My Shop in Tiptop Shape?

Posted 6/11/2012
By Mike Olson

Is my shop in tiptop shape?

Ten years ago, most shop owners would have answered this question with a huge “yes!” Business was good, cars were fairly easy to figure out, and the economy was not too bad in comparison with today’s difficult times.

Over the past three years, many shops have seen profits shrink, costs go up and vehicles that break down far less often. Most shops spend money on technical training trying to keep pace with the technology used in the new vehicles. This is necessary to compete, but what about the bottom line? There are profits to be made without revamping the way you do business. 

Having consulted and written about shop management training the last 25 years, I have seen a lot of financial statements and taught this subject many times. The one thing I come away with is that many owners shy away from the numbers because it is so foreign to them and it makes them uncomfortable. Let’s face it, we are creatures of habit doing what is the simplest to master. If you have never done a financial analysis, it can be challenging.

I strongly recommend taking a different look at your business. Most business classes within the auto industry have you focus on hitting a percentage. This always confuses many shop owners. Instead of just measuring GP (gross profit) on parts and labor, look at your profit and loss statement in a different way. Look for areas that need improvement.

We recommend to all of our group members that they strive for 15 percent to 20 percent net profit. This means that on $100,000 in sales, the shop keeps $15,000 to $20,000 minimum net profit.

We analyze and diagnose the improvement areas. The percentages are only to point out areas you can improve.

These percentages really mean a lot when trying to maximize net profit. For example, if you’re achieving a GP on parts sales of 30 percent, you are making a small profit. But what happens when you increase the parts GP? Using parts sales of $30,000, you currently make $9,000 on parts sales. If you made 50 percent on parts, that’s $15,000 – or an additional $6,000. Over a year, you earn $72,000 more on parts sales. That is just parts! Now, if you can increase your labor gross profit, you have built a stronger business. We coach our clients to obtain a total of 60 percent gross profit.

You can be in this position. Get training, join a group and take action. If you cannot, retain a bookkeeper that will produce these numbers and make the
necessary changes. 

How much gross profit do you retain on labor? This is a little tricky. Most shops calculate this by multiplying at least 15 percent of sales as a profit; doing this will result in your shop not being in tiptop shape. Using your technician hours, just divide this into your total labor sales. This will give you the hourly rate you actually charge your customers.  Most shops find this hourly rate they charge their customers to be much lower than the posted rate.

The whole key here is, if you are not retaining at least 15 percent of sales, your business is not in tiptop shape.

Here are some tips to expedite the journey to more profits:

• Get your parts GP to 50 percent (not markup).
• Audit your labor, and measure and improve productivity. If productivity is 70 percent or lower, seek help. It is not always the tech’s fault.
• Audit your customer service. Call customers who have not been in recently and ask if there are any issues.
• Most of all: Become a manager, not a technician. There comes a time when all owners must decide their role. Is it being up front taking care of customers and selling? If that is not your role, hire someone who can do this, and you watch over the shop. Only you can decide what works best for you.

Editor's Note: This article is one of several management articles that will be contributed to AutoInc. this year by Automotive Management Institute (AMI) instructors. In 2012, AMI's knowledgeable instructors will continue covering a variety of topics designed to educate and train today's service and repair professional in AutoInc. To learn more about AMI, its courses and instructors, visit www.AMIonline.org. AMI administers the distinguished Accredited Automotive Manager (AAM) program.

Mike Olson has 39 years of experience in the automotive industry. Following the sale of his own business, Olson began studying repair shop management. The combination of his hands-on experience and management knowledge quickly made Olson an in-demand consultant. Following several years of consulting work, he began developing management training programs, which led him to his current role as director of business management for the WORLDPAC Training Institute. He can be reached at mikeo@worldpac.com.