Nailing Down Paint and Materials Costs

Paint and materials (P/M) profitability should easily exceed 25 percent and you should strive for more than 40 percent. So where is your gross profit level for P/M compared to this benchmark? The most common task that first must be "repaired" to reduce costs or increase profitability is to make sure everything is being accounted for properly. This often is not the case. I have commonly seen:

• Non-paint and materials items being costed against P/M sales;
• Income for P/M items not posted properly;
• Moving money from a profit center to balance another (often in dealerships).

What is P/M?

Costs and profitability are greatly affected by what is defined as "Paint and Materials." To some this area includes everything that gets dumped into the account and many of these charges aren't actually paint and materials. It is no wonder profitability is low and costs are at unacceptable levels.

You may decide to put any line-item expenses in paint and materials, however, make sure the revenue is there too. "Costs" and "Sales" must be in the proper accounts for any accounting or benchmarking to be beneficial.

Supply Chain Support

A strong suggestion is to get your supplier involved in this arena of your business. A number of progressive jobbers and paint companies are willing to provide clear direction in this area. Take, for instance, invoicing. Set up different account codes to be provided on separate invoices. Have one GL Account for paint and materials and additional accounts for the other items, which would not be considered paint and materials. Some shops have set up a regular paint and materials account, a shop expense account (for items such as booth filters), a small tools account (for things such as sanding pads) and even a safety items account. This makes mis-postings much more infrequent.

The key on the supplier's side is to accurately invoice each order to the correct account and place the customer's accounting code for quick and accurate accounting distribution. If multiple accounts aren't done, then at least items are listed on separate invoices with the proper account codes listed so distribution is easier and consistent. Proper accounting distribution practices make all the difference in the world to the final accounting reports.

Moving Money

I sometimes find, after digging deep into paint and materials accounts, that final billed sales don't match the actual estimated materials allowances. This seems to happen more in dealerships, but can be found in independents as well. In these cases, the revenue provided in the paint and materials is partially transferred to offset other deficits in another revenue area. This is often done to balance the repair order prior to input into the dealership accounting system.

I have seen it done to adjust for some additional metal/paint hours for techs who have already been paid, but the shop failed to get it approved for a supplement. Since the parts are almost fixed in these environments as well, they have nowhere else to shift it from. In other words, the bottom line is distributed in the system to balance the ticket, but may not reflect the same distribution as the estimate.

This cost shifting accounting surely shouldn't happen, but it does. With it, don't expect to be able to compare "apples to apples" with benchmarks either. What we have found often in these cases is the owner/manager didn't know these "adjustments" and "charges" were even going on. The bookkeeper, the data-entry person or accountant made the call.

Take an Accurate Inventory

Along with proper distribution, the inventory carried each month does affect your costs within that accounting period. This is especially true if a large order increases your inventory at the end of that period. If a large order for paint backup tints, a few cases of clear, hardener and reducer hits at the end of the accounting period it could mean $2,000+ to the costs of materials. However they should not be costed at this point – they have not been consumed on the vehicles repaired for the accounting period (see sidebar "Numbers Game").

The most accurate method of tracking your true costs for this area would be to place all your purchases in an "Inventory" account and then subtract your "Change In Inventory" at the end of the accounting period. This then would account for large orders that come in at the end of the month and also, when you eventually use those materials, your inventory level goes back to normal. There are countless ways to do this; establishing a correct system is key.

What Next?

An expression I often use is, "To effectively change anything, you must measure it, have a system to do it, commit to it, get others to embrace it and then execute it as a team."

Other than the cost reduction, it is important to consider the other side of the profitability equation – revenue. The total paint and material's revenue should generally represent approximately 10 percent or above of your total sales revenue. This is calculated by taking all your paint and materials revenue in a given accounting period, such as a month or quarter, and dividing it by the total sales revenue (total turnover) for that same accounting period excluding taxes collected. This percentage should be calculated to two decimal points as well for better accuracy.

This is not only controlled by the paint and materials rate you charge, as many shop owners (and clients) have complained and moaned about for years. Many just believe there is no room for improvement in this area, because it is "out of their control." Not true. Often people forget about line items that would be in the category of paint and materials. We get too busy to worry about it.

Many shops we have worked with and reviewed have averaged over 11 percent revenue for this area, an important factor for those who are having paint and materials profitability problems. Shops need to spend a day analyzing some of their repair orders (50 to 100) to determine if pricing in all areas of the business is in order. This analysis provides key insights into a shop that can go a long way in determining an effective solution.

Another important tool is to have a method to audit your estimates for missed items and staying within compliance of any of your work provider relationships. This can be done manually or with software.

The System

Still the biggest contributing factor to profitability and costs of paint and materials is in the hands of those that use the products. This one area can change the costs-and-profitability equation by great percentages. But do you have a workplace that is focused on this?

It is not just using true HVLP equipment and the training required to reduce consumption, but rather it's a mindset of all involved. Everyone in a shop needs to control waste. In fact, the extra paint overmixed and not used rightfully classifies as inventory and should be deducted from costs. This is whether it is stored for future use or thrown into a waste container and hauled away. The "throwaway" most often costs you twice, though (wasted product and disposal costs).

The disposable cup systems available today will assist in reducing this waste along with the use of a computerized mixing scale to monitor consumption based on each repair order. It, however, often takes a change in habits that are hard to break. Establishing a mixing order sheet at the beginning of the repairs that factors in the amount of products needed to mix can also help break this habit. Most paint systems provide a recommended amount to mix based on panels or square footage. Use it as a starting point.

It is a very important task to reduce and eliminate waste in any phase of your operation. One system we suggest is the SMART program:

Supply Organization

• Centralize supply inventory to limited and secure locations.
• Standardize and organize working inventory storage for each technician.
• Reduce product variations down to few as possible. Don't have multiple brands, same product.

Monitoring and Measurement

• Implement log sheets that track usage and distribution of all inventory.
• Implement computer scales using RO and password for usage reports.
• Implement taking monthly and quarterly inventories.

Abolish Waste

• Improve mixing process to match what's actually needed.
• Eliminate storage locations and limit to only a few shelves and to color family containers.
• Improve repair process to use the most effective use of materials.
• Use recycling equipment to reduce hazardous waste.

Review and Reward

• Perform monthly analysis of costs and profitability after adjustments.
• Establish "Waste Buster" committee to get staff involved with ideas and support.
• Conduct periodic reviews for everyone in the shop.
• Establish incentive system to share the profitability.

Training and Technology

• Provide continuous internal system training to improve process.
• Provide Proper Product Training provided by manufacturers
• Introduce and provide new product training ... always look for a better solution.

Each of these areas requires complete commitment by the shop operator and the staff. Ultimately, it should become a self-managed system because the staff will have participated in the development of the program by way of committee involvement. This focus will provide measurable results, quickly.

Taking a closer look at procedures in your shop will help you fine-tune your business and identify problems in your P/M costs. Finding solutions is essential to running a top-notch shop.