really a whole lot of money - about 20k - but it hurt. Now it's just me and a helper or two most days.
I have a lot of experience in doing all types of commercial architectural millwork, but increasingly feel that I can not be out in the field doing this type of work for too much longer.
My home is only worth about 40k more now than when I bought it and my credit is trashed after waiting so long for payments.
I have experience in tenant finish, basements, remodels, etc., and it doesn't take quite so much of an investment to be a general contractor as it does to start up a shop.
Just feeling the pressure now more than ever to have a real business behind me that can get me where I want to go. I don't want to be one of those guys still banging out trim and cabinets in the field at 50 years old, while I can work in a design/management capacity at that age just fine. So what is my best path (with only 20k to invest) to get there?
I have heard of a small business group of retired executives that will help you write a business plan. Have any of you used this with success, or should I just take some college business classes? It is very clear to me now that you can be the best craftsman around and the good businessman will beat you financially by leaps and bounds.
When I was 22 I was training this guy who was 30 on how to install millwork. He had just dropped out of the corporate accounting world and was working out of the back of his BMW. Now 10 years later he has a millwork business that does 10 million in revenue every year. He is still a good friend and gives me install work quite often.
Where do I get the information that I lack? Where can I fill the lack of business knowledge that I so obviously have? The sense of satisfaction from installing an awesome looking executive conference room is quickly creeping away as I look at a future that ends up hoping on social security. I know I need a paradigm shift and more business sense, but am struggling to find out where to get it.
By the way, I totally agree with living within your means. All my business and personal vehicles are always paid for with cash and I own no credit cards.
To the original questioner - have you talked to SCORE?
I mostly agree with Dave Ramsey for personal things, but not necessarily for business. There are times it makes sense to borrow money - just do all the "what ifs" before you do. I agree that a plan is a basic requirement. So is having enough savings to weather the unforeseen. If you are going to be in business, there will always be risks. That's where the plan comes in.
I think you would agree that you are miles ahead of where you were when you were teaching that 30 year old how to trim. It sounds more and more like you are leaning towards commercial millwork. You also have a resource to sit down and actually discuss this arena, and that is the formerly 30 year old who now runs a $10 million dollar operation. Schedule a sit-down with him, and pick his brain (i.e. - how he got there, what machinery was needed, what would he have done differently, is he open to mentoring, etc.).
The group you were referencing regarding business plans is S.C.O.R.E. They can get you going on the concepts, but guess what? A business plan is only as good as the info put into it - therefore it still requires you to do the hard work in putting it together.
You have already demonstrated why you should hold onto that $20K that you have. It's called having cash reserves for dealing with issues such as short pays. (Interesting that the client shorted you $20K, and you now have $20K to invest - see the correlation? Could've saved your credit had you had the cash reserves to absorb the blow, right?) That $20K you should put into a separate account and forget about, and use it as a new budget floor. Start saving from that point. If the short from the client hasn't taught you that, or the current downturn, nothing will.
One thing you'll note from the above postings is the steady pace that ended up with a shop that owned the equipment, rather than leasing it. The other thing you'll notice is that they invested in other areas.
What should you do? Keep asking questions until you get the answers. On WOODWEB, from S.C.O.R.E., business books, classes, mentoring, etc. When you get discouraged (and this is a completely normal part of the cycle when the wheel that was moving forward hits some mental mud), get on WOODWEB, let us know your progress, and we'll be happy to get you going again.
There's a saying that used to drive me crazy years ago (because I thought it was so simplistic) that said - "most people spend more time planning their vacation than they do their lives." It's true - weeks spent making plans and arrangement for a vacation, but somehow planning the rest of your life should be a quickie.
Make a night of the week dedicated to working on this ongoing plan instead of watching TV. See where you are, where you need to go, do your research and make adjustments. If not, it becomes very easy to let another year go by without any movement or action.
With regard to borrowing or debt management, it is very easy to make the argument to borrow, but what you have to realize is if you were thinking of doing so a year or two prior to a downturn, all the justifications were there, but a year or two later when the downturn materializes, you would be dragged down real quick because of the payments. You saw how hard it hit you with a $20K shortfall from a client. Now imagine how hard it would be with ongoing payments, whether the economy is good or not. Financing arguments do one thing - separate you from more of your money that you worked for. No one can make that call, whether it is worth it for you. I can tell you, and it seems others above have had the same experience - planning on a purchase and saving for it will yield you much better results in the end, but you have to have your eye on the endgame.
