Running a Shop Finance

Track and Meet Your KPI Goals

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Let’s put this in car terms: Imagine you’re driving your vehicle on a road trip. You have a final destination—a goal—and you have a solid concept of how you’ll get there, too; you have the address punched into your GPS, and you have all your stops planned out.

The only problem is that you have no odometer and your gas gauge doesn’t work.

“How’s that going to go for you?” asks Bob Spitz, senior vice president of business development for Management Success! “You wouldn’t drive your car with all the gauges thrown in the trunk, would you? Or to change it up a bit, would you ever operate any piece of technical equipment without the proper gauges or measurements?”

The point, as Spitz puts it, is this: “If you wouldn’t do that, then why would operate your business,  one of the biggest things in your life, without the right numbers?”

Every shop owner needs to keep the proper gauges running on his or her business—no matter the size, scale, location or specialization of the shop. Talk with any consultant, coach or successful shop operator, and they will preach the importance of religiously tracking your business’s numbers.

Too many, though, still don’t, Spitz says. And many that do, still lack the full understanding of how to actually achieve the proper benchmarks associated with those key performance indicators (KPIs).

There are literally dozens of KPIs a shop can track—some helpful, some not so much—but through conversations with two number-focused, profitable shop owners, we’ve narrowed it down to two key metrics that, if measured,  analyzed  and reacted to appropriately, will be the difference between your shop’s success and failure.

ANALYTICAL APPROACH: A former chemical engineer, Joe Alli runs Auto-Lab of Canton South with a strict focus on processes and procedures—and the key metrics that support them. Photo courtesy Joe Alli

GROSS PROFIT—More than meets the eye

Joe Alli understands the concept of a process. He spent the majority of his professional career (35-plus years, actually) as a chemical engineer, working for or managing a number of high-level chemical operations.

“As an engineer, you naturally just analyze things,” he says. “You’re always looking for new things; if you don’t change and adapt, you’re dead.

“It’s what I took over to this industry—you have to find a way to do more with less.”

In the grand scheme of business, Alli says that means operating as efficiently as possible to allow your shop to be as profitable as possible.

He’s owned Auto-Lab of Canton South in Canton, Mich., since July 1, 2008. And despite the steep learning curve of entering an unknown industry and a harsh economic climate in his market, Alli has been profitable since Day 1.

There are a lot of reasons for that, he says, many having to do with the staff he’s put together. And there are a number of metrics that can justify the shop’s success. But, when he’s looking to take the pulse of his business, he looks at one KPI first, a KPI that he says will help signal the health of all others in his shop: gross profit.

Achieving Your Goals: Make Each job profitable

The overall, big-picture method for effectively reaching benchmarks for gross profit is to write and sell accurate estimates, Alli says. That means having the proper mix of labor and parts, and Alli has processes in place to ensure that happens—processes that must be carried out in both the back and the front of the shop:

Proper Labor Costs

The simplest way to earn the proper amount on labor, Alli says, is to charge the proper amount. That means having an hourly shop labor rate that will fit those needs. Alli doesn’t feel there’s a magic calculation for it; it comes down to each shop’s needs—including factors like technician pay, experience, work mix, etc.—and a bit of trial and error. His shop charges $93.67 per hour for labor, a number that took Alli all of five years to nail down.

“We started too low, and we’ve slowly tweaked it up over the years,” he says. “We know that, if the hours on the job are estimated correctly, that allows for the [17 percent cost of labor percentage].”

And there’s the catch, Alli says, to have your labor rate correct, you have to write an estimate for the correct amount of labor hours for each job. That comes from two things, the first being a thorough and standard inspection on every vehicle. Auto-Lab has a company-wide 33-point inspection for all of its franchise locations. Alli says his shop has used that as a template to build a specific inspection sheet with added checkpoints for various features it regularly sees.

The other tip for writing the correct estimate, Alli says, is even simpler: Charge for every hour it will actually take your tech to finish the job. If there are circumstances in your shop that may cause your job to differ from the book flat rate, Alli says not to be afraid to charge for that.

