Financial keys to success

May 3, 2016
Here you will learn how to achieve your automotive service repair goals by consistently managing these specific financial tools.

You’ve been working diligently to achieve that ever-so-elusive balance between gross sales and profits, and have managed to control your operating expenses to yield a nice net operating profit. You’ve worked for many years to develop and maintain a good customer base. You have a staff of highly trained and competent people. And yet, you’re confused as to why the numbers don’t always add up. Here, you will learn how to achieve your automotive service repair goals by consistently managing these specific financial tools. It must be stated right now that at Automotive Consultants Group, Inc. (ACGI), we’ve developed, refined, and are continually updating these tools, and have been for the last 16-years. Nonetheless, they are fairly basic in their design, such that once you understand their importance and what they tell you, you can them simply gather your needed numbers, develop your own format, and you’re off and running. It should also be understood that any report should yield only one primary purpose: to tell you something that will aide you in managing your business.

Please note that this is an extremely complex subject here, and so our hope is to provide you a basic understanding.

A basic understanding of where these numbers come from and what activities they are derived from, and most importantly – how to manipulate these numbers, i.e. make them go either up or down closer (or on target) with the industry wide benchmarks, will be imperative. This last point, manipulating the numbers, is where we find most people have a challenge. Look at it this way. If you have a Service Consultant who carries a very poor close ratio (less than 50%), why on earth would you put in all the effort to increase car count? That’s not where the real problem lies!

You should begin by knowing what numbers you’ll need, and where to find them. You’ve probably already heard the acronym KPI.

What are KPIs?

As its name would imply, KPIs, or Key Performance Indicators, are specific and critical numbers used in your automotive repair business and across our industry. They tell the business owner how healthy their business is or is not performing. Many of these KPIs are actually generated during the sales process with your customer. The most important KPIs are generated during the estimating process. Other KPIs are managed differently, such as operating expenses and their control, having the correct compensation plans in place for all production personnel (technicians), and having the costs of your service writers (herein after referred to as Service Consultants) expressed differently. Those numbers are more often expressed as a percentage against sales.

Learn where to pull the KPIs from

When you begin to pull all your numbers together, it’s imperative that you utilize the exact same date range for all data pulled – for a defined period of time: day, week, month, quarter, or year. In other words, if you use your Profit & Loss Statement for the period of 2015, then your business summary report should also be for 2015.

(Editor’s note: the Charts provided are simply examples, and don’t adhere to this rule).

Data to pull from your shop management system (SMS)

Business Summary Report

Look to your SMS to provide a Business Summary Report that includes:

·             Gross sales in the following: Labor, Parts, Sublet, Shop Supplies (all measured in dollars)

·             Labor GPM%

·             Parts GPM%

·             Sublet GPM%

·             Sales taxes are not calculated; they are simply a wash (in and out)

·             Car Count/RO count

·             Average Repair Order (ARO, dollars)

·             Billable Hours per RO

Revenues by source

Your SMS should be able to tell you where your customers are coming from. If you do any advertising at all, you have a cost associated with it. Your Service Consultants must ask every customer “how did you hear about us today?” Even if they are a loyal customer to you, they may be responding on this visit to an ad you’re currently running. This must be tracked to yield the effectiveness of your various advertising campaigns. A customer sign-in sheet would easily capture this information. This will give you the data you will need to tell you your customer acquisition cost. The saying “cheaper to keep her” holds true here. It is easily much more expensive to find a new customer than to keep an existing one. (But that doesn’t mean that some of your customers shouldn’t be fired!)

This report may also tell you the effectiveness of your Customer Retention Management Program (CRM). However, most CRM programs used nowadays, such as Demand Force, have their own dashboards for this information. Parental discretion advised in reading them!

Sales by category

This tells you what kind of work you perform the most, i.e. brake work, diagnostics, electrical, engine, transmission, etc.

Sales by service writer

This tells you who is selling what, total dollars, and most importantly, at what GPM percent

From your Bookkeeper

A Current P&L

Remember the date range should match any other reports you pull

·             Gross sales, the costs associated with producing those sales (COGS), Total Operating Expenses, Technician load/costs, Service Consultant costs, etc. In our experience, most CPA-generated P & L statements do NOT conform to this format. They normally lump all sales in as one number. The fact that your business has multiple profit centers, which carry their own individual GPM, mandates that they be split out and tracked separately.

