Dollars and Decimals
Denise Piña, who owns Brea Auto Body with her parents, David and Virginia, in Brea, Calif., has always been pretty good about running her numbers on a regular basis. But those dollar signs and decimal points can quickly become complex and confusing—and even conscientious shop owners like Piña are left wondering how best to track the numbers in order to maximize profits.
Not to oversimplify things, but “the basic premise for all business is that you have to charge enough to cover overhead,” says Maylan Newton, senior instructor for Education Seminars Institute, a repair shop training program affiliated with the Automotive Management Institute.
Newton’s course “Profit Structuring for the Independent Automotive Repair Shop: Installing Winning Formulas” helps owners sharpen their skills in accounting and finance. He defines “profit structuring” as a set of formulas that assures profit as opposed to assuming it. “The [idea] is to determine actual cost of overhead, to establish what labor is needed to cover that cost and to establish the expense of operating the company,” he says.
NAILING THE NUMBERS
Where to begin? Pull out the cashbook registrar and just dive in, Newton advises. He cites two major reasons why shop owners aren’t able to maximize profit structuring: The first is that shop owners don’t understand the math, and they are, to some degree, just pulling numbers out of thin air. The second is that some expenses aren’t being included in the profit loss statement (P&L). “I’ve seen a P&L off by as much as $12,000,” Newton says.
He suggests asking for your P&L from either your accountant or your bookkeeper—whomever takes care of your finances.
NEWTON’S WINNING FORMULAS FOR MAXIMIZING PROFIT
Determine Hourly Rate
Newton says there are three expenses a shop owner should always keep in mind:
• Cost of wages
• Cost of parts
• Cost to sublet (this includes anything you don’t do in-house, like replacing glass for instance)
Anything outside of these three costs is considered overhead.
To determine your hourly rate, Newton suggests this easy-to-use formula:
Hourly rate = expenses (minus the cost of wages, parts and
sublet) + a little bit of cushion
+ wages – parts profit = ______.
The resulting number should guide the cost of your labor. Drop below that number, and you won’t be able to cover your operating costs. For instance, let’s say your cost of overhead is $50,000. With 500 labor hours available, you’d need to charge at least $100 an hour to cover that cost.
Know What to Charge
You’ve set your hourly rate based on overhead needs—and that gives you a guide for the lowest rate you can risk charging. But charging the appropriate hourly rate for the job is important too, Newton says. To accomplish this, you should:
• charge based on the skill level of the job. What expertise is necessary to repair the car?
• charge based on the condition of the car. For example, if the owner of the car has been off-roading and the car is caked with mud, that will require extra labor to clean the car before repairs can begin.
Pay Your Employees Well
Newton says people often work just hard enough not to get fired. To combat that inclination, provide incentive for your employees to give their all. He suggests offering both team and individual bonuses, structuring pay like this:
• Show-up pay—this is the base hourly rate or salary you pay your employees.
• Serious money—this is money you use to reward employees for a job well done.
Save, Save, Save
The No. 1 reason for small business failure is lack of working capital, Newton says. He stresses the importance of having liquid capital at your disposal, because you absolutely have to ensure your financial security. To accomplish this, Newton says you need three separate savings account:
• General savings account—money you can use for a rainy day or for fun things around the shop.
• Capital account—money to maintain the strength of the business.
• Retirement account—money for a retirement plan for you and your key employees.
Next up: Hire a pro to do the math. To correct an erroneous P&L, you may have to spend a little, but you stand to gain a lot. “The only thing [a shop owner can do to get it right] is to have someone who understands their business set up their P&L,” Newton says.
While your consultant will nail down your actual P&L, your accountant will make sure the numbers you’re running—and the money you think you have—is correct. “You need to work with an accountant to make sure your net profit is actually what’s in the bank,” Newton says. “Your P&L and cashbook registrar need to be close.”
Piña, who attended Newton’s course a year ago, learned she needed to run her numbers daily when implementing new processes at the shop.
Newton asked shop owners to get back to basics when making big changes, like adding equipment or making a new hire. “He asked, ‘How much is it costing you to run your shop each hour, per tech, per area?’” Piña recalls.
That good idea was easier said than done. “It’s finding the time to drill down into the numbers and then making changes where and when needed—without taking excessive administration time,” she explains.
But taking the time ultimately paid off for Brea Auto Body. “Something Maylan said struck a chord,” Piña says. “He asked, ‘When do your vendors come? When does it work best for you and your employees?’”
For Brea’s, simply changing the time when the shop’s mobile catering truck came by has increased their profit. Laughing, Piña says, “The truck used to come between 9:00 and 9:30 every morning, and the guys would take a solid half-hour to eat brunch. My mom changed the time to 7:45.” That let the techs eat breakfast before the workday started. Eliminating that disruption improved production—and therefore profits—for the shop.
By continuing the lessons learned in Newton’s course, business at Brea’s continues to grow. “Over the past year, we’ve increased productivity by 14 percent,” Piña says.
Despite the initial struggle to crunch numbers the right way at the right time, Piña takes a lighter view of the task now—one that Newton shares with all his students: “I liken it to baseball. It’s no fun to play if you can’t keep score.”