Don’t have your techs rushing unnecessarily to achieve unrealistic expectations that will hinder the quality of their work. And charge for diagnostics.

Of course, the front of your shop still needs to sell the labor to the customer. This is why the inspections and estimates need to be 100 percent accurate, Alli says, because your front-desk staff needs to effectively communicate the vehicle’s needs to the customer. Alli’s staff regularly goes back in the shop to show vehicle issues to customers. They explain parts costs, labor costs, etc., to eliminate any doubt.

“For something like diagnostics, customers often wonder why it costs so much,” he says. “I explain that it’s the most expensive thing we do: We have our absolute best technician on it with our most expensive equipment. And the diagnosis is what will make the repair accurate and save them money.”

Proper Parts Costs

Maintaining parts margins can be simple, Alli says, if you build a foundation that allows for it. The first step is to have proper mark-ups on each part used and to be sure to charge for every part included in the repair.

Mark-ups, though, should not be universal—they need to differ from part to part and vendor to vendor. Alli says the first step is to have a full, working knowledge of the price structures of all your regular vendors. And then, work to negotiate standard pricing with each vendor.

“We use different vendors for different things, based on what they sell, what price they sell it at and what deals we negotiate with them,” he says. “We have five vendors we use, and we made deals to get across-the-board pricing: With one, we pay $24.99 for all brake pads, regardless of what vehicle it is. In the end, it saves us a lot of money.”

Auto-Lab then has a parts matrix to effectively mark-up the costs to reach that 23 percent benchmark on every repair.

THE DEFINITION

GROSS PROFIT: The difference between the revenue of a job and the cost of completing that job. It excludes all overhead costs.

THE SHOP CALCULATION
As a figure: Gross Profit = Revenue – Cost of parts – Cost of labor

As a margin: Gross Profit Margin = Revenue* – Cost of parts as a percentage of revenue
– Cost of labor as a percentage of revenue

*Revenue will always equal 100 in this calculation

THE PURPOSE OF TRACKING IT
Measuring gross profit allows you to understand how profitable each job is in your shop—and, when looking at it in larger scale, the profitability of your business’s work mix, Alli says.

A poor gross profit margin can demonstrate a number of inefficiencies in the shop: labor pricing, parts pricing, ability to fully charge for parts or labor, effectiveness of vehicle inspections, estimate-writing ability of your staff, etc.

“It’s one of those numbers that, although simple, tells you so much,” Alli says.

Alli’s Benchmarks

Total gross profit margin: 60 percent
Total cost of repair as percentage of sales: 40 percent
Cost of parts as percentage of sales: 23 percent
Cost of labor as percentage of sales: 17 percent

COUNTING ON EFFICIENCY: Since taking over his family’s business more than 20 years ago, Steve Hixson has overhauled operations by implementing strategies to improve his shop’s efficiency levels. Photo by Jennifer White

EFFICIENCY—Beyond billable hours

On paper, it would seem that Art’s Automotive in Longview, Wash., is a pillar of consistency. After all, the business has been owned by Steve Hixson’s family since his grandfather founded the company more than 60 years ago.

Hixson’s family name, though, is pretty much the only constant.

When his grandfather sold the business within the family in the 1960s, the business transitioned to electric rebuilding—and that’s what it focused on for nearly 30 years. Hixson himself grew up rebuilding starters and alternators, occasionally “dabbling” in mechanical work.

When he bought the business in 1992, it was more or less stagnant with its “short-sighted” mix of work.

“We needed to diversify what we were doing and add services,” he says. “I transitioned it right away to full mechanical repair.”

It was a time-consuming and slow-going switch, he says, that included a large personal learning curve for himself as a 27-year-old owner. And the business did grow, although the effort amidst that growth was ineffective, Hixson, 48, says now.

Wasted energy was the problem; the shop spent too much time on jobs that weren’t allowing it to be profitable. And, even though his staff was working around the clock, they weren’t producing enough of the right work for the shop to be truly profitable.

That was solved, Hixson says, by focusing on one particular KPI: technician efficiency.

