With a deathly ill economy languishing in critical condition, owners of collision repair shops are being urged to conduct a triage and take the financial temperature of your business – stat!
A thorough examination of sales dollars coming in and cost dollars going out will help render a diagnosis of what might be ailing your operation, ultimately leading to an effective treatment regimen.
The process involves minding your key performance indicators (KPIs) and benchmarks. Benchmarks are standardized industry percentage goals, while KPIs encompass the figures your business is generating at this moment.
“There are all sorts of things you can do, but it means researching the numbers and making some hard decisions,” says Darrell Amberson, collision division director for the Automotive Service Association (ASA).
Industry-wide sales are off anywhere from 10 percent to 40 percent, according to Amberson, president of six Lehman’s Garage outlets throughout the Twin Cities region of Minnesota.
“We’ve been living that,” he says. “The economic conditions are catching up to us. I’ve cut some staff, and it tears my heart out.”
By delving into your cost and profit figures, “you protect yourself so you can weather this economic storm. If you’re in an area where collision work is drying up you’re going to have to act; the whole key to this is knowing where you are at,” Amberson advises.
Industry leaders, exchanging frankness for anonymity, indicate that it remains a too-common practice for an owner to still rely on the outmoded method of judging a shop’s health by merely monitoring the end-of-month checkbook balance.
“I suspect that there are many who are conducting their businesses that way,” says one. “They got into the body shop business because they like to fix cars,” and have been slow to develop an acumen for keeping the bottom line straight.
“The ‘gut feeling’ was the way some business owners in the past may have been able to sense how the business was doing,” says another, “but those days are over.”
“For business owners, all the talk about the economic crisis and a Wall Street meltdown is irrelevant,” says industry consultant Paul Rauseo, managing director of George S. May International. “What matters now is how a specific business is affected. Regardless of the impact, the heightened awareness and panic serves as an excellent wakeup call that now is the time to take a hard look at business performance.”
Lehman’s has long kept careful tabs on its financial condition, and Amberson has embarked upon an effort of gauging the impact of future sales declines should they occur.
“The approach I’m taking is looking at what-ifs,” he explains. “The point of this exercise is to adjust your company down to the point where you can at least break even in a reduced sales situation: How big a loss can you sustain and for how long? To maintain the same benchmarks you have to adjust the cost factors.”
The process of taking the financial temperature of your business has little relevance to what a competitive shop is doing. There will be opportunities to pursue that aspect later on. “Work on what you are doing,” says industry consultant Ron Kuehn, president of Collision Business Solutions.
Rauseo says, “too often business owners get so tied up handling the day-to-day demands that they have no time to step back and evaluate the direction and focus of the operation. Their focus is lost in external issues – like today’s credit crunch or what their competitors are doing – when addressing the needs of their own business and managing for profits is the only important thing.”
If the performance of a neighboring shop remains a distraction that still causes you concern, some insight can be gleaned by becoming familiar with your own operation. “The more you’re educated on your business, the more you’ll know what’s going on with the competition,” Kuehn says.
CARSTAR has an education, development, growth and excellence (EDGE program. There are 12 consultants on board to assist the franchisees in submitting a three-year business and operating plan “complete with an assessment of the competition around their shops plus any opportunities they see in the near future,” says Jo Pierce, assistant vice president and director of corporate initiatives.
Monthly “flash reporting” is another element, and the company has a staffing matrix that will show a shop how many people there should be in the front office and in the production area. “Most shops can reduce overhead anywhere from 5 percent to 12 percent depending on their current staffing levels and still take care of the customer,” Pierce says. “Reducing overhead puts dollars on the bottom line as well.”
“Profitability comes from cutting costs and increasing productivity, which is accomplished through a planned profit model,” notes Rauseo. “Businesses that can implement one into their strategy and daily operations can thrive even in today’s markets. The first and most important question you need ask as a business owner or manager is: ‘Are we profitable, and if not, how can we become profitable?’”
Kuehn says, “the economic engine of the collision business model is driven by your ability to convert labor hours into dollars. Everything else is ancillary to that.”
An accounting of your shop’s performance levels relates to a comparison to stated industry benchmarks, “like peeling away the layers of an onion,” according to Kuehn.
And the benchmarks will vary. “There’s a bandwidth on both sides,” he says. “This is not a boilerplate thing; this is not chiseled in granite. Each one lays a building block or foundation, and then you’re going to dig into that and peel away that onion.”
