Gross profit is the path, and cash (NOP) is our destination

Car counts in most shops these days are very strong. The availability and price of new cars have many consumers holding on to their vehicles for much longer, which of course is driving sales opportunities across the industry. Unfortunately, more cars and increased sales have not translated into increased profits. This is resulting in many shops and shop owners working much harder, with little or nothing to show for it. The old saying "The best way to make a million dollars in the automotive repair industry is to start with two million dollars" would seem all too true for many shops and shop owners. As always, cash (in the form of profits) is king.  

When running a shop that is losing money or only marginally profitable, the choices will often fall between increasing sales, cutting expenses, or increasing gross profit.

We used to do an exercise where we would take a hypothetical shop with hypothetical sales, costs, and expenses. We would ask shop owners what things they would do to increase net operating profit (NOP). The most common response we would get was to increase sales. Maintaining shop efficiencies and margins where they were, we would increase our imagined sales by 20 percent. There was no discussion of our ability to handle this or if it was even practical. We would add 20 percent to the top line, track flow through to the bottom line, and note net operating profit dollars generated, a significant number to be sure! In the practical world, you cannot budget for a sales increase such as this, and unless there is an effort toward being more efficient, productive, and proficient, you are likely to be very busy, much more stressed, and only marginally better off for all the effort.

Next, we took our hypothetical shop and decreased our expenses (fixed costs) by 10 percent. Again, in the real world, it is not entirely practical that we cut our expenses by this drastic of an amount (but for the sake of this exercise, we would do it and with all other performances being equal). We again tracked bottom-line performance. There is no doubt that the very second you reduce expenses you will see an improved bottom line, and we did, an even larger number! In most shops, rent is the single largest expense (with marketing being a distant second). I would encourage any shop owner to frequently audit expenses and look for ways to reduce these numbers, but only those that would allow us to continue to operate efficiently and effectively.

Finally, we took this imaginary shop and simply manipulated the cost numbers to show a 5 percent increase in gross profit. Now, unlike the other two exercises, this small increase in gross profit would be completely practical and, in most cases, easily doable.

With a very modest adjustment in how we price our parts, how we pay our techs, and how well we control payroll, we could easily improve gross profit by 5 percent. Other ways would include asking for deeper discounts from our parts vendors (if we also adjust our pricing to assure a reasonable return) or building our menu items and canned jobs to reflect a very modest gross profit increase. And finally, pay attention to what prices we end up charging our customers. Negotiating a great price with our vendors will mean little if we give it away in discounts. In doing this exercise, we were able to improve bottom-line performance dramatically (and well beyond what we accomplished with a huge increase in sales) and much better than we accomplished in slashing our expenses.

Before I move on, I want to be careful in explaining what I meant by making "modest adjustments" in how we pay our techs. I am of the strong opinion that as an industry, we have not done enough to make being a technician a viable career option, and what I am suggesting here is not in any way cutting the wages of our technicians. Instead, just like in other areas, I am going to suggest we find ways to support, encourage and motivate our technicians, helping them find ways to be more productive, more efficient, and more proficient. Our path to increased profits goes right through their bays. Our success is tied to their success.

For canned jobs and menu items, such as transmission flushes, it is crucial to find a balance between profitability and competition. However, shops will often credit technicians for an hour of labor on these services but in trying to be price competitive, only charge customers for 0.6 hours (and there goes the profit). Crediting a tech .6 hours on a service that takes 20 minutes is fair and reasonable, though your technician might or might not agree. In the long run, the shop being viable and profitable is a win for everyone. Consider the following example of a transmission flush, where we are using a $145/hour floor rate and a $35/hour flat rate for the tech, profitability can be built into a retail price for this job or any typical service.

Find practical solutions

In searching for solutions to our problems with profitability, we need to be practical and confine our efforts to those things that we can reasonably accomplish. Chasing sales numbers would seem a reasonable response, but unless you are profitable, which the average shop is not (or not as profitable as it needs to be), you will work very hard for a modest return. Cutting expenses is another rational approach but one limited by what is real and achievable. Few businesses have 10 percent fat to trim from their expenses and too often in the effort, we end up reducing our ability to operate efficiently. Sprinting with one less leg becomes an exercise in futility. Most important in all of this is how easily we can affect gross profit. We just need to get a little better at things we already do.

Try something different; be profitable.