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• If you don't measure it, you can't manage it.
• If you and your people don't have a target to shoot for, you certainly
  won't hit it.
• A smart person learns from his mistakes. A wise one learns from other's mistakes.

All these expressions are especially true when it comes to your shop's financials, which is why benchmarking is so important.

Benchmark Worksheet

Benchmarking is the process of comparing your shop with others to assess how well your business is performing. There are many possible measurements in any business. We joke that the way we used to measure our shop's success was that if we had any money left in our pocket at the end of the month, things were good.

If only it were actually that simple.

The problem with this is that no measuring is done until the perceived end so there's no way of knowing where the profit came from, if there was more profit possible or if what you made was acceptable for what you did.

Today we measure our business success using Key Performance Indicators (KPIs), which allow us to know how we're doing while we're doing it. The idea of benchmarking is to compare these KPIs to industry averages, industry leaders, your competition or your own goals.

Gross Profit Levels by Department

There are hundreds of possible KPIs in any business. The most common financial KPIs used in our industry are gross profit levels by department. Gross profit dollars are simply the dollars remaining after you pay for your direct costs for those sales. For example, in the case of parts, direct costs would be the dollars you collected for a particular part(s), less the dollars you paid for the part(s). Direct costs often include any shipping/delivery costs that were incurred as well.

Very often, gross profits are reported by percentages rather than dollars. This way, you can compare a business to another business. (Trying to compare gross profit dollars one business receives in parts is directly related to the business' sales volume, whereas percentages are less so.)

To compute your gross profit percentages, divide your gross profit dollars by the total sales for those items. For example: The part retails for $100, and costs you $68 (you've given no discounts or incurred any additional costs).

The gross profit dollars are $100 - $68 = $32 (GP$)

The gross profit percentage is $32 ¸ by $100 = 32% (GP%)

This process is also done for labor categories, paint and materials, sublet, towing, etc.

There are, however, some very important considerations of which to be aware. To compare anything and to get value from the comparisons, you must be comparing "apples to apples."

Too often in our industry, comparisons are made when they're not representing the same accounting procedures. This is most often seen when benchmarking labor departments. This happens when a shop includes all employees indirect costs into the figure as a direct cost and others do not or only include partial indirect costs. This is often called a "loaded labor" figure rather than the "unloaded labor" of only the gross wages of the employee.

I'm not here to debate whether the figure should be "loaded" or "unloaded" (although the right way is unloaded for "Cost of Good Sold"), but to make sure that you're aware the numbers can represent many very different things.

Other differences may occur with how you account for parts discounts, in-house towing verses subletting, if detailing is funded by a percentage deduction from other departments, etc.

There are simply many, many ways that you can elect to run your own business.

The Targets

Once you've calculated your gross profit percentages by income departments, you can use these figures to benchmark (compare) yours with others or with your own company goals. The industry has had gross profit percentages provided from many sources. The following chart provides what's considered typical gross profit levels for the basic departments. As you get to the top of the range, you're entering into the top percentile of the industry.

Mechanical and frame labor usually are listed at the same GP percentage levels of other labor departments.

Why so much variance? Because a number of circumstances affect what numbers you can realistically achieve in your market area. Take parts for instance. It makes a difference what your vehicle mix is, the volume of purchases you buy each month and even the competition among the suppliers in your area.

If you happen to work a great deal on Saturn, Lexus or Infiniti vehicles, your actual gross profit percentage may even be below 25 percent because the discounting by many dealers is lower on these vehicle types than on other prestige vehicles, such as Porsche, Mercedes and Jaguar.

Also, if your annual total sales is $500,000 or less, your parts purchases will be much smaller than a shop with sales of $3 to $4 million - and this may not allow you to get the best volume pricing.

Finally, the competitive nature of your market may very well determine your best market-area discount. Competition in some markets between suppliers is fierce while in other markets, there's little competition.

But don't let this discourage you. We've worked with clients and taught educational programs for a number of years and, in most cases, these "best levels" can be reached. These figures are achievable.

Other Financial Measurements

Other financial measurements that aren't related to gross profit levels also help to analyze the "health" of your business, such as:

• Income department amounts compared to total sales.
• Expense categories amounts compared to total sales.
• Total overhead expenses compared to total sales.
• Sales per employee (production, indirect and total).
• Sales per square footage.
• Sales per work bay.
• Staffing ratios (indirect vs. direct).
• Direct staffing to work bays.
• Average repair ticket.
• Average cycle time.

