I think all of us involved in the collision repair industry have found themselves in this line of work due for the most part because of their love of cars. I know I did. I doubt many of us just decided out of the blue one day, to move toward this vocation without first being involved with or fascinated by cars in general. Because I always wanted a nice car, but didn't have the money to just buy one, necessity drove me to buy cars that needed lots of TLC. Consequently, over the years I bought and sold a lot of pretty ratty looking vehicles. Usually, these cars would need paint work, and minor repair, and because I was able to perform the work myself, I was able to buy one for a small amount of money, fix it up, and turn a tidy little profit on it when I sold it. At least I thought I was at the time anyway. In reality, I didn't look at all I had invested in some of those repairs with materials and my time, and when I did some real calculations years later, found out my profit margins weren't so good after all.
I have a feeling some of us do this today in our shops. We all think we understand the idea of profitability, but do we? My thought is no.
The definition of profitability is: The financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity.
This sounds pretty simple, and in fact it is, however, it is imperative in the collision industry, as it is in all businesses, to determine several important metrics before you can accurately gauge your profit, and then work toward improving it.
Initially, let’s look at each repair your shop performs individually. In every instance, each job you do you should make money on. Simplistically your repair charges should be more than your cost by a certain percentage. Is it always?
I am not talking about the occasional job you have to eat for whatever reason, or the rental cost, or whatever. In general, the profit you generate on each repair is what you use to pay all of your shops expenses, outside of those directly tied to the repair cost. If you don't know that average profit on each job you do, you should.
In fact you have to start here.
If you do not currently utelize some type of management system, you are already at a disadvantage. Go buy one tomorrow. You won’t survive in our highly competitive industry doing things by hand. For the sake of argument, I am assuming all of you reading this currently have a system and use it. As a rule of thumb, you should be generating at least 40 to 50% bottom line profit on every job you do. Departmentally, you should be shooting for 30 to 40% profit on parts, 35 to 40% profit on paint and material, 55 to 60% profit on labor, and 25 to 30% on sublet work. Your system will allow you to run reports that display these basic numbers by department. Looking at each department individually, will allow you to address each one, and make the improvements needed in each.
In all repair centers, labor generally offers you the greatest profit potential, as you can see, at the 60% profit target. Common sense then tells you, you should try to fix more whenever possible, since this gives you the greatest opportunity to make money. This is the first step, toward maximizing your profits, sell more labor. As a rule of thumb, you should try to maintain labor sales of at least 50% of your overall sales. Train your estimators to always look to repair first, rather than replace. Often, a damaged panel will pull, and is repairable after pulls are completed, even if it doesn't look like it at first glance. Repairing a panel is usually faster than replacing one as well. Remember, the faster a car moves through your shop, the faster you get paid, and the faster you can bring in additional work. There is no economic sense in keeping a vehicle in the shop longer than necessary. Everyone wins when your cycle time is lower.
How you pay your employees will impact your labor profit as well. I have mentioned this in prior articles, but I am a firm believer in commission over hourly or flat rate. Paying your techs on commission, always guarantees a certain percentage of labor profit, no matter what the labor rate on the particular job is. If you pay a 40% commission, you will always make 60% profit on the labor, unless you over flag. Try your best to charge for what you do. If something has to be removed to facilitate a proper repair, remove it, and charge for it. I know that with some DRP programs this might be hard, but you should always charge for what you legitimately can. Become a student of the P pages, and use them for your backup when needed. Another thing that paying on commission should help you do is drive production. I advocate not paying the tech for the entire job until it is completed. This way, there is a certain amount of urgency by your techs to get the car done....again the faster the car is done, the faster you get paid.