A partial sampling of Kuehn’s benchmarking figures (there are many more, including administrative overhead, real estate, taxes, etc.) on a shop’s profit and loss statement could consist of:
Parts sales 42 percent
Labor sales 45 percent
Sublet sales 3.0 percent
Paint and material sales 10 percent
Parts costs 30.2 percent
Labor costs 16.7 percent
Sublet costs 2.4 percent
Paint and material costs 6.0 percent
Parts profit 28 percent
Labor profit 63 percent
Sublet profit 20 percent
Paint and material profit 40 percent
“A benchmark is nothing more than something you gauge yourself from,” says Kuehn.
Aim to keep your labor costs at around 15 percent to 17 percent.
Measuring how a business actually performs, however, is subject to numerous factors, such as the region in which you are located, the number of direct repair programs (DRPs) you participate in, the types of customers you attract and the time-of-year or weather conditions.
If the drivers in your area are prone to sliding into each other on ice-covered roads, a mild winter may have an impact on sales, as would a furious hailstorm, a flurry of tree limb-busting high winds or other climatologic calamity.
“Let’s talk about your clientele base,” says Kuehn. “What types of cars do you repair?” Are they mostly General Motors nameplates or imports from Japan or Germany? “OE parts for German cars are inherently higher, so the benchmarks are going to be different.”
Volume discounts on parts may be obtainable if you’re able to buy them by the truckload, while a smaller operation won’t have that opportunity. If you’ve negotiated discounts from your suppliers, make sure you don’t overlook overcharging “because you’re not keeping track of your invoices,” he suggests.
“For sublets, this is an area that’s all over the map,” Kuehn reports. “A lot of DRPs don’t allow you to make a profit on towing, and some don’t allow you to mark up any sublet, or they’ll put a ceiling on it. Some insurance companies have set prices for those sublets.”
As you analyze your business, if you’re too far away from a particular benchmark, “you can dig in and look for why that number is different and if there is something that you can do to move that number – sometimes you can, and sometimes you can’t,” he adds.
The main part is monitoring your situation with an eye toward coming up with solutions.
“We have to figure out where we can cut these expenses without hurting the business,” says Kuehn. “It’s people management and process management to maximize your gross profit.”
Addressing the cost of labor regarding your support personnel and collision repair specialists can be especially vexing.
When Kuehn conducts consultation classes among shop owners, he consistently garners an audible gasp when he says, “flat rate and commission promotes slothful management practices.”
Flat rate and commission-based payment strategies can hinder cross training among the staff and lead to “territorial” concerns when multiple employees perform tasks on the same vehicle. “You have to stop having surgeons doing the work of general practitioners, and you have to pay them accordingly,” notes Kuehn, saying hourly pay rates are frequently more cost effective – except when a shop has pronounced peaks and valleys of business coming in. You want to avoid being obligated to fund hourly workers when there are not enough customers to support it.
“If you have a steady workflow, that hourly rate will work. Good management can fix cars quickly and profitably in that type of situation. An hourly rate depends upon the ability to keep the shop busy and the ability of the manager to manage the people and the workflow,” he says.
“You’ve got to figure out how to maximize the labor for profitability, but the technicians still have to make a viable wage. It’s a balancing act,” says Kuehn.
Tracking efficiency is critically important, according to Rauseo at George S. May. “To measure efficiency, one must look at what is expected of the employee, what they accomplish in a given amount of time, what the variance is, and how to narrow the variance,” he says.
“If a shop owner tracks the steps of a technician, they will usually see that the tech spends a lot of time waiting at the parts window or just waiting. A simple procedure where each job is ‘staged’ (the night before) will increase the efficiency of the techs,” says Rauseo.
“The efficiency of techs is directly related now to motivation.” Rauseo encourages adopting a company culture that encourages each worker to become a “stakeholder” in the business. “A stakeholder in the collision business will not only do the (assigned) repair, but they will look after any other repairs that may be necessary” and in-turn perhaps bring in more revenue.
“A stakeholder understands how they affect the company’s bottom line,” he elaborates. “An employee worries about doing a good job and getting paid – there’s a big difference. You want your employees to be stakeholders so they’re always interested in the financial health of the company.”
Shop owners are increasing picking up on this concept. “That’s a big ‘ah-ah’ in getting through this recession,” Rauseo says.
Pay reductions also are being seen in these hard times. “They’re calling in people and asking them to take a 10 percent pay cut,” he reports. “And for the first time, employees are saying, ‘thank you,’ because they’re thankful that the company is being fiscally responsible to save their job. Can you imagine what they would have said a couple of years ago?”
Layoffs may be in the offing if a shop’s economic condition is seriously grim. Yet this prospect can be profoundly upsetting – or even rejected outright; it can be particularly troubling in smaller shops where the owner has longtime personal connections with employees and their families.
“Don’t let your own kindness jeopardize your business,” cautions Lehman’s Amberson. “As leaders it is our job to protect the organization. Eventually you’ll jeopardize the rest of the staff” should the company be forced out of business.