And with a staff that now boasts total shop efficiency numbers above 100 percent (and that includes an in-training apprentice and his two electric rebuilders), Hixson says it’s up to the owners and managers to put staff in positions to do their best work.

Achieving Your Goals: Make Each Technician Efficient

Communication within a business is the first important step to operating efficiently as a team, Hixson says. “That’s where you have to start, by having that atmosphere where everyone is approachable and we’re all talking and working together.”

Hixson also has a shop manager and an office manager to help iron out details of day-to-day operations.

From there, Hixson has a number of processes in place for the front and back of the shop in order for his technician’s to achieve their efficiency benchmarks.

Front of the Shop

Hixson has weekly meetings with his service writers to review, analyze and, if necessary, react to the shop’s regular sales benchmarks. This includes things like gross sales, gross profit, average repair order, closing ratio, etc. What do these have to do with efficiency in the back? Everything, Hixson says.

“This is where our work mix comes in,” he says. “If they aren’t writing jobs correctly and organizing and assigning the work correctly, our staff in back isn’t going to be efficient.”

The ability to close sales on the right type of work means that technicians won’t be wasting time on partial or unprofitable jobs that are hard to exceed book hours on. That’s why being able to sell all work in the estimate is also critical.

Hixson says marketing and advertising is another large factor to ensure that your shop brings in the correct demographic of customer. He targets the vehicles that his shop wants.

The shops use of its management system and in-depth workflow schedules also help to organize work for technicians.

Back of the Shop

It starts, Hixson says, with the shop’s physical space.

Lifts, hoists, bays, equipment—the entirety of the shop needs to be laid out to accommodate efficient workflow. Position your lifts to allow easy entry for vehicles. Make sure the shop floor is cleared of clutter. Though it may seem like common sense, Hixson has a policy that all tools, equipment, parts, etc., be put back in their appropriate places after use.  

Also, the importance of having new equipment and the right equipment for his shop’s work mix is crucial, Hixson says.

“It can be hard to pull the trigger on new purchases, but old, [outdated] equipment wastes too much time,” he says. “And piling it in your shop makes it more cluttered and hard to move around.”

Then comes two very important factors: training and pay. Technicians need to be equipped with the right skills and knowledge to work on the vehicles in the shop. That’s why Hixson and his service manager, Reuben Byman, have developed a training program for the shop staff that includes all the recertification requirements as well as vehicle-specific training.

Hixson says that for his team of technicians, paying on flat rate has been most effective. It has created extra motivation and helped his team understand that when the shop is doing better, they will all benefit. But, what motivates a team—and what pay system to use—will differ from shop to shop, Hixson advises.

And just like in the front of the shop, meetings play an important part in the back. Hixson holds daily production meetings with his staff in order to plan out the day’s work flow, go over the schedule, organize all jobs and make sure all of his technicians are on the same page.

THE DEFINITION

Technician Efficiency: It can also be viewed as “effectiveness,” and, in general terms, compares a technician’s billable hours, or the book time for a job, to his or her actual hours needed to perform the work. It can be measured on a per-job basis or over various periods of time.

THE SHOP CALCULATION
Technician Efficiency = (Technician’s Billable Hours / Technician’s Hours Needed) X 100

THE PURPOSE OF TRACKING IT
There are two ways to look at this number—on a staff level and on a shop level.

When looking at tech efficiency on a staff level, it allows an operator to understand the effectiveness of his or her staff in completing their work. It can shed light on technical skill level, technical knowledge, effort level and organization skills.

That being said, there are mitigating factors that can affect a technician’s efficiency that are outside of his or her control. That’s where the shop-level concepts come from. From an overall business standpoint, efficiency in the back of the shop can be affected by everything from work mix to the marketing used to get work mix, to the cleanliness of the shop, among many other things.

HIXSON'S BENCHMARKS
100 percent*

*Hixson’s shop is slightly different than most, due to his electric rebuild department and his apprenticeship program. He includes all shop employees in his efficiency numbers. Standard industry benchmarks tend to gravitate closer to a 125–135 percent shop-wide average.

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