Are you making enough?

Beware the number Nazis
“Wherever a shop is on the “all parts/no labor” to “no labor/all parts” spectrum, standard one-for-all formulas just don’t work,” Witt said. Shops need to understand what the products and services they off cost, in order to then determine where the real opportunities for them in their market are. To get there, and beyond to improved profitability, shops need to take a different approach and make it work, Witt suggested.

That approach is cost accounting, according to Witt, a complex topic when just the theory is studied, but far more easily understood in the light of the many practical, automotive shop examples that he covered during the presentation. “People need to know how to price their services,” he said. “It is the science of breaking down the individual steps in a process, to see how much each step costs in an effort to gain efficiency and/or reduce costs.”

“However, of those who say they do this, so many of us who own shops today were technicians once and lack the necessary management training needed to be sustainable, especially in a business where the products, skills and knowledge needed to service and repair vehicles is growing ever more complex. As a result, Witt explained too many follow the herd, make incorrect assumptions, or simply never bother to consider what brings value verses what doesn’t.
 
Looking at the steps that build the cost of a product is essential, for eliminating the steps that added cost, but no value can plug the cash drain in a shop. Examples of areas where shops can go wrong include inventory-handling costs, not understanding how to purchase the right piece of equipment and structuring a profitable, rather than profit draining promotional campaign.

Witt said that boiled down to its essence, cost accounting serves two purposes. First, it serves to help shop owners find and address instances where operational steps add cost, but no value. Secondly, cost accounting empowers shop owners to understand which operations make the most money and which ones don’t.

Let gross profit per hour be your compass, not an anchor
Using a cost accounting approach to running a shop requires a shop owner to be disciplined. Understanding a few key terms, what they mean, not just what they are, is key.

1. Parts-to-labor ratio: This ratio can show whether a shop is under- or over-charging for its labor. While merely an indicator, Witt said that the key here is to ensure that a shop’s total gross profit on labor is somewhere between 50 and 60 percent.
2. Net effective labor rate: This rate is simply what the average billed hour actually sells for, which is usually a much different than the shop’s posted rate, which is often used for preparing and quoting estimates. “For financial purposes,” Witt asserted, “net effective labor rate should always be used in evaluating operations.
3. Gross profit per billed hour (GPH): “This is probably the best method to establish pricing,” Witt noted. “GPH is arrived at by taking all of your expenses for a month, adding in a reasonable allowance for profit and return-on-investment, and then dividing that total by the number of total billed hours. “Although this is just an average and won’t be attainable on every job, it will be an effective financial tool to help a shop owner manage his business and pricing.”

Witt leverages a number of typical services that shops provide – including changing the rear main seal, selling tires and installing engines – to establish understanding. “It’s critical that a shop determines if or how it can make money on each and every job. In addition, it’s just as important that a shop owner know how to evaluate the net return on owning a piece of equipment as readily as the cost of not owning a certain piece of equipment.”

Don’t give a good customer a reason to leave
“You need to do everything you can to keep your customer’s in your shop and your shop only,” Witt emphasized. “Even if it’s work you don’t normally perform, consider taking those cars in your front door, then driving it to another shop that does and treating it like a sublet.”

There are about a half-dozen jobs in any market that shops will field more price-shopping on. “You have to have your bid prices in the ball park,” Witt shared. “The price shopping is over once the car is in the air and the wheels are off.” Pre-inspection should be done on all vehicles. “Keep lower prices on those jobs that people commonly compare prices on and raise other ‘less-shopped’ jobs until the mix is where you need your GPH to be.”

One of these price-shopped jobs is the oil change. Witt suggests rename this “periodic maintenance’ and combine it with other common jobs such as tire rotations, brake inspections, and more. He adds that shops should save their certified Master Technicians for more important tasks, hire someone right out of high school, train them to do the changes thoroughly and delegate them to this while they pursue certifications. 

The key is for shops to uses these oil changes as opportunities to build relationships, as well as perform an inspection for any other necessary work. “If you don’t see your customers lining up for oil changes, you lose contact with them and they may just get out of the habit of coming to your shop.” Taking the time to dialogue with customers provides other insights and benefits for a shop owner. For instance, a shop owner can develop a nose for good verses predatory customers. Learning to screen out ‘bad’ customers early can save headaches and costs later. Remember, not everyone should be your customer.

Using good-better-best tiered pricing can also be a useful tool for handling buyer resistance. It allows you to office a few price/value propositions that don’t compromise your shops GPH in addition to providing a reading of the type of customer you are dealing with. This gives a shop the chance to talk with the customer, up-sell where possible, and in the simple acts of conversing and listening, build relationship over time. “People are really just looking for someone they can trust to fix their car right the first time and treat them well in the process.”

Other areas that shops neglect include knowing and factoring in the cost of writing a repair order, as well as the myriad number of shop supplies. Another means of limiting shop productivity is overloading service advisors such that they are so busy they create a logjam for the technicians in the shop needing parts, authorizations and more. Because advisors represent many technicians and others in the background, the value of having capacity at the counter can lead to savings and improved productivity in the bays and a shop’s bottom line.

Witt encourages shop owners to begin to collect and analyze their own shop data to establish the only base line that matters – your’s.  Change things slowly, so that the chaos of making too many changes doesn’t become overwhelming, let alone cloud which changes were positive and which ones weren’t. Finally, accept that there is more than one solution to any situation, and that sometimes, with the blinders off, the best fix isn’t to reduce something, it’s to increase something else.