Next, let’s look at your parts profits. You should know by manufacturer, what percentage of profit you make when you sell a part. I know of one shop that can make up to 60% per part sold, on aftermarket parts. Taking out emotions, would it make sense for this business owner to try and sell more aftermarket parts with that kind of markup? Of course it would. Again, you have to approach the transaction from a business standpoint, not from a body techs view, or even an Insurer. Obviously, there are instances and circumstances that are going to dictate what type of parts are used in all repairs, but knowing the profit numbers will help you work smarter when selling certain lines. If you are in an area where you can work with your vendors for better discounts, do so. What a vendor offers isn't always the best they can do. A lot depends on volume, and timeliness of payments etc. You won’t know unless you ask. A vendor’s service is also a consideration with regard to profit. If your percentage is 2 points better from a vendor that stocks nothing, and it takes you days to get a part, the discounts won’t outweigh the slowdown in cycle time. It is becoming increasingly more difficult to generate an acceptable profit on parts, so be vigilant, smart, and persistent at all times regarding your cost and markups. Remember to charge for what you put on the vehicle. Adding the charges for the ten bucks in clips that you are now tossing in for free can generate quite a bit of revenue.
Paint and materials seem like they go up every day. Every time oil goes up so do material costs....but not the allowable material charges in most agreements. The first suggestion I generally make to most shops is to get a handle on waste and potential theft in this department. I have set up a system in our shops called Can Ban, where every tech gets a certain allocation of material on a cart every day. The cart is theirs, and is easy to maintain by filling it to a certain point with the pre- decided upon material list. The parts manager fills it daily, and tracks the techs usage on a spreadsheet like form with each fill.
Our standardized list allows us as the shop management to choose the most cost effective material available. I don’t stock more than we need to do our repairs, and the stock is checked daily. The carts are occasionally cleaned, and product in excess of the standard allocations is removed and put back in the shops stock. On one such clean-up day, 6 rolls of tape, and nearly two boxes of excess sand paper were gather up and re used from the paint shop. The value of the rolls and the paper was well over 100 dollars, that would just have been wasted had it not been seen, and re purposed. Every shop has waste. Working to minimize yours will help boost profitability. Since using this Can Ban method, our material bills have dramatically reduced, and I firmly believe we use what we buy, we don’t waste it.
Monitor your mixing reports, and make sure there aren't lots of over mixes and re mixes occurring. If there are, get your jobber or suppler involved for further training. No one can afford to mix too much, or waste paint mixed improperly. Set up a specific list of certain materials your shop will use but, for example, don't stock both hook it and stick it sandpaper. Choose one subsystem or the other, and use it. Keeping multiple kinds of the same grit sandpaper is really wasteful, and expensive. I rely heavily on my paint suppliers for help here, and suggest you do too. That is part of the service they offer, so make sure you use it. If you do not have a contract with a supplier, shop around and look for the best pricing. I recently compared several jobbers price on a particular kind of sandpaper. Out of 4 suppliers, each one was different, with one being almost $4.00 per box more. This was the same product from the same manufacturer. Obviously, I chose the least expensive option, and have found that the vendor is very competitive in all product lines, and has been able to save my shop me lots of expense over the past few years on supplies.
Perhaps the biggest expense in your shops is the same as mine, and that is fixed costs, like rent or mortgage, heat, light, taxes, phone bills etc. All the things you need to pay for, but have less control over than the cost going into your repairs. I suggest you tabulate all these expenses, and just like the costs involved in the repair directly, look at each one individually, and see what can be done to reduce them. If your mortgage is high, try to re finance. If your car payments are staggering, maybe consider getting a less expensive vehicle, or rolling some costs into a loan with less interest.
The best way to impact profit is to increase sales out of the same square footage you use today. The base overhead will go up slightly with increased sales, but at a smaller percentage than the sales revenue increase. The key is really to never be complacent in your business in any area. Many of us find ourselves wrapped up in the problems of the day to day operation, and don’t take the time to look at all the areas that may be suffering and in need of attention. It happens to the best of us, but realizing you have a problem, is the first step toward correcting it. The morning after you read this, spend a couple hours looking at all these issues before you start your normal day. I think you will be surprised at what you see. From then on, spend some time every day to look at the big picture, and soon you will find your day, and the shops bottom line, looking a lot better.
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