I think the most needed purpose for woodwork is for promotional purposes. Your most valuable asset will be your contacts - get good ones. Don't forget about your own purpose - it is not purely about money, which may be why your friend bailed on the corporate world.
Contributor P - yes, he has taken out many leases on equipment, warehouse space, shop, etc. and is having a real cash crunch now, but has cash flow. Everything is very tight.
Contributor K - the other millionaire that I know in this business has all his shop equipment, etc. paid for (both are in commercial millwork), has been at it for 35 years, and he could not care less whether or not he gets the next bid. He is financially set. Both have had the banks decease their available credit lines and the 35 year guy has borrowed money from himself to keep the business going, but does not seem bothered by it. The other guy is a little stressed but seems to keep trucking along.
I believe both paths can be used successfully, but for my current comfort level I lean towards contributor K's approach.
As an interesting side note - I took a job for the first six months of this year with a fix and flip company while my lead guy ran the commercial installs so as to have a steady income for a while. My boss there borrowed cash at 18% interest from private investors and had 30 flip properties going at once. He never could have gotten this going by saving - it would have taken a lifetime. He had paid back 600k of debt in one year, but when I left, the margins on the flips were getting smaller and smaller and the company was still in debt over one million dollars.
A buddy of mine's son flipped houses also (on a large scale). He is 40 and retired with assets of many tens of millions - he fills up his passport. His contacts are quite good and he made his credit creak.
Unlike a lease of machinery, which goes down in value almost immediately (and for which you are responsible for the difference if they repossess and auction), fix-and-flip houses are already bought at a huge discount, and the private lenders (and banks) will not go above 65% FMV as far as lending goes, although most are lending at 50-55% FMV and require at least 20% skin-in-the-game. They've already built in a 35-45% buffer zone so if the flipper goes belly up, they are protected.
Just as a lot of shops don't realize the money they are bleeding, most flippers only look at the money they actually make, and not what they are giving away. Thousands, just to get a few extra months. For the guy doing 30 flips at a time, multiply that by however many flips. As usual, it works out to having done more jobs to realize the same profit.
For those that finance flipping, it is short-term rental of money to get access to the cash in a home. That argument is easy to justify, as the return is much quicker, and without it, you would not have access to the cash in the home. This is versus long-term payments on a lease, which is there whether you want it to be or not, in good times and bad. The lease is to purchase a product for which you hope you will see a rate of return. If you could show me how I could increase my net income by 30-40% every year just by leasing equipment, you might have the makings of an argument.
In this market, there are excellent opportunities out there, if you know what you are doing. It's not what you make; it is what you save.
We have no truck or van payments. Yes, these make me money too, mileage, but we pay cash for these.
I focus on service and remind myself and all employees - we are a team that thrives on others' poor planning and we run on the premise that "every action is taken in the sense of urgency" mode. We do exactly what we promise. So I think long and hard about every promised delivery before we commit.
Every time I get paid I put 10% away first. Every time I pay myself I put 15% away. I never let my savings drop below 5000.00 at home, period. My savings at work is a much bigger number.
I stop spending. Overtime and unnecessary labor is spending, and we put a major freeze on it when money starts to slow down and we need to dip into reserves. The reserves are always replenished first upon payment and then all else gets paid - period.
We work a lot of small commercial projects and get our billing in before the end of the month and verify our bill has gone in to the client. When we reach 30 days of work - not billing time, but work time, we start asking about money. I don't care what the pm or office staff says, I want money coming in. They have our product and in long stretch jobs, I remind supers we are looking for payment.
I spend 1/3 of my day - each and every day - making deals, bidding or looking for work. The other parts are comprised of site visits, money management and helping to get jobs out, shop drawings, material orders, etc.
On the money management side I use QuickBooks Pro and let the software do most of the categorizing. I pay for all materials on rewards Visa and pay it off. I write 12 checks a month. I look at my bank statement with a microscope and balance it.
My niche - p-lam casework and p-lam tops. There are a lot of cabinetmakers and box builders, but we pride ourselves on quality and speed.
My specialty - service and making sure the client knows we are there. When a customer calls for an extra filler or drawer screw or whatever, we work it into the immediate schedule and get it to them ASAP. Many times we ask how soon, and we send it with someone going their way at break, lunch or home.
Financial security for your business and your family will start when you look at every dollar spent and that it should come back doubled or tenfold. Works for me, mileage may vary. I take credit cards, too.
