In part one of Back To The Very Basics, we discussed the 15 basic touchpoints a service advisor has in transactions with the shop’s clients. All of those processes need to go well in order for there to be a sale. The client’s concern needs to be identified, an estimate needs to be created, the work needs to be performed, and an invoice needs to be created and paid for.
In that exchange of money for time and materials, there needs to be a profit. That sale must pay for the cost of goods, and then have enough gross profit to help the shop survive and thrive.
Most people in business focus on sales, but I feel that focus is misdirected. I think businesses should focus on gross profit. Gross profit is the money that is left over after you pay for your cost of goods (COGS). In an automotive shop, COGS is the cost of the parts you buy from your supplier plus your technicians’ wages. Once you have gross profit, you can pay for your expenses and your net profit.
Of course you need sales, but if the sales are not generating the gross profit you need, this situation needs to be re-evaluated. I have seen shops so focused on sales, without enough gross profit, that they actually lose money – their fixed expenses surpass the gross profit generated. (I once worked with an owner who did $3 million in sales in a year and he needed to take money out of his personal RRSPs to make payroll in December!)
In our industry, the mechanical gross profit should be 60% of sales.
Mechanical gross profit is the combination of the gross profit of service and parts. Gross profit is also generated by tire revenue, sublet revenue, and maybe some other revenue categories. Let’s focus on the mechanical gross profit, so that we can compare apples to apples from one shop to another and to the benchmarks.
There are several ways for a shop owner to know if their business is healthy at a glance. The first is the ratio of fixed expenses to sales. Fixed expenses are things like occupancy costs, service advisor wages, management wages, utilities, etc. (As explained above, parts purchases and technician wages are considered variable expenses, generally called cost of goods (COGS).) They are not included in this ratio. The guideline of the ratio is 40% of sales in fixed expenses.
Example: Monthly sales of $100,000 and monthly expenses of $45,000 would give a 45% ratio. This might mean that the expenses are too high and need to be managed, or if the expenses have been managed as well as possible, this shop would need more sales.
Another quick way to know how you are doing on a daily basis is to calculate your fixed expenses per day and your gross profit dollars per day, to arrive at your net profit per day. Example: $45,000 ÷ 21 days = $2,142.86 in fixed expenses per day. Let’s assume this shop is generating $55,000 in gross profit in a month. That would be $55,000 ÷ 21 = $2,619.05 in gross profit per day. That would leave us $476.19 in net profit per day. If you then take the sales of $100,000 and divide by 21, you get $4,761.90. $476.19 net profit per day divided by $4,761.90 sales per day, gives you a net profit percentage of 10%. That is better than the industry average of 7%, but shy of the benchmark of 20%.
Lastly, we can take a look at a shop’s profitability by invoice. For the sake of this example, let’s say this shop did 225 invoices this month. Expenses of $45,000 ÷ 225= $200 fixed cost per invoice. The question a shop owner needs to ask themselves at this point is, how many invoices a month did I lose money on? This shop would need an average work order size of $444.44 to be profitable.
That means that all of those one-line work orders are a losing proposition. How many standalone oil changes or tire changeovers did you do last month? The best tool you have to improve this is inspections. In fact, digital inspections are the leading way to serve a client better and to achieve more sales per work order.
Let’s say 80 of this month’s invoices were less than $150. I am convinced that eight of those vehicles would need a battery, eight would need wiper blades, eight would need an air filter and cabin air filter, eight would need tires, eight would need a brake service, eight would need a transmission service, eight would need an injector or combustion chamber cleaning, eight would need a serpentine belt, and eight would need a cooling system flush. That is a list of 10 services a vehicle might need, and it is only a start.
We have covered a small handful of key performance indicators that a shop owner can use to check on the health of their business on a daily basis. There are, of course, dozens of KPIs we could look at, but those exist to diagnose what is going on when the basic numbers are not where they need to be.
We have also left you with a simple action plan: to perform a very basic visual digital inspection on every vehicle that comes to your shop. Let your customer know that you will be doing this; mention it to them while the vehicle is still in the bay. I know your sales per work order will go up significantly, and your clients will thank you for helping them look after their vehicle.