Tips to Cap Common Overhead
March 11, 2021—Every shop owner is trying to grow their profits, but many don’t know the right strings to pull that lead to growth. The answers aren’t cut and dry for every shop. Each business has its own factors to account for and potential opportunities to expand on.
Aaron Stokes, Ratchet+Wrench contributor and founder of Shop Fix Academy, recently lead a discussion on this topic for the 2021 Virtually Vision Training and Expo entitled “Secrets for Leading Your Team to Massive Growth and Record-Breaking Sales.”
He broke down the common mistakes he calls “silent leaks,” that can limit potential shop growth. Here are just a couple of the many takeaways Stokes discussed.
Don’t reject the cost conscious customer.
Stokes described a scenario where a new customer needs a new set of brakes. She's never been to the store before and is coming off a divorce from another shop. The shop quotes the job at $1,000 and after getting a quote with her old repair shop she wants the new shop to match the price at $800.
Becoming profitable is all about managing overhead, Stokes said, and in this scenario you’ve already expended your overhead with the time spent looking at the car and going through the quote. Stokes sees too many shops refuse to budge on pricing because they believe it will cause them to lose money. But Stokes pointed out the shop has already put overhead into the customer, as long as the job is turning any type of profit, you’re making money back. It’s also important to establish trust with a new customer, so if it’s a slightly less than ideal price, that’s fine to gain their business. Get what you can once the car enters your shop.
Don't calculate RO and P&L the same way.
A P&L is pretty simple, Stokes explained. If you’re bringing in $100,000 a month, the general goal is to spend 40 percent on parts and labor and then another 40 percent on overhead, leading to 20 percent profits.
Stokes said it's easy to then take those same calculations and apply it when trying to decide if a repair order is profitable. But that’s not what you should do.
If you have a $1,000 job, like the brake order, don’t expect that 40 percent of that is going to be overhead and 40 percent will be parts and labor. Businesses get tripped up in the overhead calculation. Overhead should be calculated by dividing your monthly overhead by your car count. That’s how much you’re spending on overhead for every car.
This often lowers a business expected overhead, which increases the net profit calculation of a job and will allow businesses to see that they actually can do a repair for $200 less if a customer is pushing for it and it will still be viable for the business.