Greenwood: The true cost of running your business

Here’s a useful exercise. If you normally refer to our industry as a “trade,” try replacing that word with “profession.” Not once in a while… but every time.

It will be difficult at first, but soon it will become natural.

And the difference is not just semantic. Not only does it define your work, but it defines your attitude toward your work. More and more people in our industry recognize that auto repair is not a trade or a craft, but a true profession that requires ethics, protocols, and ongoing training.

We must all acknowledge that the “trade” days are over.

The proof is all around us, from the vehicle technology we work with, to the increasingly sophisticated management procedures that ensure profitability. You can no longer run an automotive repair facility the way it was done 20 years ago. Or even 10.

A new era has arrived, and with it comes new management benchmarks and measurements. Simple sales data and car count will no longer cut it. All they measure is shop activity. They say nothing about profitability.

In this new era, the focus has to be productivity, not activity. Once you grasp the distinction, you’ll see how critical productivity is to moving your business forward.

We have learned that 60% to 65% of the business coming through a service shop today does not create a single dollar of net profit. It simply creates sales and gross profit. People out there still believe that when sales are up, they’re doing better. But that’s not necessarily the case. In fact, with the increasing complexity of today’s vehicles, it is likely that increased activity takes you farther from profitability.

It is mathematically impossible to create net profit on every job. But if you get the “busy work” down to a more reasonable 35% or 40%, your net profit will undoubtedly soar.

For most, the question becomes, what should I be measuring?

When you slow down, and take the time to do a few calculations, you will find that you have a very powerful tool at your fingertips.

Many shop operators measure the cost of doing business by dividing their total annual expenses (taken directly from their financial statement) by 365, to provide an average-cost-per-day. Others, however, divide it by the number of days that they’re actually open in a year, which gives them an average-cost-per-operating-day. This second method is more accurate and is a good starting point for measuring your business if you’ve never had one before. Given the challenges of running an automotive maintenance shop, it doesn’t really matter how many days or hours you’re open. It matters how many hours you bill.

Now, if you were to take your total labour revenue from last year in each labour category (maintenance, diagnostic, reflash, etc.) and divide it by the appropriate labour rate for that category, you’d have the total number of labour-hours-billed for each category. Add the hours up and you have the total number of hours-billed last year.

It is mathematically
impossible to create
net profit on every job.
But if you get
the “busy work”
down to a more
reasonable 35% or 40%,
your net profit will
undoubtedly soar.

If you were to take your total expenses for the year (from your accountant’s financial statement) and add the non-commodity purchases such as technician wages, freight, and anything else that your accountant put into “cost of goods sold” category, you’d have your total-operating-expenses for the year.

Finally, if you were to divide the total expenses by the total labour hours billed for the year, you’d have your average cost of running the business per billed labour hour. Take your total net from profit last year and divide it by the total billed hours to see what you made in net-profit-per-billed-hour last year.

Once you know these numbers, you can measure each job very quickly and quite accurately. First calculate the total gross profit made (include total labour revenue) on the RO. Next take the actual hours billed on that RO and multiply the hours by your average cost per billed hour that you calculated above. Take the total gross profit dollars and subtract the total cost which now gives you a reasonably accurate account of the net profit you will make on that service work. Compare that to your average net profit per billed hour last year. Are you higher or lower than last year’s average? Remember, you are in business to create net profit, not just create activity.

It is recommended that you fine tune this each month using your year-to-date numbers, always divided by the number of months to come up with your average so you know the actual average labour hours billed every month as you go through the year. When comparing your numbers to the same month of the previous year, don’t look at sales; look at the labour hours billed. If your hours billed goes up this year, then you were actually more productive. Over time, it will lower your cost-per-billed-hour. You cannot say the same thing if you just measured sales. Sales measurement is a measurement of activity only. Increased productivity, however, dramatically leads to increased bottom-line profitability.

Calculate the gross-profit-per-billed-hour for the current month and compare to the same month in the previous year. Are you up or down this year? From your monthly financial statement, using the year-to-date numbers, calculate and compare your costs per billed hour this year to last year’s. Are you up or down? Finally, take the gross-profit-per-billed-hour minus cost-per-billed-hour equals net-profit-per-billed hour. Are you up or down?

It’s important, from an attitude perspective that you know you’re making progress each day towards your annual net profit goal. This quick measurement, when used, will help keep you focused to achieve that. Keep it simple, but know your facts, because the math does not lie.

Bob Greenwood is an Accredited Master Automotive Manager (AMAM) who offers personal business coaching and ongoing management training for aftermarket shops, focusing on building net income. He can be reached at 1-800-267-5497 or greenwood@aaec.ca.