It’s Your Business
- Subject: Tracking statistics to keep your business profitable
- Essential Reading: Shop Owner, Center Manager
- Author: Terry Greenhut, Transmission Digest Business Editor
You do, but only if you aspire to a higher level of success. It’s amazing how some business owners count very heavily on statistics but others rarely, if ever, look at their numbers.
You’ll get shop owners who’ll tell you they don’t need to look. They analyzed their numbers years ago and know at a glance whether they are making money on particular jobs or on the business as a whole. On the other end of the spectrum you’ll find the owners who dote on the numbers every day to see how they’re doing. They watch their percentages change when the cost of goods increases and, it’s hoped, at that point raise their parts markup and/or labor rate to make up for the shortfall. Some are so busy analyzing they forget why they are doing it and don’t spend nearly enough time fixing the problems that might be keeping them from making really good money.
What it comes down to is that if the shop is doing well and the owner derives pleasure from looking at the numbers he or she will want to see them far more often than if the shop is in trouble. Of course, it really should be the other way around. When it isn’t going well, that’s the time to really scrutinize the numbers to see what needs to be changed to create a profitable atmosphere. It’s really wonderful to know when the shop is making lots of profit. It’s even more important to know when it isn’t, so it can be fixed.
How many statistics do you need? Which ones are really important and should be tracked diligently, and which are OK with an occasional look-see? My own personal favorites to watch are gross sales and gross-profit margin. Those will easily yield gross-profit percentage. Gross profit is the amount you are left with after you pay for the cost of goods sold. In our case that’s the parts and anything else you buy that has to go directly into the job. Transmission fluid, oil and antifreeze would be good examples.
Once you know the gross profit you can then deduct all your payroll and other operating expenses (usually known as fixed costs) to find out what your net pretax profit will be.
Since your fixed costs don’t change all that much from month to month – not that you shouldn’t track them to be sure they don’t change – knowing your gross profit can give you your net-profit figure at a glance whenever you want it. Once established, your gross-profit percentage acts as an instant indicator as to what changes will need to be made to keep the business at its maximum earning capacity.
For example, let’s say that your gross-profit percentage on $100,000 a month in sales is 60%. That means you have $60,000 left after paying for parts to take care of payroll and all your other operating costs, including your profit. Whenever you see either that percentage or your gross-sales figure decrease by a couple of points you know that it’s time to take some action to bring it back into the proper operating range. Generally, when this happens it is because your parts cost has increased but your selling price hasn’t, so the solution is to raise your parts profit percentage by a couple of points so you are charging a bit more until your numbers get back in line so your gross-profit percentage is maintained.
If, on the other hand, gross sales and gross-profit percentage go up you get to sing one chorus, and only one chorus, of “We’re in the Money.” Any more than that and you would be pressing your luck; so gross profit and gross-profit percentage are really good numbers to watch.
Another pair of numbers that will show a change in your profit picture instantly is your labor cost as a percentage of gross sales and your parts cost as a percentage of gross sales. If your labor cost is normally 25% of gross sales and you see it start to creep up, you can quickly raise your labor rate or find out what’s hurting productivity so you can attend to it immediately. Similarly, if your parts percentage is going up you can look for more-cost-effective parts solutions or increase your markup. The idea is to have those numbers available at a glance so you can fix small profit problems before they become insurmountable ones.
The next number that really means a lot is technician productivity. Many shop owners lie to themselves about how productive technicians really are and how it affects their bottom line. This is especially true if the technicians’ pay is based on a weekly salary or an hourly wage. The only way to know how productive your technicians are is to pay them on the basis of book time charged to the customer vs. actual time taken to complete the task. If you are charging 10 hours and they complete the job in less than 10, they are productive. In fact, they are better than 100% productive. If they are not finishing the job on time or better, they are not very productive and are costing you more in some instances than they are making for you.
With the national average of technician productivity hovering around 50%, a job that’s sold for five hours is often taking 10 to complete. On the basis of that the hourly rate that the shop charges is off by about 50%, so with the assumption being that the technicians will be 100% productive when the owner establishes the hourly rate, he now finds that his effective hourly rate is only half of what he’s charging. It pretty well explains why the shop isn’t making money, so technician productivity is a key factor in shop profitability.
Questions to then ask yourself about your shop’s productivity before you decide that it’s all your technicians’ fault for the lack of production and shop profitability:
- 1) Are my technicians in need of training to complete tasks more quickly? Should I be providing more of it?
- 2) Am I giving them enough information about each job or letting them know where to find it?
- 3) Am I underestimating jobs? Am I not leaving enough wiggle room in case the book time doesn’t cover my real time spent? Am I factoring in weather conditions (like having to remove snow from cars in the winter before working on them or spending extra time trying to locate or pick up special parts?) Do I forget to charge for the extras?
- 4) Do I provide all necessary equipment and shop tools to speed production?
- 5) Is the shop organized for maximum throughput?
- 6) Do I anticipate and keep fast-moving parts always in stock?
- 7) Do I order parts up front for jobs that I’m reasonably sure I will sell?
- 8) Am I assigning the right technician to the right job?
- 9) Am I creating bottlenecks by the way I go about selling and scheduling work?
- 10) Do I have someone call to verify appointments in advance so customers show up on time?
- 11) Do I subscribe to a service that will help my technicians find the information they need or chat with other technicians to find out how they solved the same problem?
- 12) Do I maximize every sale (try to sell everything that’s found to be needed during the vehicle inspection) to keep from having to bring customers’ cars back over and over again for things that can be done now?
- 13) Do I order the best possible parts to keep my comeback rate as low as it can be?
- 14) Do I insist on replacing parts that will cause the good parts I am installing to fail or prematurely wear?
Any comeback or never-leave eats up resources like crazy. Although it may take a technician only an hour to fix a problem initially, it often takes three technicians and the shop owner to diagnose and fix a comeback. Although that in itself costs a lot of money it’s nothing compared with the loss of revenue from the other vehicles that are not being worked on until this comeback is handled, so comebacks and their true costs are additional stats you should want to keep.
Tracking statistics may seem like extra work, but if it can help you identify problems earlier it could make or save the shop a lot in the long run – definitely worth the little bit of time and extra effort.
Terry Greenhut, Transmission Digest Business Editor. Visit www.TerryGreenhut.com.