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HITTING
EXPECTED PROFIT MARGINS
by
Larry Edwards, CMC
Just
who are these so-called 'top producers'? You know who I'm talking
about; those nameless people who everyone refers to when you're
told what your profit margins should be.
Having
been a management consultant for the past 16 years, I've had the
great pleasure of meeting hundreds of the top producers from all
over North America. I find these shops wherever I go, from San Antonio,
Texas to Halifax. In fact, it's very likely that some of these top
producers are right in your market.
But
top-producing shops are hard to spot. You can't determine if a shop
is a top producer simply by looking at the facility. And you can't
spot a top producer by talking to a shop's staff because it's been
my experience that most top producers spend more time listening
than they do talking. Most likely, you have to look at a shop's
numbers to determine if it's a top producer.
Top
Producers Control Expenses
Let
me define how Edwards & Associates determine whether or not a shop
is a top producer. First, understand that we work with hundreds
of bodyshops every year, ranging in size from four employees to
200 plus. However, we must have a way to compare one shop's performance
to another and a financial measure, i.e., profit margins, is the
simplest way for us to do that.
Many
people believe that only large shops have the best profit margins.
Actually, the size of a shop has nothing to do with it. The key
to good profit margins is controlling your costs of doing business,
or, to put it another way, controlling your expenses.
Good
expense control requires planning, budgeting and constant monitoring
to assure that you're staying within planned sales projections while
maintaining budget expenses.
It
seems so simple, but anyone who has ever owned and managed a business
knows how difficult it truly is. It can be done, however, because
top-producing shop owners are hitting these numbers every day.
Defining
Gross and Net Profits
Before
we determine how shops are hitting top numbers, let's see what the
key numbers are and how they're compiled, by taking a look at the
key profit margins we track.
First,
are gross-profit percentages. Gross profits are the profits made
after subtracting the direct costs to produce that sales item. For
example, labor gross profit is what remains when the direct cost
for the technicians to do that labor (i.e., the hourly rate paid
multiplied by the number of technicians) is subtracted from total
labor sales.
Indirect
costs, such as employee benefits, aren't included because they come
out of net profits, which is what's left over after all indirect
operating costs are subtracted from the gross profits. Hourly wages
paid to a technician are direct costs and should come out of gross
profits. Technicians, benefits--such as insurance--and taxes are
indirect expenses and should be deducted from gross profits to yield
net profits. Paint is a direct cost, so it's deducted from gross
profits. The room to store the paint, the heat to keep it warm and
the electricity to stir it are indirect costs and thus should be
deducted from net profits.
The
Magic Numbers
Now
that the difference between gross profit and net profit is known,
let's look at some numbers top-producing clients we work with are
hitting.
Gross
Profit Items
- Labor
= 65 per cent
- Parts
= 32 per cent
- Materials
= 35 per cent
- Sublet
= 10 per cent
- Total
Gross Profit on Sales = 48 per cent
If
gross profits only include the direct cost to produce a sale, then
what's included in the net profit items? We break net profit items
into five categories:
- Support
salaries
- Semi-fixed
expenses
- Fixed
expenses
- Net
profit as a percent of gross profits
- Net
profit as a percent of total sales
Support
salaries include all support labor costs for any employees on your
payroll who aren't directly involved with the production of labor,
such as owners, managers, estimators, cashiers, bookkeepers and
porters. Support salaries also include any benefits paid to support
staff, as well as any benefits paid to the production staff, such
as your portion of insurance and vacations.
Semi-fixed
expenses include all variable costs of doing business. These are
expenses that generally occur monthly but are usually charged to
you based upon usage, such as the electricity bill. Semi-fixed expenses
include vehicle expenses, tools, supplies, policy or goodwill, legal,
auditing, training, computer and building maintenance, and any expenses
that occur monthly at a rate based upon use.
Fixed expenses occur at a fixed rate every month and include items
such as rent, depreciation, lease payments, etc. By separating the
variable expenses from the fixed expenses, shop owners can more
easily review each month's variables and work on the items over
which they have the greatest control.
Net
profits remain after support salaries and semi-fixed and fixed expenses
are subtracted from the gross. Because expenses are subtracted from
gross, our clients tend to view net profit in one of two ways; as
a percent of gross or as a percent of total sales. Either method
is correct, but percent of gross shows net at a much higher percentage.
The
numbers our clients are hitting in these categories are:
- Support
salaries as a percent of gross profit--40%
- Semi-fixed
expenses as a percent of gross profit--20%
- Fixed
expenses as a percent of gross profit--15%
- Net
as a percent of gross profit--25%
- Net
profit as a percent of total sales--12%.
"I
Could Never Hit Those Numbers"
If
you compare these numbers to your own and say to yourself: "No way
can we hit those numbers," hold on!
First,
make sure that you're comparing apples to apples. For example, does
your statement include technician benefits in the labor cost? If
it does, take these numbers out, then recalibrate using only the
direct cost of labor to see how you compare.
Does
your materials gross include small tool purchases? If it does, take
these out and recalibrate to see how you compare. Does your statement
not separate semi-fixed expenses from fixed expenses?
Once
you're comparing apples to apples, you then need to look at the
out-of-line items to ask yourself two things:
- What
must be done to get my shop's numbers in line with the top producers?
- Can
I accomplish this?
When
you're determining what must be done and what you are capable of
accomplishing, remember that these top-producing numbers don't have
to be achieved immediately. Some shops took us as long as four years
to get their labor costs in line.
To
reduce their labor costs, we first had to grow their businesses
so we could justify hiring more technicians. Then new classifications
of technicians, such as B-, C-, and D-level technicians, had to
be developed. Then technicians for these levels had to be found
and worked into our production system. After four years, we were
able to get these shops' labor gross profit up to 67 percent.
Becoming
a Top Producer
"Does
someone sprinkle magic dust on these top performing shops?" "Are
they just lucky?" "Why can't I hit these numbers?" These are questions
heard every day.
First,
there is no magic. Becoming a top-producing shop requires a lot
of hard work and a single-minded dedication to hitting these numbers.
Many times, shop owners tell us that they want us to help them turn
their shops into top producers. But when we get to the bottom of
why they aren't hitting the numbers--such as too many support staff,
overpaid technicians, too many computers, etc.--these shop owners
refuse to make the changes necessary to become top producers.
So,
let this be a warning. Don't fret over your shop's lack of performance
if you aren't willing to make the tough choices necessary to change
the results. If, however, you do want to change the results of the
shop, here's a seven-step plan that will help:
Step
1.Evaluate your current operation to determine the key areas
that are out of line.
Step
2. Determine which items within the out-of-line areas need fixing.
Step
3. Educate yourself about industry trends regarding methods
used to control or manage each account item.
Step
4. Set realistic goals to fix the out-of-line items, and allow
yourself plenty of time to make the changes. Change always takes
time.
Step
5. Develop an action plan with specific timing and actions that
must take place to accomplish your goals.
Step
6. Communicate to everyone involved where you are currently,
where your are to be and how you plan to get there.
Step
7. Monitor progress and be willing to adjust and change your
objectives as business conditions dictate.
It
Takes Work
Change
doesn't come quickly or easily, but if your problems are not addressed,
change won't come at all. Remember that you're the captain of your
ship, and your employees are looking for you to plot the course.
The question is: Will the course plotted lead you to become a top
producer, or drown you in the sea of mediocrity? The choice is yours.
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