In a previous life, I worked for a great company that was completely and scrupulously dedicated to automotive repair shops, the shop owners and to improving their lot in life. The truth is that most shop owners work brutally long hours for little or no return on their investment in time, money, and effort. A more disturbing and frustrating truth is that nearly all these shops could and would be profitable if the owners would simply focus on operational excellence and align the business for profit.
Compared to other industries, the automotive repair industry is profit-starved, with the average shop and shop owners netting something in the low single digits. Think about that for a second. If you were to gross $1,500,000.00 (a million and a half dollars) in a year and only net 3.5 percent, you would bank $52,500. That is your paycheck and compensation for working 65 or 70 hours a week, for putting up with whining customers, lazy service advisors and bitching technicians. Is that worth it to you? My son made that when he was 19 years old as a union bricklayer. Did I mention that any equipment you would need or be forced to buy would come out of that? Or that your shop likely grossed something less than a million dollars, not that $1.5 million described here, and maybe the $52,500 would look darn good to you. If your goal in life is to work for a non-profit, volunteer at Wounded Warrior Project, Habitat for Humanity, or other great charity. Automotive repair is a for-profit venture, and it is way past time that you understood that.
Profit is your best friend
As an automotive repair shop owner, you are in the parts business and the labor business. Along with ensuring the profit structure in these separate entities within your operation, you need to work to assure your productivity and efficiency and you need to control your fixed expenses. You are in business to serve your customers, or to satisfy your ego, or because you just decided you did not want to work for someone else and opened your own shop. The reason doesn’t matter. If you are not profitable, you will be out of business. Profit is your best friend.
Parts profitability is generally simpler. The day you commit yourself to a realistic profit model or matrix and the day that you insist your people use it without exception or deviation, is the day you will start making appropriate profits on your parts. This is a frightening time for most shop owners and service advisors because you are anticipating a massive customer backlash but in my experience that will never come. Set your parts prices to make somewhere between 50 and 60 percent gross profit and move on!
Labor profits are much more complex and impacted by many factors and therefore need a greater effort to get them to a point of profitability and to maintain them there. First and foremost, you need to raise your hourly rate to a point where it can support the compensation plan (including the taxes and benefit load on what your technicians are making) you have in place for your technicians. Again, your fear will want to kick in here, fear of those angry customers but you do not sell based on your hourly rate, you sell based on a fee for a service rendered. “Mrs. Jones, that water pump and coolant flush will run you $642.83, and I can have it ready by 3:00 this afternoon.” She says yes or no (or maybe), but we do not typically have a philosophical discussion of our hourly rate. Occasionally we will get a guy that is angry or upset about a large estimate and he wants to question you on your hourly rate. Explain that excellence and value have a cost. Set your hourly rate where it needs to be to assure your profitability and move on.
Ensure the integrity of your hourly rate
As we are discussing our labor rate, we also need to be discussing how we have built our canned jobs, our discounting of our labor, our estimating process and anything else that would dig into the integrity of our hourly rate. If we pay the technician for three hours’ worth of labor, we want to collect that same three hours from the customer. Anything less than that and our effective labor rate is impacted, and we are once again giving away our profits.
Tech productivity, efficiency, and proficiency (as defined by NADA) will all impact labor margins. If we charge the customer for those three hours of labor and it takes our tech four hours to get the job done, we are not generating the labor sales we had anticipated over that period of time and are therefore missing out on those potential profits. Hire the right technicians based on knowledge, experience and efficiency and pay them in ways that encourage and reward performance. No salaries and no hourly unless there are bonuses or incentives based on production. Hire the right guys! Fire the wrong ones!
Gross profit on the labor side of your operation should be in the vicinity of 50 to 60 percent, very similar to where your parts margins should be. If you are very efficient and sell maintenance, your labor margin could easily be higher.
Keep fixed costs at 25 percent of gross sales
The money that is required for you to open the doors each month could reasonably be described as your “fixed” costs. That $1.5M shop we had described above would reasonably have fixed costs that ran somewhere in the vicinity of 25 percent of gross sales. We could talk for hours about what would be and what wouldn’t be included here, but suffice it to say that opening the doors each day, rent, utilities, various fees unrelated to the cost of labor or cost of parts would all be included. The lower you can maintain this number without impacting your ability to do business, the greater chance you have of being that profitable shop we are talking about. If you are one of those guys who wants to buy all the best equipment, expand, and landscape the lot, not a problem, just increase your sales so that by spending those dollars, your fixed costs remain at or around that 25 percent of gross sales. If you are one of those shops whose fixed costs are above 30 percent, it’s time to audit those expenses and either increase your sales or put your shop on an expense diet. Sales do not matter if your spending habits outstrip them. Live within your means and control your expenses.
The math is simple, if you can generate that same $1,500,000 in gross sales, with 50 percent gross profit out of your parts and labor operations and maintain your fixed cost at 25 percent, you would net 25 percent (50 percent GP minus 25 percent fixed costs) instead of that 3.5 percent we had talked about earlier.
I am guessing that you could find something to do with that $375,000 you would be netting at that point. I am also guessing that you could see your way to getting comfortable and cozy with profit.
The profit potential is out there. What are you waiting for?