The list can go on and on. Some of these have industry averages, and some may not. But by comparing these with other shops, you can see where improvements can be made. Let's take a closer look at some of them ...

**Overhead percentage excludes all owner salary, benefits, vehicles and any other perks.

Shops generally fall into the above ranges. When they don't, the areas in which they often fall short are:

• Metal labor is too high because they're repairing too much.
• Paint labor isn't within 60 to 80 percent of metal labor because they're not blending and getting full allowable refinishing times.
• Paint materials aren't at least 10 percent of sales, which causes their paint/materials profit to suffer.

Expense Categories to Total Sales

This may vary dramatically from business to business. What may be surprising is that areas in which you feel you're adequately spending are, in reality, very low and should be reconsidered. One such area is often the money spent on education (not just the owner or technicians, but everyone). I almost never see a 1 percent level of spending for education, although it should be at least 1 percent - and may even need to be 2 to 3 percent of total sales budgeted.

Another area is marketing and advertising. This should be budgeted at 4 to 7 percent, but what I often see is 2 percent or less.

Both of these examples are "putting back into your business," which improves the long-term health of your shop.

Sales Per Employee

This figure can be analyzed for daily or monthly. I prefer daily. This is the total sales produced in your facility based on the total employees, the indirect labor (not production staff) and/or direct labor (production staff).

Daily:

Total sales per total employees = $500 - $600

Total sales per production employee = $750 - $900

Total sales per non-production employee = $2,200 - $2,500

This benchmark is used to monitor the total throughput of a facility based on staffing. It also provides an indication when non-production staffing will become overloaded. When does overloading occur? Many more variables need to be considered before you can answer that, such as is the business a dealer, independent or dealer-owned independent? What technology is used? How many and which DRPs? What's the vehicle mix and average repair ticket?

This figure is used to analyze when work is backlogged to see what the average person should be able to produce. If the shop has a bad production or parts manager, this will also show up, since management is restricting what production can produce. (None of these benchmarks, however, can determine what's wrong with an operation in itself; it takes someone to interpret the findings.)

If the non-production staffing figure for a shop is, for example, $4,000, I would begin to think that they're understaffed in the office. It's a given that every dollar of sales requires a certain amount of time to manage and administrate. Having a sales ratio to non-production staff that high would indicate the workload would be high on them.

But before saying this for sure, you'd have to look at their system to see how it's being done and at their staff members to see how they're completing such a high volume.

Sales Per Square Foot (Meter)

This figure can also be analyzed for daily or monthly. Again, I prefer daily. This is the total sales produced in your facility based on total square footage or total production square footage.

Daily:

Total sales per total square footage = $.60 - $.80 ($6 - $8.50 per meter)

Total sales per production footage = $.80 - $1 ($8.50 -$10.50 per meter)

This benchmark is used to monitor the total throughput of a facility based on facility space. One element to take into consideration is that extended hours and multiple shifts can make these benchmarks look low. This benchmark is designed for single-shift facilities at approximately 45 hours of total production weekly.

These figures also vary based on geographic area. In the South, outside bays are often utilized (tents, partial coverings, etc.). This space should be counted if commonly used for repairs. In the North, figures can also vary depending on if it's summer or winter and on local practices/laws.

Most shops fall short in this figure because they don't utilize their space well. Often they have a high stall-to-tech ratio, which means they have techs who have three- to four-plus stalls.

A tech can't possibly work on more than one car at a time, yet we almost always have at least two stalls for him. Why? Because at a management level, we haven't taken into account all the variables (correct parts, authorizations, other administrative tasks, etc.), so we have a lot of vehicles sitting idle ... waiting. Sometimes we even have vehicles waiting for the tech since he's working on another vehicle.

This number provides a global picture of how the shop's total throughput is related to its available space. However, having a volume of work available is also required for this to have meaning, i.e., if sales were down (for whatever reason), this ratio also would be.

Sales Per Work Bay

This figure can be analyzed for daily or monthly. I prefer daily. This is the total sales produced in each work bay in your facility.

Daily:

Total sales per work bay = $400 - $500

This is used to monitor the total throughput of a facility based on how many work bays a facility has (and not filled with junk, boats, custom cars, race cars, etc.). Extended hours and multiple shifts can make these benchmarks look low. This is a benchmark designed for single-shift facilities at approximately 45 hours of total production weekly.

These figures also vary based on geographic area. In the South, outside bays often are utilized, and this space should be counted if commonly used for repairs. In the North, this figure can also vary depending on the season and on local practices/laws.

