Why can’t I get paid when my expenses go up?
The quick answer is also the most frustrating one: It’s always been this way. But that doesn’t mean it should be this way.
The industry should react to the expenditure promptly, rather than waiting until the next rate increase interval—whenever that is—to cover the new expense. Let’s look at where the problem begins and how we might solve it.
We all know that the insurance industry usually reimburses using one of two rates:
1) the Prevailing Competitive Price, which is 50.1 percent of shops’ retail rate in an area as surveyed, or
2) a contracted rate secured with the repair facility, usually through a direct repair agreement.
In the ’80s, computerized estimating systems debuted in our repair facilities, allowing us to be more efficient in writing estimates. We started to see expedient calculations on our labor times, parts calculations, paint materials, appropriate sales tax, proper deductions on overlap and other monetary accuracies. We accepted the New Era of Estimating, confident the opportunities outweighed the challenges.
Except one: our rates.
We still calculate our rates the way we once did. We still ask for increases the way we always have. And the amount of increases have stayed the same. But profits are in the pennies and nickels, not the dollars.
Imagine that during the fourth quarter of 2007 you realized you would need to raise your retail labor and material amount by, say, 1.8 percent in 2008 and then did so, not waiting for the so-called normal increment. This being the New Era of Estimating, your computer system would automatically perform the calculations for you, rather than you pulling out your calculator and crunching the numbers. What impact would that have for your business over the course of one year?
Let’s say a shop does $500,000 in labor each year at a labor rate of $40 per flat-rate hour. That would generate $9,000 of net profit per year and possibly another $3,600 net profit for paint material. The overall impact is that a shop running at a current 5 percent net profit would increase their bottom line by more than 21 percent!
Many management systems out there today help shops monitor their profit margins and assist them in maintaining consistent margins for their business, which is almost a must in today’s business climate. Management systems also allow facilities to check their estimates before printing or uploading them, giving the facility time to make the necessary changes to meet their desired gross profit margins—another “almost a must” in today’s market.
I encourage shop owners and managers to embrace their numbers, realize the power of the pennies and nickels—and start letting these increments add up, if you will, to their net profits of tomorrow.
Ray Fisher is the president of ASA-Michigan. This article represents his opinion and does not reflect the views of ASA-Michigan.