·             Advertising and Marketing expenses

·             Other major expenses, such as a shop remodel, or the purchase of new capital equipment, should be noted separately.

Cash Flow Statement/Balance Sheet

·             Tax liabilities, equipment depreciation, long-term liabilities, etc.

Manual Gathering

·             Lost sales opportunities, also known as “Declined Sales”. Some SMS systems provides this, but many do not.

·             Coupon sales or specials may or may not have to be tracked manually. (Discounts should be picked up by your Business Summary Report)

What a million-dollar shop looks like

$1,000,000 in annual sales is:

  • $83,333 sales per month
  • $19,231 sales per week (52 weeks/yr.)
  • $3,846 sales per day (5-day week)
  • $41,667 @ 50 percent GP
  • 21 Average days per month
  • $1,984 GP per day

Find your value

Next, you need to figure out the value of one billable hour in your shop. Use this formula:

Your Hourly Rate X (1 + P/L RATIO) Note: P = parts, L =labor

= 92 X (1 + 40/60) (assuming a shop labor rate of $92/hr., with a parts/labor make up of $.40 parts, $.60 labor, for every dollar you sell)

= 92 x (1 + .66)

= 92 X 1.66

= 152.72/hr. (value of one billable hour)

= $2.55 per minute Tech time (BTW)

$3846 sales needed daily, divided by $152.72

= 25.18 billable hrs./day needed

NOW THEN –

      ARO*                                Cars per Day               Dollars Per RO

@ 1.4 ARO                                         18                                = $213.81

@ 2.0 ARO                                         12.6                             = $305.44

@ 2.6 ARO                                         9.7                               = $397.07

@ 3.0 ARO                                         8.4                               = $458.16

*ARO = Average Repair Order

Results would look like:

3 techs @ 8.41 hrs. each (105% productivity)

Tech production goal is $1282/day

If you accomplish this, you WILL hit your Million Dollars! (It’s simply math).

Now that you have an understanding of what numbers you’ll need and where to find them, it’s time to put you on the map. After all, how can you possibly get to where you’re going if you don’t know precisely where you are? At my consulting company, we’ve designed some proprietary software which amasses a tremendous amount of data, all based upon this simple little query. Gather these numbers up. (See Chart 1)

Chart 1

SHOP NAME Shop labor rate                          $93.87
Bob's Garage How many production techs?     12.0
ADDRESS Business hours Mon-Fri             M-F 8-6
CITY How long Sat. lunch?                 1.00
STATE Number of working bays            12
ZIP CODE How are techs pad?                  Check one
PRIMARY PHONE On flat rate                                   X
OTHER PHONE/CELL Hourly                                           X
FAX NUMBER Salary
WEBSITE ADDRESS Other
EMAIL ADDRESS  
   

Let’s begin by studying the apparently simple Chart 2 Annual Forecast. (Reader’s note: the charts provided here are NOT all from the same shop or time frame. They are merely for illustrative purposes).

Chart 2

Time period for financial review (months) Jan 1 thru Jun 20, 2012
Which is how many months? 6
Number of repair orders for this time period 4832
Total labor sales $1,054,445
Total labor costs $399,969
Total parts sales $982,006
Total parts costs $593,860
Total sublet or tire sales $7,058
Total sublet cost $5,352
Total shop supplies/hazmat/other sales $36,748
Total shop supplies/hazmat/other costs $4,668

I’m very strict on using accuracy in working with numbers (unless of course you use rounding in certain instances, i.e. reading a P&L).

You can begin by pulling your P & L for 2015 (the full year). Write down the number next to “Gross Sales”. I would prefer that you add somewhere between 10-15% to this number. Standard business growth formulas are in this vicinity.  This will be your annual sales target, which you should then break down to a daily target, and make certain your sales staff knows this number! From there, using your available data, fill in the remanding numbers. The last number, Billable Hrs. Per Day, you will need to calculate.

