FOR MOST OF my life, I haven't been a big fan of math. I did what I needed to do to get through math classes in high school and beyond, but I didn't embrace its benefits. As I grew older, however, something changed. I began to understand the benefits of a thorough understanding of mathematic principles and applications of those principles in daily life. I began to understand most of what I did every day involved math. The light bulb finally went on.
Now I look at math as a challenge and source for answers to questions about everything. By understanding basic finance principles, I was able to increase my business and create more accurate projections of my potential for success. Basic financial knowledge allows you to measure performance so you can improve it.
Most of us have heard buzz words and acronyms such as EBITDA, net, EBIT, markup, discount and margin – all of which are important. But the first basic principle you need to understand is gross profit, which equates to the selling price per job minus the cost per job. In other words, it's the selling price of a repair, or a completed RO total, minus the direct costs involved in doing the repair. Pretty simple.
These costs should be broken down by category or job costed. For example, a shop completed a repair for a customer on his new minivan, and the total repair bill was $1,000. This repair number was derived through the estimating system. The sale breaks down like this:
- Labor – $650
- Parts – $250
- Material – $50
- Tax – $27
- Sublet – $23
The total repair cost $1,000. To accurately job cost this repair, you need to know the cost associated with each department. How much did the labor cost you? The parts? The material? This might be difficult to do by hand, but it's not impossible. I don't recommend calculating these percentages by hand. Every shop should use a management system. If you don't have one, get one as soon as possible. There are robust products on the market that will provide all of these numbers for a minimal cost. In our fast-paced world of business, it's almost impossible not to use some type of management system to run an operation.
In each department, you should make a certain gross profit percentage. The total of these departmental percentages, when averaged, will be the overall gross profit. As a rule of thumb, try to maintain a gross profit average of 45 percent or more on every job. Obviously, the higher the gross profit percentage, the higher the net profit. In the example repair, the profit percentages are:
- Labor – 60 percent (attained by paying techs on a 60/40 split).
- Parts – 30 percent (attained by negotiating good discounts with vendors).
- Paint and material – 35 percent (attained through help by your paint jobber).
- Sublet – 15 percent.
The resulting gross profit on this job would be almost 50 percent. This is a respectable and attainable number. Remember each job has to be job costed and reviewed daily to keep the profit percentage as high as possible. If you carefully monitor each job individually, your profits are guaranteed to increase. The fact you're watching them will force you to improve your performance. Gross profit is where it all starts from a money-making standpoint. You must maintain a healthy gross profit average.
Many factors can affect gross profit. If you buy parts and don't charge them to the job, what will happen to your parts gross profit? What if your labor charges are too low, or if you don't charge for an operation you perform and pay a technician to do? Your gross profit will decline for obvious reasons. This sounds simple, yet I see shops not charging for all the parts they use on a job, or not charging the proper labor on a repair every day.
The gross profit you make on a repair will directly affect your ability to run your shop profitably, or even keep it open. It's one of the areas you can control. Look at your parts margins. If they're not high enough, negotiate better discounts from your vendors. Monitor your paint and material usage. If you're not getting at least a 35 percent profit on paint and material, you're throwing money away. I've seen shops that make 50 percent on material. It's possible by belt tightening and monitoring.