Examining the Bottom Line

Examining the Bottom Line

Posted 6/15/2000
By Larry Murray

Stop right there! Take a deep breath, and let go of the countless details clamoring for your attention right now. With the hectic pace of all you do each day it is no wonder that sometimes the forest gets obscured behind all the trees. In this case it is your profitability that may be getting masked behind the daily details of running your business.

In an effort to regain a bit of perspective, let's take just a few precious minutes to examine your bottom line. This may very well be the most important activity you do today!

To begin our discussion we need to establish a working definition of profit. In the discussions I have had with automotive industry professionals there are numerous ways of viewing and defining profit. Some believe there is no such thing as a gross profit, as the only real profit is what is left over after everyone else is paid. Others will admit that there is some room for discretion on how profits are spent before reaching the point referred to as "net profit." About the only thing they all seem to agree on is that profit margins are currently under some serious downward pressure!

For the sake of our discussion, consider gross profit to be what is left when you meet all of your recurring monthly commitments, but before you take care of all the other things that are clamoring for your money. It is pretty tough to argue with the definition of net profit being the amount you retain for yourself after every other claim has been paid.

With our definitions firmly in place, I would like to concentrate for the next few moments on where profits come from. In addition, we will evaluate some of the areas where you can spend the profits you do generate.

In the automotive service industry, many of the owners and managers come from the ranks of the average worker. The typical worker was led to the industry by a love for the automobile and a deep fascination for all that makes it go. Unfortunately, such interests do little to prepare a person to manage a business as complex as an automotive service business.

Fortunately, part of the mission of the Automotive Service Association (ASA) is to provide education opportunities for you, the member. This discussion of profit and the bottom line is one such educational opportunity.

The fundamental basis for achieving a profit is to charge more for a commodity or service than what it costs to produce in the first place. When dealing with parts, which have a published price list, it is relatively easy to know when you are selling for a price greater than your cost. Your labor costs, on the other hand, are a different story. There is no published price list to tell you what an employee hour really costs. Your employees are one of your most valuable business assets, but they are also one of the most expensive! Setting your selling price and determining your profit margins are especially important when it comes to setting your labor rates.

Many repair businesses set their labor rates to be competitive with the shop down the road. While it is certainly important to consider market factors when establishing your rates, it should not be the only determining factor. You must know your costs and you must carry a reasonable profit margin if you are going to generate a profit from your billable labor!

Unfortunately, there are still many automotive repair businesses that are shortchanging themselves on their margins. Some are still accepting a percentage of an item's cost, rather than achieving their desired profit margin on the sale of parts and service. See the "Percent of Cost vs. Profit Margin" sidebar for an explanation and example of pricing methods. While this exercise may seem simplistic, a thorough understanding of margins is critical to our discussion.

Perhaps you are already up to speed on figuring margins and are currently pricing for profit. If so, why might your profit margins be feeling the same downward pressure as so many other automotive service professionals?

Many in the industry point to the rising cost of overhead as a major contributor to lower profits. Even though we are in the longest running economic expansion in the history of the United States, not all of the results are beneficial to shop owners and managers. As property values rise, so do lease rates and property taxes. Low unemployment translates into fewer qualified candidates, and higher wages for those that are available. The increased integration of electronics into vehicles translates to increased training requirements.

Increased competition is also contributing to shrinking profits. Many are convinced that the only way to compete is on the basis of price. Some are simply unaware of their true costs and don't realize they are selling below their costs until it is too late. With the expansion and availability of the Internet, consumers have greater access to information than ever before. This includes competitive pricing, not only from across town, but across the country. All of these factors contribute to pricing pressures and shrinking profits.

Even though there is pressure on your profit margins there are still incredible opportunities for the savvy automotive service owner. From my experience working for independent professionals, as well as from my consulting practice, I am convinced there are answers. The ultimate key to your success lies in how you handle the dollars between your gross and net profit. Those relatively discretionary dollars can either make or break your business.

“The ultimate key to your success lies in how you handle the dollars between your gross and net profit.”
I believe that the key to your success and continued prosperity is the proper investment of your discretionary profits. You must first and foremost invest in the education of yourself and your employees. I understand that training costs are already a big part of the budget in many automotive repair businesses. The key is to realize that education and training is an investment and not a cost.

Your own continued education is vital if you are going to have the skills necessary to lead your organization in the face of mounting competition. You need to understand business principles, employee management, marketing and customer relations. Having been an outstanding technician in the past does not necessarily qualify you as a manager today. Development of your leadership skills will allow you to act instead of reacting to changing market conditions. You must also invest in the education of your employees. Their ability to stay current on today's technology will allow them to be more effective in their jobs. Their ability to make complete and timely repairs will go a long way toward adding value for your customers.

Another area of investment is in equipment that will allow you to make better and more cost-effective repairs for your customers. This does not mean spending money to have the newest and best "whiz-bang", just to keep up with the folks across town. It does mean that you ensure your people have the tools they need to do the job right the first time. Invest in tools and equipment that will give you a solid return, either financially or in customer satisfaction.

Invest in the appearance and functionality of your facilities. Keep your shop clean and neat. You should be able to invite your customers into your business with pride. If you or your employees don't feel good about where you work it will reflect in your attitude. Next to their homes, vehicles are the largest investment most people make. Each time they bring their vehicle in and turn it over to you, they are trusting you with a big part of their lives. If they don't believe you value your own work area and property, how will they ever believe that you will show concern and responsibility for their property?

Finally, invest in customer relations training. Every person in your organization must be trained to take care of your customers. Caring for your customers and resolving their problems should be the top concern for your entire organization. After all, without your customers there is simply no reason to be in business.

Last but not least, invest during the good times to provide for the future. This certainly applies to providing for the lean times, but it also applies to such events as your retirement. Make daily investments in your own health and well being. Do something special for yourself... there is value in allowing your employees to see that you are confident enough to take a few days off, from time to time.

Ultimately, examining the bottom line is more than just a monetary evaluation. It is also a reflection of the various reasons you chose to own and manage a business in the first place. As you take an accounting of your bottom line, don't forget to factor in the customers you have served and pleased over the years. Remember the daily efforts and loyalty of your employees. Consider the value you add to your neighborhood, your community, and to the industry. Be thankful for the challenges, as well as the rewards, that have come to you over the years. All things considered, your bottom line may be better than you ever imagined!

Larry Murray is the president of Interface Network (Inter-Net), which offers training and consulting in service/support management and customer relations. He can be reached by e-mail at lcmurr@ida.net.