Your Shop’s Net Profit Issues
Sometimes you have to ask yourself “why” in your business: Why are numbers lower than normal? Why are some of your technicians scrambling when a car comes through your shop? Why can net profit play such a critical role in financial gain?
According to the 2018 Ratchet+Wrench Industry Survey,15 percent of respondents do not regularly track their net profit margin. Net profit is considered the “bottom line,” according to a report by the Market Business News, and can be found using the following equation: Add up all of the business’s total expenses and then subtract the revenue from it.
Shop owner, Alan Symmes of Revolution Automotive Services in Norwood, Mass., joined a local automotive course in Boston to learn more about the business side of auto repair. After the course, Symmes says he went home and made changes to the business instantly.
“I was learning how to analyze the numbers and read them, and then from there was once you have all of these numbers, then you can diagnose your business just like we diagnose the car,” Symmes says. “You start to see trends in things, you see dips in numbers, you see the numbers that are out of whack, and then from there I can analyze, and look into what causes that.”
In two years, Symmes was able to increase his profits from $400,000 to $700,000 and credits it to making changes around the shop. According to Symmes, the shop had maybe a three percent net profit at the time, and today the shop has grown to a 21 percent net profit.
Bryan Stasch, vice president of Automotive Training Institute says shop owners often don’t understand the numbers that come with running the business. Stasch has been in the automotive industry for 36 years where he ran and opened shops for 18 years.
There are small components in your shop that have big impacts, and even though operations may look right on the outside looking in—numbers can reveal a different story.
Symmes and Stasch reveal the mistakes that shops often make when it comes to net profit—and how to change them.
1. Your numbers aren’t tracked.
It’s important to track numbers that not only will give you insight on your business, but allow you to turn over a profit afterward. According to Stasch, he’s worked with shop owners across the country who are talented, but often are unaware of what to track at their businesses.
“Your average shop owner doesn’t know their ‘WIN’ number, [and] they also don’t know what their gross profit dollar need is for their business,” Stasch says. “So they just sell, sell, sell, at the end of the month they pay all of their bills and don’t understand there’s no money left.”
According to Stasch, shop owners should redirect their focus from sales to drive gross-profit dollars and manage expenses.
“Most focus on sales and focus on top-line sales, and what they don’t understand is there’s not a single shop owner on the planet that gets paid on sales, when unfortunately everybody they surround themselves with does: service advisors, technicians, parts vendors,” he says. “Shop owner gets paid on what I refer to as ‘the gap’ between gross profit dollars and fixed expenses—they get to keep what’s left.”
A ‘WIN’ number—what’s important now—Stasch says, can help lay out what sort of lifestyle you want and return of investment you want on your business. Stasch suggests determining how much sales is needed for your WIN, or desired lifestyle: Gross profit dollars ÷ Gross profit margin as a decimal = sales needed.
2. Your services are priced low.
Your labor rate is often not recognized by customers and is an adjustable mark on which your business can continually work. When it came to implementing changes in the shop, Symmes says the first thing that he changed was the easiest: the labor rate and the parts matrix.
Previously, the shop was at $89 an hour, and he said he made the subtle change to $105.
“Not a single person gawked at it,” Symmes says. “Today, we’re at $142.97, and nobody is gawking at it, and now we have scaling labor rates for the complexity of different jobs and cars that we work on.”
While the labor rate is higher than previous years, labor rate is typically not discussed with customers, Symmes says.
“We discuss line items [on] what does this job cost,” Symmes says. “‘It needs an alternator? That’s $1,000, not, ‘The alternator is $800 and labor is $200.’”
In addition to adjusting labor hours, it’s beneficial to look at other items sold at your business, such your parts matrix. Symmes says he realized that he was giving parts away for less than he should have.
The issue, he says, is that his shop caters to German cars with high-end parts, and parts come from the dealer. Symmes began to matrix his parts to build value, he says.
“Back when I first started the group, my parts margin was 36 percent,” Symmes says. “In December 2018, my parts margin was at 53 percent. That’s just incredibly huge. We made so much money just by putting in the correct numbers where it needs to be, and that doesn’t even touch on sales.”
By taking a look and adjusting your labor rate prices, you’ll bring in more funds into our shop.
3. Your staff members rarely make time for training.
The industry continues to develop every single year, and if your shop isn’t making time for training, then it can pose an issue to the reliability of your business. It’s important to ensure that your entire team is on the same page, collectively, otherwise issues can unexpectedly pop up.
According to the 2018 Ratchet+Wrench Industry Survey, 50 percent of shops allocate nearly 1–5 percent of sales to training opportunities. Additionally, 28 percent of shops shared that they do not allocate money from sales to training.
“I invest a lot of money in because it makes me money,” Symmes says. “Technicians that know what they’re doing can diagnose and repair cars faster than who is scrambling for the answer or trying to figure out how the system works when the car comes in the door—my techs know what they’re doing when the car comes in already.”
He says it’s important that your entire staff is trained as everyone is part of the customer’s experience in the shop.
“Sales has to know how to sell,” Symmes says. “I send them all over the country to get trained by the best people in the industry I think that can help them get better at what they do, and in turn, makes my business more profitable and it helps them build confidence too when they have tools for the job.
“The tools can not only be a tool in the shop, but the knowledge of what to say or how to handle that price-shopper on the phone, or how to handle that difficult customer who is really drilling you on, ‘Why are you more expensive than others?’”
In his shop, employees are required to attend industry training events, whether they’re nearby or further away. To stay ahead, Symmes books flights early in the year so his employees know when to anticipate traveling for training purposes.
“They all get paid and they want to grow and be better,” he says. “The better they are, the more money they make.”
4. You haven’t defined your customer base.
It’s important to market to the right customer and bring them into your business. Every customer is different, Stasch shares.
“Not every customer is a good customer,” Stasch says. “Unfortunately, [if you’re] discounting, you just train your customers. “
When looking for the right customers, he says you can look at a wide variety of sources that provide insight about potential business.
“Look at who your current customers are and your better customers,” Stasch says. “Learn the demographics and the psychographics of your customers.”
For Symmes, his shop determined a customer avatar who the business is able to center marketing around, further bringing new business into the doors.
“I have a customer avatar and she’s between 38 and 46 years old, she has a husband who works, she has a couple of children and they both drive German cars,” Symmes says. “I have this person dialed in; I know where she goes out to eat, I know where she grocery shops, I know everything about her, and I target my marketing in every aspect to attract her, and then everything else comes as a result.”
According to Symmes, when you bring in the right customer for your shop, your business is able to grow from it as the right customer may later recommend services to others as well.
“By bringing in the right customer, it’s allowed me to be able to do things that I need to do in my business to make it profitable,” he says. “The right customer is not concerned with price first. It’s actually fourth or five on the list of priority, and that’s really been the biggest thing for me: learning to define who the right person is and then market to that person.”