The reason shops fall short here is the same reason as sales per square footage: They aren't utilizing their space well.

Generally, if sales are down, this figure will be down as well.

Staffing Ratios

This ratio is the comparison of direct labor staffing (production) verses the indirect (non-production). It's been published for years that the ratio should be around 2:1 to 2.5:1. This means that if a shop has five production employees, it would normally need up to two indirect-labor staff members.

I don't place much credence in this ratio without looking deeper into the business's organizational structure. With the advent of DRPs has come more administrative responsibility, and this usually means more staffing. In addition, you need to look more at the cost of each indirect staff member. It very well may be that the market allows you to have two people doing administrative work for the same cost as one person in another market area.

It also makes a difference whether your shop is an independent, a replicator, a consolidator or a dealer since the organizational structure is different.

Single-shop independents have the greatest challenge since DRPs require much more administrative work than in the past. Replicators and consolidators are able to spread some of the administrative work (accounting, to mention one) to a single person who does it for multiple locations. Dealers have accounting departments that handle it for all their departments.

Because the expectations of insurers are increasing, the work required from indirect labor staff also is increasing. Still, it's important to interpret the information and observe the processes to determine if you actually need more or less staff.

Direct Staffing to Work Bays

This is basically how many work bays per technician for a single-shift operation. We're striving for a 1:1 ratio - one work bay per tech. But this isn't what we've historically done. In real life, the number is closer to a 2:1 ratio two work bays per tech.

The idea that techs need more than one stall is deeply embedded into our industry culture. That's too bad because it wouldn't be necessary if we performed scheduling, administrative work and pre-production activities properly.

Unfortunately, we often don't do a sufficient job of ensuring the processing of the vehicle doesn't stop once it begins. But this article isn't intended to cover proper scheduling and workflow processing. For more information on scheduling, go to www.TheBOSs-Online.com and after logging in, go to the Additional Modules Button and check out the Schedule BOSs Program.

Average Repair Ticket

This is simply your facility's average repair or what insurers call your average severity. This number can vary dramatically from facility to facility based on vehicle types repaired and types of damage typical to your market area.

For many years, figures around $1,800 to $1,850 have been used. However, many clients I've reviewed are closer to $2,100. As mentioned earlier, there are many factors to consider before comparing these figures with the figures of others.

Average Cycle Times

For many, they have no way to accurately measure this or don't accurately complete the dates in their system to track it. The average cycle time also varies based on the way it's measured, and past figures have been all over the board because of this. Some figures may measure DOL (date of loss) to file closed date (insurer file), while others may measure only when production started and finished.

In general, the industry average -from drop-off to delivery - is still between 12 to 14 days. Of course, there are variations for "driveable vehicles" that range from three to seven days. Again, many factors come into play here.

The reason I even mention this measurement is because it's becoming increasingly important to insurers, as well as to progressive shop owners who understand the significance of gross profit dollars per hour rather than just gross profit dollars.

Other KPIs

Not all employees will be able to relate or contribute toward meeting some of the basic financial benchmarks we've looked at so far. This is why benchmarking may also include other KPIs that aren't directly related to the financials. These can include just about any area of a business that can be measured.

For example, a production manager may need to focus on how many vehicles are completed each day or how many are painted - not on the gross profit of parts. The parts manager may need to focus on gross profit on parts, but he certainly wouldn't have much to do with the gross profit on labor. For this reason, some additional KPIs are necessary - ones that are operational in nature and not strictly financial.

Now don't get me wrong. The reason these operational KPIs are established is to ultimately have an effect on the financials, but they aren't directly, in many cases, a financial measurement.

Some examples of these types of KPIs are:

• Vehicles produced per day - Targets for production and sales to match incoming with delivery. There's no benchmark here because if a shop is small and does low volume, units per day will be low; larger volume shops do more cars. The key is to try to keep whatever your shop's average is consistent each day, not to deliver one car on Monday, Tuesday and Wednesday and then 15 on Thursday and Friday.
• Estimate percentage sold - Sales goal to monitor sales department effectiveness. It's amazing our industry average, even with DRPs, is only 68 percent. This figure varies, depending on the percentage of DRPs you have and your walk-in traffic. I believe we can get this figure to 80 to 85 percent.
• Total sales per estimator - This figure varies so much it's amazing. I've had clients whose estimator handles more than $200,000 of sales each month. The main determining factor is how much production duty they have. Do they order parts? Do they check parts? Do they handle all supplements? Do they deliver vehicles? Do they handle quality control? Do they close files? All these take time and affect how much volume they can handle. General figures show around $125,000 per month.
• Number of parts orders - This hasn't historically been tracked but if it were, it'd certainly reveal some inefficiencies in our processing. The goal is to get to one, but realistically, an average for all vehicles should be between one and two orders per RO.

