Determining the cost of doing business

Jan. 1, 2020
One simple question determines if an expense is a cost of business.
Mike Anderson

How many times have you had an insurance adjuster tell you that something he doesn't want to pay is included in your cost of doing business? Is that really valid?

One of the most basic principles I learned when I was in college was that if you're trying to determine if something is included in overhead or the cost of doing business, ask yourself this: Would my cost for this item change based on whether I fix one car or 100 cars?

So let's look at some examples. Let's say I pay $95 a month for the security system on my shop. Whether I fix one or 100 cars per month, the price is going to be the same. It's not a cost that is directly attributable to how many cars I fix. So that would be included in my cost of doing business.

Similarly, if I pay $400 a month to subscribe to an estimating system, that fee isn't going to change whether I fix one car or 100. So that's included in my cost of doing business.

But costs that fluctuate depending on how many vehicles I fix, and expenses that can be tracked to a specific job, are not included in the cost of doing business.

Let's look at some examples. Keep in mind that I'm not talking about how much or whether you charge for these items. I'm only interested in determining your costs for them.

Consider your cost for garbage or solid waste disposal. This includes getting rid of the cardboard packaging from parts you buy, and the used masking paper you remove from vehicles you've painted. If you didn't fix any cars, you wouldn't have any trash to remove. Waste removal costs could fluctuate based on the amount of garbage you generate, which varies based on whether you fix one car or 100 or some number in between.

The cost to deal with hazardous waste disposal is similar. It's based on whether you fix one car or 100. In addition to actual hauling fees, there are other associated costs, such as depreciation on your thinner recycler and the thinner recycler bags you have to buy.

You could add up these costs for a year and divide it by the number of cars you repaired to get an idea of your average cost. For example, if my costs are $300 and I fixed 100 cars, then my hazardous waste disposal is $3 per job.

Remember, this would just be the basis for any fee you may charge, not necessarily what you charge. Whether you decide to charge for or make a profit on these costs is a business decision. But you should understand your costs as the basis for these decisions.

Let's consider your utility bills. Your cost for natural gas to heat your building doesn't really change whether you fix one car or 100. But the gas needed to power your spray booth certainly changes based on how many cars you paint.

I know some shops that have installed a special meter – that typically costs $1,200 to $1,500 – on their paint booth to track the amount of gas used to run the booth. When the painter begins a job, he resets the meter, and when the car is finished baking, he hits a button and the meter prints out a receipt showing how much gas was used. That's an expense that is directly attributable to that job.

As a side note, at least one paint company offers an online calculator to help determine paint booth energy costs. You enter information on the type and size of your booth, and what your gas costs are, and it calculates your costs to run the booth.

Deciding what costs you will charge for and profit on is up to you. But if an insurance adjuster is telling you that a certain expense is just part of your "cost of doing business," use the rule of thumb: Will that cost change whether I fix one car or 100?

Mike Anderson, a former shop owner, currently operates http://COLLISIONADVICE.COM/, a training and consulting firm. He also acts as a facilitator for DuPont Performance Services' Business Council 20-groups.

If you have a business issue or question you'd like Mike to address, email him. [email protected]