This is a very open statement... which can also be an assumption, unless you've actually measured the productivity gains and converted it to monetary terms. The machines in and of themselves do not make money. In fact, just having them does nothing. It can only save you in labor costs after you have closed the business, and even then, it would need to be quantified. Only problem is that the savings usually only present themselves 30-90 after the purchase and you max out on any real or imagined productivity/money gains. It then becomes part of your pricing structure, and even though you peaked after a couple of months on the savings, the payments remain for years. You could, of course, raise your prices to accommodate the payments, but remember, you are not making the money, the bank is through the interest... that is, unless you raise your prices above and beyond the price needed to cover the payments. Then you have to ask yourself why you can raise prices to accommodate paying the bank, but you couldn't before to pay yourself.
"Financial security for your business and your family will start when you look at every dollar spent and that it should come back doubled or tenfold."
Doubled or ten-fold is certainly a huge difference in return, but I agree that scrutiny of finances and practices is very important, which is why I focus on this issue a lot... maybe too much.
"The other factor is that you cannot economize your way into affluence, which you pay for in cash, but the point is still the same."
I totally disagree with this statement. Google "investment calculator" and start playing with the numbers. This only works if you save the actual savings and do not spend it on something else, however, a business of any size can save $200-$500 monthly. There are many ways to reinvest this money to increase savings. If you develop this discipline now while things are tough, when times are better, you can increase the speed.
Using binoculars and looking through the wrong end yields worse results. If you don't get started now, where you are at, the endgame looks (and is) farther and farther away... so far, in fact, that it becomes too far off to mean anything.
I look at shops that have been around for decades without updating their equipment for their core competencies. Decades later they are still at the same level of production. By only looking through the magnifying glass you might miss that there are better ways of doing things, that the market has changed, that the labor pool has changed.
You cannot economize your way into affluence. There are times to economize and there are times not to. Ironically, when you are rolling in the dough is the time to economize and when times are hard is not the time to economize on your marketing.
In order for more efficient equipment to pay off in added profits, you have to increase volume (added sales), lessen material costs (less mistakes, better utilization), or reduce labor costs (eliminate people). If you do the same amount of production with the same crew and have the added cost of the new equipment, you will eventually be gone.
We could never seam off our old saw with Corian, p-lam or even guarantee a square cut after three sheets of melamine on the saw. I was able to, and do, capitalize on the new time found. Production has soared. (I won't generalize and brag that it doubled.) I'm actually shocked that I am defending statements that I have made on the benefits of a small loan that have allowed us to benefit and capitalize on efficient and reliable equipment.
That said, if the productivity gains are real and substantial, you should be able to put a nice dent in that loan over the next 30-90 days while the productivity gains max out. Hope it works out for you in that way. I relate to that new machine high.
Next time, I encourage you to try paying for it cash, and then the high is even better, because you have the security of knowing that if things go sour, you have an asset to sell, and not one that has to be potentially repo'd if you can't pay and you are stuck with the balance. That's all I am saying.
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Contributor P, I would be interested in hearing your definition of remaining competitive as it relates to this thread.
We had 3300.00 for machinery saved in an account. We had two years left on a five year note, at 500.00. We were losing traction fast. It was a no-brainer for the three new pieces, throwing some cash at it and having a few months of payments saved. The note now included highly reliable, productive pieces that were much less maintenance, and the note was downed by 197.00.
I'm curious, what do you produce for immediate consumption (not stock)? Our product is very diverse, but we need machines that hold tight tolerances and clean, plentiful air is a necessity. What is it that you see wrong with my thinking?
How do you quantify a "rate of diminishing returns" after ninety days? We are still cutting case parts, Corian and other materials, sanding daily and pocket cutting regularly on a reliable timetable without downtime, or repeated calibration.
I saw a changing of the guard around here about 20 years ago. These shops were damn good with varying reasons for failure, not the least of which was when someone took over the running of the business and violated tried and true policy that had been extant for decades. This speaks to the importance of organization and policy in competitiveness - in other words, sticking with what worked for them.
That aside, having hired a few castaways from these shops, they were pretty good craftsman but technology ignorant. I had drawn some continuous handrail in 3D so as to cut the parts without having to lay anything out, and it was impossible to get them to embrace this idea. I ended up having a less skilled guy do the work simply because he was willing. It indicated to me that these shops had not remained competitive regarding technology and they disappeared. They had been in business for 50 to 80 years.
A friend of mine who, between him and his dad, have been in business since 1956, does work that few on these forums could match. But their iron is old. This makes them more and more reliant on scarcer and scarcer labor.
