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Your Shop Is Busy, But Is It Making Money?Posted 11/13/2000By Mark Delp
I've met and talked to several shop owners in similar situations and have gained valuable insight into the causes behind this terrible disease called "lack of profit syndrome." The cure is a three-step process that involves investigation, communication and evaluation. Investigation is the act of identifying exactly where you stand concerning profits, expenses, sales and customer satisfaction. Communication is explaining the situation to your employees, vendors and advisors. Evaluation requires using various benchmarks to make sure you stay on the right path. Although this sounds simple, amazingly most shop owners are so focused on the production side of the business that they fail to analyze the operations side. For example: How much net profit did you generate in the last quarter? If you don't know the answer, then you can grab a pencil and calculator and help yourself to some extra profits! (Before continuing, you should have a calculator handy, as well as an income statement and balance sheet.) Investigation
Start by taking your fixed monthly expenses (rent, electricity, phone, insurance) and add in all non-production salaries (secretary, accountant, parts person, service manager). We'll call this number EXP. Now take your average total labor hours over the past three months. We'll call this number LABR. Next, divide EXP by LABR and you end up with your total overhead per billable hour. Now watch how your profit magically disappears! Hypothetically, let's take what “Joe's” average technician makes per hour (plus the per hour cost for payroll taxes and benefits) to determine his per hour labor cost. Add Joe's overhead per billable hour to this to determine his TOTAL cost per hour. Profit from labor is used to pay for all overhead, your salary, and maintenance and upgrade of your building and equipment. Profit on parts is supposed to be just that: profit. If Joe's labor rate is equal to his total cost, he's barely paying his bills; if it's any less he's losing money! Net profit percentage and sales per technician are easier to compute. Your income statement should show your net profit percentage. To reach your sales per technician, take your gross sales and divide by the number of technicians. These are important numbers to keep as a means of measuring your efficiency and wastefulness. If your net profit is low but sales per tech is high, then there are wasted expenses dragging your profits down. If your net profit is high but sales per tech low, there are inefficiencies preventing your technicians from reaching their full potential. Communication The only warning I have is to open communications, but control it when having these staff meetings. Once people are free to complain about what is wrong, it can easily spiral into a gripe session and finger-pointing. I've found that setting the stage in the beginning can reduce tempers and improve morale. Here are the rules I believe all employees should follow during a staff meeting: Do not point out a problem without having thought of a possible solution, do not put others down, be open to criticism, be involved. I also believe the employer should abide by some rules: Respond quickly to ideas, if solutions cannot be implemented be sure to explain why, don't be afraid to change the way things are done or responsibilities are handled. Evaluation The first time this happened was when I landed a large account and my sales tripled from one month to the next. I was so focused on getting the cars in and out that I failed to follow my own advice and watch profit margins and expenses. You can imagine the look on my face when I finally sat down and found out just what had happened! It was painstakingly slow and tedious, but I finally returned to my previous position. To get there I had to raise my prices (I added staff to handle the workload, thus overhead went up) and reduce expenses (advertising, overtime). Now it is a bigger, stronger and smarter company that understands what it takes to succeed. I hope I've inspired you to take an hour a week to help yourself to the profits you deserve.
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Copyright (c) 1996-2008. Automotive Service Association. All rights reserved.
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Recently, I surveyed several shops in my area and found a vast [$35] difference between the highest labor rate per hour and the lowest. You could assume some of this variance is based on training of the shop personnel, equipment or services offered and some is based on ignorance. Ignorance by the shop owner of what it truly costs to do business. Most shop owners base their labor rate on a multiple of their highest paid technician and give little regard to the hidden costs of doing business. You can now set yourself apart by knowing exactly how much your total hourly cost is and what your true labor rate should be.
