Part One of a Two-Part Series – How to Hit Your KPIs
It’s a new year. How did your shop fare last year?
If you hope to hit your goals this year, then it’s imperative you have accurate numbers from last year so you can lay out your targets for the new year. A precursory understanding of key performance indicators (KPIs) and the associated activities from which they are derived is essential. We’re going to take a look at a fictitious shop called Bob’s Garage.
What are KPIs?
Key performance indicators are specific and critical numbers used in your automotive repair business, and across our industry, to tell the business owner how well his or her business is performing. Many of these KPIs are actually generated during sales processes with your customers. The most important KPIs are generated during the estimating process. Other KPIs are managed differently, such as controlling operating expenses, having the correct compensation plans in place for all production personnel (technicians), and having the costs of your service writers (hereinafter referred to as service consultants) expressed differently. These numbers are more often expressed as a percentage against sales.
Why are they important?
The importance of these numbers cannot be overemphasized. Let’s look at perhaps the most important KPI of all: net operating profit (NOP). Net profit derived from your business is the only reason for being in business in the first place! After the techs and service consultants have been paid, and the rent, lights, gas, water, and software updates have been bought and paid for; after federal and state income taxes have been paid – it is what you have left in your account. Most shops, unfortunately, only walk away with single-digit net profit (less than 10 percent). However, NOP over 10 percent, and even approaching 20 percent, can be done. It is being done. These elite business owners already understand most of what we’ll be covering in this material.
What performance do they measure?
Each KPI measures its own corresponding performance. Let’s take, for example, labor gross profit margin (GPM) percentage. The criterion for this KPI is your shop labor rate less the cost of your technician. There are two ways to look at this KPI:
Loaded costs, which include all other real costs you, the business owner, incur. This could include Federal Insurance Contributions Act (FICA) tax, Federal Unemployment Tax Act (FUTA), State Unemployment Tax Act (SUTA), Medicare, paid time off (PTO), vacations, training allowances, uniforms, etc. The associated benchmark your shop is looking to hit is 60 percent GPM, minimum.
Unloaded costs: This would be your shop labor rate, less whatever hourly wage you actually pay the individual. This applies whether you pay on flat-rate, hourly rate, salary, or some combination thereof. The associated benchmark your shop is looking to hit is 68 percent to 72 percent GPM.
Analogies to other KPIs, or metrics
Another name commonly given KPIs is metrics. They are essentially the same. Same goes for the name: benchmarks.
Important income statement benchmarks
What are benchmarks, anyway? Simply put, it is a number that is representative of what is normal, average, or expected. Let me explain. Say you’re in the market for a high-performance sports car. You’re going to compare a Corvette Z06, a Porsche Carrera GT3, an Audi TT, a BMW 3-series, and a Dodge Viper. Now, popular magazines write up articles comparing performance characteristics of all these awesome machines. They will most certainly compare such things as:
• Zero to 60 mph times – acceleration from dead stop
• 60 mph to zero times – controlled braking times
•100 mph to zero, total distance to stop
• Slalom times through the cones to determine pitch, roll control and stability
• Quarter-mile performance, the “King of Performance” benchmarks
• And usually, especially in this category, skid pad circles, to measure lateral g-force.
So, what will come from these comparisons is a bunch of numbers. A person buying one of these performance automobiles will most certainly check out all these numbers to see just how they stack up. He will look at the benchmarks to allow him to rank one to another (I wish I were able to be in the market for any of these machines)! Keep in mind that benchmarks for the performance car are going to be drastically different from the econo-box class of car.
You can’t make a dime of profit if you don’t have sales
You’ll notice that we first take into account sales from several areas. These areas are also known as profit centers, which we will introduce to you shortly. For simplicities sake, we aren’t breaking our sales down further than this. However, your own profit and loss (P&L) statement should probably be more detailed. The more detail you can show, the better you’ll understand your business. Perhaps you have a popular line of tires that seems to be selling well, but upon further analysis, you discover you’re not really making any profit to speak of. Of the thousands of financials I’ve reviewed for other shops, I still prefer to break mine down further. I normally get their P & L, and then transpose their numbers into my format. In this way, I can get a gross profit margin on each of the critical areas, or profit centers, such as labor, parts, sublet and shop supplies, which we’ll discuss … ah, how about now?
Profit centers can be unlimited – profit center analysis
This catch phrase is nothing more than understanding that your business is made up of various areas from which you derive profit. And you thought it was just from fixing cars? No, there’s more to it than that. If you stop and think about it, other than the obvious profit you make on parts and labor, what else is there? Let’s take a look.
• Sublet, such as towing, machine shop work, radiator repair, glass repair, and anything else you farm out to another vendor.
• Shop supplies can be a small profit center. At the very least, you should not be bearing the often-huge expense of all the assorted and sundry items your shop uses every day to effect repairs on customer cars.
• Hazardous materials charges are those you incur as a result from having to comply with regulations governing the disposal of automotive wastes, such as oil, filters, tires, and batteries.
What other profit centers do you have?
As the saying goes, “If it can be measured, it can be managed.” Therefore, you should pay close attention to any significant source of revenue. A few examples follow:
• Wheel Accessories
• Air Conditioning
• Diagnostics, Check Engine Light
• Heavy Engine or transmission
• And, most importantly, maintenance (preventative maintenance).
Gross Sales. Beside the title will be some number (hopefully a big one). What is that number made up of? Do you really know? Shouldn’t you know? I always ask shop owners, “What percentage of maintenance work does your shop do?” Most of the time, I get the “deer-in-the-headlights-look.” If it hasn’t been made clear by now, it should be apparent that your shop must have a strong computer, and solid accounting and management software such as R.O. Writer. What’s cool about good quality software is that you can slice and dice the numbers any way you can think of. Don’t get too carried away, but do find out where your profit centers are.
A final word about profit centers
Analysis of your profit centers, tied in with the seasonal and cyclical ups and downs typical in our industry, will allow you a solid tool for the purpose of forecasting and trend analysis. Simply put, it’ll allow you to navigate the “stormy weather” shops usually experience around November, December and January. Likewise, when you’re wide open in the spring and summer months, you’ll be more prepared because you took the time to understand your profit centers, and used that information to develop your monthly or quarterly forecast. Let’s just hope your forecast is more accurate than that of the local weatherman.