You also have to be competitive on information flow. You really have to be competitive on the ability to predict. You have to be competitive on attracting good workers.
That said, I have seen some guys in the kitchen business remain relatively unchanged, but I think they got connected to contractors that remained loyal for a very long time, and when those contractors stop doing business, they do not have anyone to replace them, so they may not be competitive with the new guys.
I see some guys are sharing their success in being competitive and getting customers though the Internet. I had the idea that this could not be done for custom work, but apparently I'm wrong, and I'm not competitive in this area.
This is what I can think of off the top of my head. Contributor K, I hear what you are saying and don’t disagree, but my viewpoint is based on my experiences and I have to stick with what I see. Although I’m not above suffering from a few fixed ideas myself, so this is a good conversation.
"Isn't having a year of payments and overhead in the bank a good buffer?"
If the money is dedicated towards the purchase, why pay another year's interest? If the productivity gains are real, you should be able to realize this amount during the original 30-90 days. But there is something more important here. Do you have cash reserves aside from this? At least 6 months worth? If not, that was your first priority. Negates the reason for any "buffer" and makes it easier to just pay it off.
What you do not understand is that you are in a pattern of payments. This catches up too. Add up the interest, then ask yourself, would I have been better off saving for this purchase? Could it wait a year or two? You may decide there is no waiting. And if you are able to realize the productivity gains you think you are going to get, you should be able to take on more jobs, and pay that loan off early.
We do custom cabinetry, furniture, tops, full remodels (and all that entails), refacing (when we have to), etc.
I wouldn't say your thinking is wrong. I am only saying there are other ways. The amount of the payment is small by any standard, and whether you are talking a Corian top or a set of cabinets once a month, you could easily raise your prices 1% (assuming average sales of $300K/year) to accommodate it. But in doing so, just realize that the bank gets it, not you.
"How do you quantify a "rate of diminishing returns" after ninety days?"
It may not even be 90 days. You'll know when it seeps into your pricing structure. For example, you are under the impression that you saved time and realized a productivity gain by financing this purchase. Well, your existing pricing structure reflects what it took you to produce your product. At some point, you max out. The same with the productivity gains you realized with the purchase. When this will be is different from company to company, but like most productivity gains, this is usually 30-90 days.
Realize that a true productivity gain is in direct correlation to sales. For example, let's say annually you made 100 Corian tops for an average of $3500, equating to $350K per year. You decide to finance the purchases you did, which would increase your output (i.e. - productivity). If your sales were the same or better for next year (YOY), then you would have a metric to be able to measure your productivity gain. Realistically, if you know that it now takes you 3 hours less to make a top, because of your purchase, when bidding, you will most likely take this into account.
What product line do you produce?
One point that hasn't been addressed here is that of accidents. We are basically all one stupid mistake from being injured, due to the nature of our work. To a small shop, this is likely to be curtains. Having a large family, this was always in the back of my mind and another reason I always stayed debt free. Being a sole proprietor in California, one doesn't automatically get the benefits of worker's comp, disability, or unemployment. Therefore one could say that financial security could really be an issue of how much of a hit could you take and still keep a roof overhead and food on the table. That puts a whole new light on most of this discussion. Do you take a loan on new equipment that you could just default on if there was an emergency in the family, and conserve your cash? Or pay cash, decrease the home emergency account, and roll the dice in hopes of more security down the road?
While debt management is a staple in a lot of businesses, the majority in our field are not successful in this aspect, because they don't have someone on staff just managing the finances, and would be much better off not accumulating debt in the first place. The problem is getting past the "gotta have it now" mindset, and instead work toward the goal. That is the benefit of defining your endgame and planning backwards. Going without it is like making a 30-piece set of cabinets with no cutlist... Can it be done? Sure, but you will yield much better and more efficient results with a cutlist (plan).
A lot of times, the thinking comes down to whether they can make the payment. At a minimum, going into debt without having cash reserves is the first mistake, no matter how you justify the purchase. One bad cycle and you are stuck.
If you are going to go into debt, buy a building with additional space for renters, and use the income from the renters to cover and pay down the mortgage. You are going to pay rent or a mortgage one way or another. Rent you never see again. A mortgage will eventually yield not only an asset, but an income producing asset.
"Guess the only real test is to look 20 years down the road and see who is still standing."
Well, you can go 20 years and still not make major progress just out of the mindset that your bills are paid, so you must be okay, even though you may not have much saved at the end. It is usually a good thing to find someone who is at where you want to be and learn from them. Those who are retired at 55 and own a yacht are a good start, if that is your goal.