Understand what your shop is capable of — i.e. number of bays, techs, billable hour production, etc. A reality check here is needed. If you only have 5-bays, trying to hit $2M/yr. is not likely to happen. (2nd location time?)

Marketing and advertising strategies should then align with your goals. Let me take a moment to explain the difference between this two commonly used words – “Marketing” is basically the various services you provide. If you open a custom wheel shop within your existing business, this would be considered a new market. “Advertising” would be the call-out to folks that you are now selling custom wheels. See the difference?

I provide all my clients with what’s called a KPI Tracker. While initially daunting to look at, in reality it provides them a very useful tool to track critical numbers each day at close. My clients love it, use it, and swear by it. I am told it takes less than five-minutes to fill out each day. This document stays loaded up in the cloud. When they fill it in each day, I receive immediate notification. What both the shop owner and I are looking for are anomalies that occurred that specific day. This could be a number that is either too good to be true, such as labor cost that day at an 88 percent GPM, or really bad, like 18 percent GPM. In either case, it raises an immediate red flag and warrants further investigation.

What’s really cool about this KPI Tracker (which again, you could design if you know a little about MS Excel), is that your annual goals you filled in a previous exercise push through into your daily targets, and also show you the variance to that target. Reach out to me, and I’ll be happy to assist you in better understanding this tool.

Your KPI Tracker

Your KPI Tracker should include the following, looked at daily, weekly, monthly, quarterly and annually:

·             Car count

·             MTD car count

·             Daily gross sales

·             Average repair order

·             Sales to target

·             Variance to target

·             MTD variance to target

·             Labor sales, costs and GPM

·             Parts sales, costs and GPM

·             Sublet sales, costs and GPM

o   Variance to targeted benchmarks

o   MTD variance to targeted benchmarks

·             Tire sales, costs and GPM

·             Shop supplies, sales costs and GPM

·             Any other relevant data, such as number of oil changes, alignments, etc.

·             Hazmat sales

·             Total billable hours production

·             Average billable hours production by RO

I preach a mantra that I’m certain you’ve heard before: “If you can measure it, you can manage it.” Parental discretion advised here: only measure what you can and should, so that you can make adjustments in the various activities that these numbers are derived from.

Example: Tracking billable Hours/RO production

There is an industry benchmark for this, and quite frankly, as of this writing, it varies greatly. However, depending on the type work your shop produces, suffice to say you should be over 1.5 billable hrs./RO. Now, if you do nothing but quick lube type oil changes, that number will be MUCH lower. Examine this for yourself and find out what your number is.

The bottom line to all this:

·             Know your numbers (meaning what activities they are derived from)

·             Know what is acceptable (is a 50% close ratio for a Service Consultant acceptable?)

·             Know what changes need to be made to bring your numbers more in line with where they should be.

TARGETS  
Annual sales $1,400,000
Working days this year 252
Daily sales goal $5,556
Parts % of total sales — 59% $3,278
Sublet % of total sales — 1% $56
Labor % of total sales — 38% $2,111
Tires % of total sales — 1% $56
Other % of total sales — 1% $56
Labor rate $98
Average RO $800
Cars per day 6
GP parts 40%
GP labor 60%
GP sublet 25%
GP tires 20%
Billable hours 21.5

The financial composite – where all this info ends up

A good financial composite will allow you to compile all this data. Visit MotorAge.com/FinancialComposite to see an example. Ours also supplies all of the benchmarks, and immediately tells you where you stand in comparison. NOTE: the significant problem with either this financial composite, or your own properly formatted P&L, is that it is a snap-shot of what has already taken place!

Using Coaches

In our presentations throughout the U.S. and Canada, we share a video about the value of time. Within this video is mention of Olympic athletes. In their world, the difference between first and second place is measured in milliseconds! And we both know they ALL had coaches to help them to achieve that level of success. There are many great coaches out here – seek them out, pick their brain, find out if you have a good fit, and pull the trigger.

So, doesn’t it stand to reason that you, with all your years of experience and knowledge, just might need someone to assist you? Okay, I said it. That was my plug for our company. Yet there is one critical element that separates us from the others: we care very deeply about helping you to have a better quality of life through this thing called automotive service and repair!

Please reach out to us with any questions you may have.

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