After three years of ownership, Mike Davidson sat in an uncomfortable chair in a stuffy, local bank, trying to open a line of credit for his Little Rock, Ark., shop.
Overall, Davidson was pleased with how his business, Parkway Automotive, was shaping up. His bays were full, his bills were paid and he was looking to expand. Acquiring a small business loan, he thought, would be pretty simple.
Before he and the banker got into logistics, though, Davidson was asked a simple question: How does your balance sheet look?
“I remember saying something like, ‘I don’t know; what does a balance sheet look like?’” Davidson says. “I had no idea what it was.”
Needless to say, he didn’t get the loan.
“That was really the defining moment when I realized I needed to have a full understanding of my finances: what the numbers mean, how to track them, how to use them,” he says.
Dan Gilley, president of RLO Training, says this isn’t an uncommon issue with shop owners. For the most part, people simply look at their profit and loss statements and check if they need money or not, Gilley says, or “they simply trust what their accountant tells them.”
“The thing they’re missing is that if you don’t know how to read your statements, if you don’t know how to get these numbers and what they mean, then you can’t make educated decisions in your business,” Gilley says. “The better grasp you have on your numbers, the better decisions you’ll make.”
There are literally hundreds of numbers a shop owner can track, some more important than others. Ratchet+Wrench spoke with two shop owners about the most critical number they analyze in their respective businesses, and how that number shapes the decisions they make every day.
Percent of Sales as a Starting Point
To his own surprise, Mike Davidson has become a numbers guy. And it has nothing to do with an obsession with revenue and profit and stuffing a bank account.
As one industry consultant puts it: He operates his business with the goal of “highly ethical practices.” He wants his shop to serve customers better than anyone in the area.
The numbers are his way of making sure he’s doing that.
“You need to track things, you need to be able to keep score,” he says. “I want to know if everyone in our shop is doing their job serving our customers in the best possible way. And you have to find a tangible way to measure that.”
It may come as a surprise to some, but Davidson does it through one financial measure: percent of sales.
When Davidson uses this term, he refers to a shop’s actual sales compared to its “potential revenue,” or the amount of work it offered to customers.
“It’ll tell you how good of a job we’re doing in presenting work that fits customers’ needs,” he says.
The ultimate goal, Davidson says, is to sell 70 percent of all the work offered to customers every month. His shop “gets very close” to that mark in some months, he says, but the key is never having it dip below 50 percent.
How He Uses Sales Percentage
It’s all about staff efficiency and productivity, Davidson says. He needs his technicians and his service advisors working at an “A” level every day.
While he can measure productivity (hours spent working in comparison to hours available) and efficiency (billed hours compared to hours available) on their own for each employee, it’s difficult to take into account how each employee affects one another.
That’s where sales percentage comes in.
“If our percentage is down for a month,” Davidson explains, “that can mean a few things. Either our advisors aren’t doing a good job of selling the work brought to them by the techs, or the techs aren’t bringing the right kind of work (jobs actually required for the vehicle)—or enough work—up front to the service advisors.
“The sales percentage number is the overall indicator of how that relationship is working. If you’re hitting in that range (50–70 percent), then you’re efficiency and productivity is solid.”
When Davidson does have a down month, he uses that information to make adjustments.
In October of 2012, his shop sold $138,917 worth of its total potential revenue of $272,500. It was a “red flag,” Davidson says. While the revenue numbers were in line with monthly goals (his shop did just under $1.7 million in 2012 sales), the sales percentage of just 51 percent showed something was amiss.
After examining the situation further, he saw some of his service advisors were losing customers on phone sales. So, he did phone training with his whole staff.
Sales percentage results also sparked Davidson to institute a thorough inspection process with his technicians a few years back.
“Knowing how that number (sales percentage) is formed and what goes into it helps you pinpoint these problems,” he says. “Then you can make the proper adjustments.
“It’s about really understanding what you’re looking at. You can have all the numbers on a screen in front of you, but if you don’t know what goes into them, they do you no good.”
Profit Margin as Proof
One of the first things Andy Lundsted learned as a 24-year-old owner was to never be afraid of admitting what he didn’t know.
He had worked at Certified Transmission for less than a year when the owner presented him with a chance to buy the shop. This was September of 2002, and Lundsted jumped at the chance.
“It was an opportunity, and I was young and dumb and just went after it,” he says. “I figured that if I could keep cars coming through the doors, I’d have enough time to learn the things I needed to run the shop.”
He bought books, took classes and listened to taped lectures. Lundsted was determined to learn everything he hadn’t already from his seven previous years as a technician.
That’s when he discovered the power of profit margin.
“It’s a simple number, but I realized that if I could be profitable—and really understand why I was profitable—then I wouldn’t be the owner running around like a chicken with his head cut off, putting out fires all day,” he says.
Focusing on profitability, and using profit margin as the overall indicator, Lundsted has not only grown his business substantially since taking over 10 years ago (annual revenues are nearly double what they were in 2002), but he did it all while pivoting his business model from transmission-only work to a 50-50 mix with general repair.
How He Uses Profit Margin
It’s no different than setting any other goal, Lundsted says; once you have that starting point, you can begin to formulate how to get there.
And with profit margin, that means a full examination and understanding of your entire business.
“We’re talking about profit after everything is paid, and that includes your salary if you’re still working in the business,” he says. “Just by examining all those items that go into calculating your profit, you’re seeing where your money is going: How are you making expense decisions? Is your money going in the right place? Are there areas to improve? It’s the same with revenue, as well.”
Lundsted sets a goal of a 20 percent net profit margin every month. He says he got that number early on in his career from a business lecture, and it’s a number that, if hit regularly, gives a shop freedom in making decisions.
When his shop made the transition to general repair, he saw average repair orders drop significantly.
General repair work is simply less expensive, Lundsted says, so he used his profit margin goals to help him set appropriate prices for the new services.
In 2012, the shop had an overall net profit margin of 23 percent. Taking into account an average repair order of roughly $500 and a monthly car count of around 120, his shop is looking at a total net profit of around $165,600 for the year.
That’s a hefty number for a 6,700-square-foot shop with just three employees.
“When you’re profitable, the only thing you’re worrying about is car count,” he says. “Your profitability sets your prices, it sets your labor rate—everything is predicated on reaching that number.
“There are lots of programs that calculate it out for you, but you really need to regularly look at everything that goes into that number. It tells you everything about your business.”
Independent is a word shop owners take a little too seriously, says Gilley.
“One of the best things shops can do is realize that we need each other,” he says. “We need each other for new ideas, to find answers, to be able to bounce ideas off of. You can’t just be on an island.”
And without an understanding of what other shops are doing, Gilley says, it’s difficult to understand whether your shop’s financial numbers translate to success.
This is where benchmarking comes in, he says.
For shop owner purposes, Gilley describes benchmarking as the process of comparing key business metrics from your shop against the numbers of top shops in similar markets.
“Industry standards are really varied depending on who you talk to,” Gilley says, “but if you’re networking with other shops, successful shops, and comparing numbers, you’ll understand where your shop is falling behind.”
Gilley says it’s fairly simple to begin the process. There are plenty of groups and organizations to join that can help, and many shops—at least ones that aren’t direct competitors—are willing to share information. After all, Gilley says, they’re in the same position you are.