How to 'Round Up' a Big Profit on SalesPosted 3/12/2006
Chris "Chubby" Frederick
I am sure you have read a large number of great articles on analytical formulas to achieve great profits when you write a repair order. I am going to share some of my "secret" formulas later in this article but first I want to discuss the biggest obstacle - you! I am far from an expert, but I have seen more than 3,000 profit and loss statements in the past five years.
The average shop owner only takes home about 1 percent to 5 percent of sales plus a salary typically tied to playing the role as service manager. Total income is about $50,000 to $80,000 per year. Then you have the few who net 20 percent to 30 percent of sales and work on their business, not in it. They are not involved in production, but they make $150,000 to $300,000 each year. What is the difference between making a living in this industry and getting rich? The answer is focus!
If you want to net 20 percent to 30 percent, you have to build a business model that will leave 20 percent to 30 percent cash profits on the table. This is something you can do on a napkin, and I will show you the formula. The problem is getting everything in your business to work in concert so that you can hit your profit goal daily.
That's right, daily! If you don't have time to focus on your key performance indicators daily, the cash will never be there at the end of the month. So why can't we focus daily on making money, not fixing cars? My perception is that most of us are really not money motivated. We give away too much to our customers, never raise prices fast enough and would rather have a hug. That's right - a hug! You can have hugs and profits if you focus on working on your business rather than working in it.
Most of us are recognition dependent - causing us to prefer cookies, presents and "thank yous" over cash. The majority of us did not go to school to be businessmen or businesswomen. We were working in a shop and the opportunity just seemed to present itself. We believed that if we could fix cars, we could get rich. Unfortunately for most, the business that was supposed to give us a life has now taken that life away. We are working long hours, missing events with the kids or grandkids, stressed out trying to pay bills and certainly not taking enough vacations. What's the problem? Focus!
You must be in business to make a profit, not fix cars. You owe it to your employees, customers, family and - mostly - to yourself. If you don't want technician turnover, you need to pay well and offer lots of benefits. If you want to attract the women purchasing 70 percent of the maintenance in the United States, you need profits. Great waiting rooms, loaner cars and cappuccino don't come cheap. If you want to spend more free time with your family, you need a highly paid manager who can run the business without you being there every day. All of these things take cash. And let's not forget your retirement money so you can grow old with the grandkids. How do you make big profits? Focus.
By now you've read focus enough to make you crazy, so let me tell you my story about focus. I woke up one morning about three years ago and my wife was making an "L" with her fingers. I didn't know what she meant until she called me a "loser." She told me that all of our friends who worked for the government are retired and that I was still going to work.
"When will you have enough money from your business to retire?" she asked. Of course, I became defensive and it was not a pretty morning. She reminded me that I teach my clients to net 20 percent to 30 percent cash profits, but that I don't follow my own advice.
Later that morning, I went in to work and called a senior management meeting. I asked my managers, "Why don't we net 20 percent to 30 percent cash profits?" They told me that I had not raised our fees to keep up with costs; we had hired eight new people for next year's growth and several other obstacles.
For the next minute, I became a dictator (not my style) and told them to do whatever we had to do today to net 20 percent to 30 percent by next month. I told them we owed it to all 84 associates and their families. "Nothing will get in our way after today," I said. "Change everything."
Guess what? The next month we made more money than the entire previous year. The following year was the most profitable of my entire 33 years in business! Please, stay with me on this. I am not telling you this to impress you, but to impress upon you that this could be you. The vast majority of my clients make a lot more money when we coach and mentor them because we are working on their business while they work in it. Someone has to have the time to just focus on what must be done to make your business profitable. Working in production, you will never have time to focus.
The Catch-22 is affording the middle management to give you time to focus on your money. Some of you are lucky to have a significant other who works with you. You have to decide who is going to focus on making money. Call them the president or whatever, but somebody has to wake up and go to sleep thinking about the almighty dollar. Someone needs to work on the business exclusively to make big cash profits. If it is you, here is the next step:
Focus on making 54 cents on every dollar of auto service. After paying your people and your parts, you want 54 cents left for you. Most owners can hold fixed expenses at 25 percent of sales so subtract 25 from 54 and there is 29 percent left for you. That gives you a $290,000 annual profit on $1 million in sales. A half million in sales would represent $145,000 to you. Less then $500,000 in sales makes it difficult to net 20 percent to 30 percent.
Then teach your manager to do this at the counter each day. Hire tough and manage easy. Introduce your manager to your clients and teach him to build relationships with them. Use a strong, incentive-based compensation package to keep them focused on holding gross profit selling and building relationships. Implement a variable comp plan that pays out on sales, gross profit and customer satisfaction. Then focus on holding 25 percent in fixed expenses and the manager becomes the most important person in your business. Would you pay a great one $100,000 a year if you made $290,000 and didn't have to be there every minute?
The final frontier for you and your manager is to get everything working in concert each day. Most who fail at this are guilty of lacking solid leadership skills. I hired a Franklin-Covey leadership instructor who has made more impact with me and my shop-owner clients than you can imagine. Knowing what to do is not power! Getting your people to follow you and your manager is power.
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