Get Your Payroll Under Control
Do you know if you’re paying too many people? Do you know if you’re paying the right people?
If you don’t know how to answer those questions, there’s a strong chance your shop’s payroll costs are higher than they need to be.
Optimizing your shop’s payroll, collision repair industry experts say, doesn’t rely on just crunching some numbers–it comes down to making sure your employees match your business’s needs, having processes in place to maximize everybody’s time, and hiring good, not cheap, people.
“Payroll has the single largest effect on your income,” says Larry Edwards, founder of Edwards & Associates Consulting.
Some businesses, he says, spend some 50 percent of their revenue paying employees.
“One small change in your payroll structure can have a huge impact on your bottom line,” Edwards says.
How does a shop’s payroll get out of whack?
One way, Edwards says, is that the shop’s structure changes. Body shops and other small businesses tend to grow and evolve organically, and people are added to keep up with that growth, but without a plan.
“It isn’t unusual to go into a body shop where they have four body techs and they’ll have four to five support staff,” he says. “You have more helper bees than you have worker bees.”
Edwards offers a rule of thumb: For every three productive staff members there should be a single support staffer.
Dave Luehr, owner of Elite Body Shop Solutions, says there are many age-old benchmarks shops still use to determine if their administrative labor is in line.
For example, some shops attempt to maintain an administrative expense to sales ratio of 10 percent of sales. If it’s a small shop grossing $100,000 per month, its monthly administrative payroll would be $10,000.
Another older benchmark is for direct labor costs, Luehr says. A shop would be paying its technicians 40 percent of its labor sales, with 60 percent leftover as the labor gross margin.
While it’s always a good idea to know industry benchmarks, he says they can sometimes actually inhibit innovation and profitability. Because of that, shops should also measure themselves against themselves, with the intention of constantly improving.
Many shops find it impossible to maintain low administrative expenses with all that is required for repairs today, while others, Luehr says, are getting smarter about how they set up production teams and are experiencing gross labor margins much higher than industry norms.