Lobsiger: Chasing a 20% (or More) True Net Profit
In the past year, I have seen quite a few shop owners’ profit and loss statements. A few have been surprisingly good, but most were not. Many are working so hard, but unfortunately keeping very little. There is a quote from Napoleon Hill’s timeless book, “Think and Grow Rich,” that states: “If you are one of those that think hard work and honesty alone will bring you riches, perish the thought, it’s not true!”
It’s funny how years ago I proved this quote to be very true, by working 80 hours per week for decades.
In my nearly 40 years in this business, I have never seen such a high demand for collision repair. At the time of this writing, my shop is booked out over three months, which is insanity, to say the least. Still, I would be careful saying, “This is the new norm.” We are at the top of the market cycle, and no one knows if this cycle will run for few months or a few years. So, it’s a good time to hope for the best, but we really need to be getting prepared for the worst.
How do we prepare? We must start by saving six months of expenses.
Well, we need to back up the bus if that’s the case. If we are just making payroll, on C.O.D. with some vendors and just surviving, it’s very hard for any business owner to prepare for anything. So, why do more body shop owners struggle than not? The answer truly lies in who the body shop owner sees looking back at them in the mirror every morning. The good book really says it the best, “Pride goes before destruction, a haughty spirit before a fall.”
What, then, is the answer to high profitability in a collision shop? The answer lies in a second quote from Hill's book, “The way of success is the continuous pursuit of knowledge.” Our industry’s true net profit average is about 10%. True net profit means subtracting any of the owner’s compensation costs (cars, boats, cabins, phones, race cars, motorcycles or other tax write-offs) above wages and rent and putting that amount towards the net profit dollar amount or percentage. Do I feel 20% true net profit or dare I even mention 25% is available? With the right knowledge, it sure is!
Some of you reading this might be saying to yourself, “Greg, please be quiet, as some insurers might be reading this!” The insurance companies know more about body shop financials than most shop owners do. They’ve employed very highly educated folks from prestigious schools that have Ph.D.s in mathematics, statistics and economics. Hello, the insurers are in daily contact with all the estimating platforms and our major vendors. Owners must get this: we are small businesses operating in a huge financial arena with insurers. With the right knowledge, we can be extremely successful entrepreneurs.
At just a starting point, a body shop owner’s profit and loss statement must be set up correctly. Most of the P&L statements that were set up by an average CPA and not directed by a collision accounting professional can in some cases be worthless. It’s like driving in a heavy fog and not being sure if you are on the road. The owner has no idea what their cost of goods sold (COGS), labor gross profit, and overhead administrative costs even are. When your P&L has been set up correctly, it will almost speak to you. Twenty years ago, my P&L was barely one page long and my gross sales had just one line in it—gross sales.
After getting help to get mine set up correctly, my P&L is now almost eight pages long. My gross sales detailed accounts now include body labor, mechanical labor, frame labor, refinish labor, detail labor, aftermarket parts, OEM parts, recon-reman parts, LKQ-salvage parts, stock parts, paint and materials, hazmat, sublet mechanical, sublet towing, sublet storage and sublet total loss administrative fees. These are all just for the gross sales side. This doesn’t include all the same corresponding accounts for the COGS side or the pages of below-the-line overhead expense accounts. There are collision repair industry professionals out there who do this for shops (I am not one of them of course). Does it cost money? Of course it does, but the ROI will be returned to you 1,000-fold. The more the owner understands how to control the business' finances, the more he can pay his employees!
One place to start for P&L help is by reaching out to your paint company. I am talking about employees inside the actual paint company itself above your local paint jobber. Most of them have Business Development Managers (BDMs) to help you. You can also reach out to me for direction, if necessary, see my contact information. In the coming months, I will be writing columns to help explain how to turn our business from a “cash eating monster” into a “money printing machine.”