Net profit: The elusive number shops must look for

The independent sector of the aftermarket service and maintenance industry seems to have a tough time understanding that a business must make more income than just an amount to cover the operating expenses and a basic management wage. 

Net profit is that number at the bottom of the income statement that stands out all by itself after all expenses have been listed and totaled.  This number usually is expressed in a “before tax” denomination, therefore, the company will pay corporate tax on this number, (assuming it is a positive) or a proprietorship (non-incorporated business) will pay personal tax on this number.

The objective, in a business operating an automotive maintenance shop, should be to “net” a minimum of 10 percent of total bay sales before tax but after all operating expenses including a professional management wage has been earned.  A business has a right to gross profit, but it must earn its net profit.

I have talked to many shop owners who treat net profit seemingly like a dirty word. “Well, if I make net profit I will have to pay tax,” or “Well, a guy who makes a $100,000 or more must of ripped somebody off” or “With the cost of everything in this business, you can’t make a good net profit anymore. I wish the old days were still here.” With comments like these running rampant throughout our industry, no wonder the industry is not as profitable as it needs to be.

The scary truth is that the average five- to eight-bay shop is missing $90,000 to $125,000 net profit out of its current business coming through the door, yet for some reason we don’t want to talk about that and discover where it is and what is required in order to go after it. Instead we hear, “I need more car count.” This is so wrong and the math, once studied, does not lie. We have all the car count required but we are not looking after it properly. We are not executing our [rofessional responsibility to our current clientele. It is time to learn how to change that and reap the rewards for doing so.

 It is truly time to understand reality. Net profit is not a dirty word; it is required for survival.  It is required to pay for updated equipment and software. It is required to hire and retain highly skilled and competent staff.  It is required for facility improvement and expansion. It is required to reduce and pay out business debt.  It is required for outside investment to ensure the owner has a retirement program. It is required for business growth. It is required to reduce the level of owner stress in a business. 

I think it is time this industry understands and embraces this concept of net profit and have a long love affair with it. And if management can’t seem to do that, then maybe it’s time the business get a prescription for some steroids” 

Juicing It Up
With all the liability exposure, the high investment required in capital items and the long hours of duress many shops endure trying to make their business work, why would an owner want to risk a $200,000 to $700,000 investment to buy himself / herself a job?  This owner would be far better off for himself, his family and the industry to cash out and get a good job as a competent technician or service advisor.  He would make more money with no risk.

A proper business plan must be built each year to see what revenues are required to pay management a professional salary, pay above average marketplace wages and earn enough net income to grow the business.  The business must grow in all aspects, especially in areas such as increasing its client base, staff, equipment, inventory and facility.   This planning is not an overly difficult procedure, but it will take some time to calculate, study and analyze whether the facility the business runs in is capable of reaching the revenues desired and to drive the necessary net income required.  The shop should be capable of paying management a $125,000 to $150,000 salary and netting a minimum of 10 percent of total bay sales before tax.

If the shop does not plan for that level of net income, something in this industry usually happens: there is none.  Watching the sales and bank balance go up and down is not planning for net income.  To net a minimum of 10 percent or more of total shop sales and pay management a professional salary, a business owner must strategically plan the business to operate in today’s competitive environment.  If he/she does not know or understand how to do that, then business management education/development is a must, otherwise their very fabric of Family security is definitely at risk. 

This business is not worth cheating time away from your children or losing a family over. Do yourself the biggest favor ever in your business career, learn how net income works and is earned in your business today.  Do not get caught in the noise of the industry, “Well, it’s different in my marketplace,” “That’s big city stuff, not reality where we are” and all the other excuses one will hear.

Net income development should be the very first issue to be addressed and understood before 2015 is over so the next three to five years can be celebrated with a new vision and true optimism for a bright and financially secure future.