Leadership Strategy+Planning Finance Operations

The ROI Guide

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How to Measure ROI for any Business Expense
From training to marketing to equipment purchases, develop a system where ROI is always top-of-mind.

An Efficient Pricing Model

People are constantly asking Dave Mulcahy: What is the most profitable business to be in?

“The one that has the most efficient pricing model,” he responds. “If you have a good pricing model that makes sense to you and your customer, the ROI for any purchase will show up in the cash register.”

As the director of the Small Business Development Center (SBDC, a branch of the Small Business Administration) at Lamar University in Beaumont, Texas, Mulcahy is used to business owners looking for the silver bullet that maximizes profitability. But, really, no matter what industry you’re in, achieving the ultimate ROI for any business venture comes down to customer relationship management.

Chris Matson would have to agree. As a fellow “finance guy by training,” Matson similarly views the auto repair industry from a different vantage point than most technicians-turned-shop-owners.

“Being profitable is what I’m responsible for,” he says.

That’s the mark many shop owners miss, Matson says. It’s why many shops achieving $2 million in annual revenue are secretly struggling to achieve the tiniest of net profit margins.

“They’re not charging for the level of work they’re doing,” he says, “whether that’s not getting paid for diagnostics, or whether that’s having a labor rate that’s too low.”

In short: If you know what your customers value, you’ll know what to invest in.

For example, take this men’s clothing store for which Mulcahy once consulted: The employees kept track of each and every customer that came through the shop, and asked, “What do our customers want? What will they spend more money on? What products are in demand?” The store discovered that, in particular, size 42 blazers were a hot commodity.

So, once the shop ordered dozens of size 42 blazers in a new color, “they called all 42-long customers up and said, ‘Hey, we have this blue blazer in your size. Why don’t you come in and look at it?’ And they got a huge return,” Mulcahy says.

Matson says the marketplace for auto repair is no different than any other business—everyone has a hard time finding and holding onto customers. But the better the relationship and the more you know about your customers and how much they’re willing to pay for a service, the easier the sale will be. In return, it will be easier to justify an expense.

Whether it’s diagnostic equipment for technicians or sales training for your service advisors, if you know what your customers want, you can justify the investment—as long as your company is financially stable. Luckily, Mulcahy has provided Ratchet+Wrench readers with a spreadsheet for tracking said stability.

“Profit can be attached to parts, labor, lots of different things,” Mulcahy says. “When it comes to tracking ROI, it can’t be horizontal. It has to be lateral, linear. You have to look at the spreadsheet and ask: Are you consistent with your pricing model? What is my labor cost with this particular sales ticket?”

And once you’ve nailed down what your customer wants, and you’ve ensured your business is financially durable in a number of categories, it’s time to outline employee expectations.

 

A Glossary of Financial Terms

Whenever Dave Mulcahy works with a business, he shares a “basic” 22-page spreadsheet that allows businesses to track all financial information, including income statements, balance sheets, cash flow reports, amortization, depreciation, and basic ratios. In the end, those factors allow you to have a better grip on ROI for any business purchase.

Here’s a brief glossary provided by Mulcahy for the terms you’ll find in that spreadsheet, which will allow you to better read profit-and-loss (P&L) statements:

  • Accounts Payable: These entries represent a company’s obligation to pay off bills to its creditors.
  • Accounts Receivable: The money the company is owed from clients.
  • Amortization: Paying off of debt with a fixed repayment schedule in regular installments over a period of time.
  • Assumptions: Expected costs for a business. Assumptions are used to enable companies to plan and make decisions in the face of uncertainty.
  • Cost of Goods Sold: The direct costs attributable to the production of goods (aka material and labor costs) sold in a company.
  • Current Assets: These items represent the value of all assets (like accounts receivable, prepaid expenses) that you can expect to convert into cash within one year.
  • Depreciation: Allocating the cost of a tangible asset (includes fixed assets) over its useful life. For tax purposes, businesses can deduct the cost of tangible assets as business expenses.
  • Fixed Assets: A long-term, tangible piece of property that a company owns (equipment, land) that will not be converted into cash within one year’s time.
  • Prepaid Expenses: When a business pays for good and services to be used in the near future. For example, you purchase insurance in case something unfortunate happens.
  • Liabilities: Financial debt that arises during the course of its business operations. Liabilities are used to finance operations and pay for large expansions.

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