Armed with this information, you can make an offer on the vehicle that allows you to make an acceptable profit once it's sold. This is considered before you make an offer because you don't want to lose money on the deal.
This same common sense should apply to the operation of your shop. Almost every day I hear about how difficult it is to make a profit in this industry and economy. Granted, it's more difficult than it used to be. Making a profit requires effort. Start by compiling information about your operation because you can't improve performance in any area until you can measure it.
Consider a few basic measurements: break even, gross profit and average repair order (RO). You don't need to have a master's in accounting to understand this, so don't be afraid to learn these basics.
Break even
Break even represents all monthly operating costs added together. When revenue exceeds costs, you make a profit. The point at which revenue equals costs is considered the break-even point. Every shop operator needs to know its break-even number.
Even if you don't have an accounting system, determine your break-even number by adding every monthly cost. Build a spreadsheet including payroll, utilities, rent or mortgage, car payments, etc. – whatever you spend monthly on bills and costs. The resulting number is the break-even number. As an example, say the break-even number is $40,000. This means you have to generate $40,000 of revenue before you make a profit. Remember, 40K in revenue, not sales. Every sale has a cost, and the profit on each sale is how you generate revenue. That revenue number is gross profit.
Once you've developed the spread sheet and determined break-even numbers, look closely at what goes into making up that number. Is there something you pay for monthly you can get for less by careful shopping? Is there something you can do without? By eliminating unneeded items and costs, you'll lower the break-even number and give yourself the opportunity to make a larger profit. Lower costs equal greater profit. It's difficult to save your way to profitability, but every little bit helps. Learn to buy only what you need to get the job done, nothing more. Time is money, so don't do away with things that help productivity.
Gross profit
Every vehicle you repair has a cost associated with it. There's a cost to buy parts, pay for labor, and buy paint and materials. The difference between what you charge for the repair and what it costs you to do the repair is the gross profit. What's the average gross profit of your repair work? What should it be?
On average, it's generally accepted the per-repair gross profit should be about 45 percent. Simplistically, if you're charging $1,000 for a repair, you should be making at least $450 of profit after all expenses are applied. Many owners do much better than this number; however, it should be your goal to achieve this amount at minimum.
Let's look at the $40,000 break-even number again. To generate $40,000 of revenue, we have to produce about $90,000 of sales (90K multiplied by 45 percent equals 40K). How many jobs does that work out to be? If you know your average RO, you know how many cars you need to reach that number.
Average RO
To determine your average RO, take total monthly sales dollars and divide that by the number of vehicles repaired in that time frame. The resulting number is the average RO. There's no industry-wide average RO, but, in general, an average of about $2,000 appears to be normal, although this number varies throughout the country. To generate 90K of revenue, at an average RO of $2,000, how many cars need to be fixed in a month? (90 divided by 2,000 equals 45.)
It's important to understand these basics before moving on because this information is going to help determine your profit margins more effectively. If you break a problem down into bite-size chunks, it's easier to digest. So let's break down the numbers a little more. In an average 21-workday month, if you need to fix 45 cars a month, you'll need to repair about two cars a day. Does that sound easier than fixing 90 cars a month? It shouldn't be too difficult for most shops.
Tweaking it
What if your average gross profit is less than the standard 45 percent? What if your average RO is $1,200 not $2,000? These are problems that can be fixed.
First, look at average RO dollars. Sound business practices and honesty prevent us from simply padding the repair estimate to boost the average RO. However, it's important to charge for everything you do while performing the repairs, but, most shops don't. By charging for everything you do during the repair, you easily can boost your average RO by hundreds of dollars.
When masking a step pad on a rubber bumper cover, do you charge for that? If you can, you should. A complete estimate up front that covers every aspect of the repair is the key. Even something as simple as making certain all the clips and fasteners you use when replacing a bumper cover get charged out to the job. If you don't include everything, you're probably losing thousands of dollars a year.
Think about what's happening on each and every repair. Look at each one individually, dissecting it to verify everything you've done is reflected in the repair estimate, that all the work has been charged, and every part used is added to the repair bill.
Here's a simple exercise that highlights the importance of the process. Let's assume your shop repairs an average of 45 cars a month. After looking more closely at each job, you've been able to add about one hour in labor to every repair and about $10 in fasteners and clips to every one as well. At a labor rate of $42 an hour, you've added about $52 per job that you had been giving away previously. Maybe you aren't adding time, but are you charging your labor to the correct category? For example, you mistakenly might charge labor at a body rate rather than the correct frame or mechanical rates.
At the average of 45 cars a month, you've been able to generate an additional $2,340 a month in sales, or an additional $28,080 per year. That's a lot of money to be giving away. The additional 28K goes to the bottom line because you had been doing the work but not getting paid for it before.
There are so many areas on each job that can be addressed, especially paint and material. Make sure you're recovering your costs legitimately, and your employees aren't wasting them. If you use more than the allowed paint threshold on a job, try to recover additional costs incurred by producing an invoice for them. Jobber software should help achieve this. Many newer management systems can take information from the paint computer and apply it directly to repair orders, so you can track your paint and material costs accurately. You can track it manually if you don't have a newer system.
The key is simple: Don't give away anything that you can legitimately charge for. By looking at these areas more closely, you'll improve profits.
Departmental profit
Gross profit is affected by how you pay your employees, what you're being charged for parts, and your parts and service markups. Following are departmental profit rules of thumb to help maintain an average gross profit of at least 45 percent.
Your biggest potential for profit generally will be labor. There are many schools of thought about how to pay technicians. Some like paying them based on a percentage of labor rather than a flat rate. This ensures a consistent gross profit on labor for every job. As an example, if you pay your techs 40 percent commission, you'll always be assured of a 60 percent profit on labor, no matter the labor rate.
Another rule of thumb is to have every RO be comprised of about 50 percent to 52 percent labor. Simplistically, 52 percent of the repairs should be labor.
In general, if you fix more and replace less, you'll be assured a higher profit margin. Obviously, some things aren't repairable and must be replaced for various reasons, safety being most important. However, if doing the repair is a safe and cost-effective option, always choose it.
OEM parts profit should be about 28 percent to 32 percent and my aftermarket parts should be about 40 percent. If you're not generating similar margins in these areas, look more closely at why. You might not be receiving the proper discounts on what you buy or be properly marking up your parts.
It's easy to let details slip away in a normal hectic day, but it's within your control to not allow that to happen. The reason you do what you do is to earn a living, so why do you want to give away what you work so hard to earn if you don't have too?
Always keep in mind the aforementioned car-for-sale scenario. If you do, you'll keep more than you give away – guaranteed.
