Last month I wrote about the importance of having thoroughly written repair plans to raise our gross profit (GP). Some owners even invest in online training/coaching for better estimating, negotiating skills, collecting copays, etc. I have seen some of these folks even raise their average estimate to the $8,000+ range. Will this strategy guarantee high net profits? Unfortunately, no.
There are two crucial metrics that every business owner MUST understand. The first one is called their “breakeven” and the second one is their “owner’s breakeven.” When I ask shop owners if they know their breakeven, many respond with a false confidence of, “Yes, I do.” Then with further questioning, I find out they are really at a loss.
Let me try and explain by using an example shop that generates, say, $2.5 million per year in gross sales and has a yearly overhead cost of 35% or $875,000. The overhead costs equal all fixed & semi-fixed expenses (administrative payroll & payroll taxes, estimating systems, utilities, vacation pay, property taxes, phone bills, accounting fees, etc.). Overhead costs in this shop per month would be $875,000/12 months = $72,917 per month. This number is one of two numbers we need to figure out the breakeven. The next number we need is the gross profit and let’s say this example shop is at 45% GP. We take the monthly overhead expenses of $72,917/.45 (GP) = $162,038. This means that this example shop must produce at least $162,038 in gross sales every month just to get back to zero or break even.
Now the owner of this example shop might say, “That’s great Greg, but I want to make a 15% or $375,000 net profit at year end.” Well, we are now going to figure what is called the “owner’s breakeven.” There are only three numbers we need for this formula: Monthly overhead expenses, $72,917; Monthly desired net profit ($375,000/12 months), $31,250; Gross profit, 45%. Now, here is that math: $72,917 + $31,250 = $104,167, the new monthly expenses which includes the owner’s desired net profit. Now we take the new monthly expenses figure of $104,167/.45 GP = $231,482, the owner’s monthly breakeven.
Some of you may be saying, “Greg, with all this math you are making my head hurt!” Yes, it took me a bit too, but to the owners who are reading you MUST understand this, as so few do! Understanding this is the keys to the kingdom. In this shop’s example, they must produce $231,482 per month in gross sales to produce a $375,000 net profit by year end at their current 45% GP and overhead cost. If you are keeping up with me so far, just think about this one. If we can get better estimate training, higher total loss charges, demand higher labor rates, parts discounts, etc., and now raise our GP to, say, 47%, bingo! This shop can fix one or two less cars per month and still have the same net profit. Here’s that math: New breakeven of $104,167/.47 = $221,632 per month necessary gross sales. Let’s say this shop can really hit it out of the park with an average 50% GP. Here is that math: $104,167/.50 = $208,334. This is crazy stuff if you think about it. Just by going from a 45% GP to a 50% GP, this example shop can fix ($231,482–$208,334 = -$23,148) three or four fewer cars per month and still make the same net profit!
If we can consistently hit our breakeven by working day 13-14 of every month, for the remaining seven or eight working days left in each month we are at a zero overhead cost. “So, what does this mean Greg,” you ask? Well, here is the flip side: Let’s say an insurer has a junk used hood on an estimate and it will take four days to get. We contact the vehicle owner, and the used hood is just fine with them. We contact the dealer and we can have a new hood in the a.m., but it will cost our shop $250 extra in the end. We are confident if we eat the $250 for the new vs used hood, we can get this extra car out by month end. Was this a good business decision? Some may be saying, “That is just dumb!” But let’s do the math to see: Say this job is $5,000 x 45% GP = $2,250 GP. We just lost $250 for a new hood over a used hood. $2,250 - $250 = $2,000. By losing $250 on the new hood to get the car out by month end, I just sent $2,000 more to the bottom line of our profit and loss statement in net profit by month end. Hopefully, your wheels are turning by now!