  Parts ordering is very inefficient in our industry. Instead of disassembling the vehicle and going through the needs carefully, it's done poorly. Hence, when the tech gets into the job, he finds more stuff he needs - stopping production on the vehicle many times until the parts are received. (See why the stall ratio is bad too?)

  Equally bad is the "checking" of the parts when received. Not only do we not order what we really need, but what we ordered often doesn't get checked. Then when the tech goes to use it, oops wrong one ... stop production again.

• Number of supplements - This, too, hasn't historically been monitored by system reporting. It'd certainly be great if the average was under two. This target with a commitment to staging (blueprinting) the vehicle would certainly improve the operation.
• Repair verses replace - This is not only important to insurers (as you've found out during the "scorecard" sessions), but also to your facility's production throughput. Measuring it in the past has been difficult until recently. Check out www.aeii.net/EMSReview1.htm.

There are a number of ways to measure this:

(Metal + mechanical + frame labor) ¸ total parts

All labor ¸ (parts + paint/materials)

Total parts ¸ (metal + mechanical + frame labor)

Parts ¸ all labor

(Parts + paint/materials) ¸ all labor (This figure varies based on the type of vehicle repaired. Mercedes parts are more expensive than Chevrolet parts so the ratios will differ. You're looking to achieve something greater than 1.0 or 100 percent here).

• Number and cost of comebacks (warranty claims) - Quality control, quality control, quality control. This area is often overlooked, yet it's one of the key cost wasters in our industry. Every time a vehicle gets sent back to the metal department from the paint department because something wasn't right, every time a person damages something that has to be re-done and every time a customer comes back, it cost you lots of money. I've seen clients expense thousands of dollars each month just for rental cars, not to mention the labor loss and customer dissatisfaction. Check out www.QasiDirect.com for more about improving quality.

Each of these - and the many others you can use - provide real-time information to monitor your business and benchmark your own company targets. And once you begin measuring, you've taken the first step toward improvement.

Net Profit: The Gross Truth

Many have asked me what an acceptable net profit should be. This question is almost impossible to answer until we understand what's been "buried" into the business costs that aren't really justifiable expenses (since this figure is simply what you want it to be for tax purposes).

The cost of doing business has increased. If you're still spending like you did 15 years ago, your net profit is much smaller than it used to be. If you're "skimming" off the top, you'll also have a lower net profit.

The net profit before depreciation is a pretty simple equation:

Gross Profit $ - Overhead $ = Net Profit $

But what you may have in overhead dollars isn't that simple. Generally today, most small businesses are only making between 3 to 8 percent net profit. Hopefully, it's on $3 million gross sales and not $750,000.

Because net profit is a direct result of what you want it to show (for tax purposes), comparing net profits for benchmarking purposes is basically futile. Small-business owners inherently "bury" expenses (personal) into the business, and this lowers net profit.

There are also many legitimate reasons why net profits vary. For instance, those who lease everything may be expensing the items/equipment each month, reflecting a lower net profit than someone who's depreciating the same type of equipment by purchasing it. And then the net profit may be before depreciation is taken.

Our industry's also been incredibly inventive when it comes to its financials, making it all the more difficult to compare net profits. A perfect example is a story I heard from an industry friend: "One day I received a call from a client asking if he could afford a new spraybooth. I checked the figures he gave me and told him that it should be OK.

"Later that year, I was on the waterfront boat dock, and my client passed and waved at me. He was in a beautiful white boat. As the boat passed me, I noticed the name of it was, 'My New Spray Booth.' "

Go figure! I wonder just how many floating frame racks, booths and prep stations there are in this world?

Contributing Editor Tony Passwater is president of AEII, a consulting, training and system-development company. He's been in the industry for more than 27 years; has been a collision repair facility owner, vocational educator and I-CAR International Instructor; and has taught seminars across North America, Korea and China. He can be contacted at (317) 290-0611, ext. 101, or at Tony.Passwater@aeii.net. Visit his Web site at www.aeii.net for more information.

We want to hear from you! Please fax your comments to (330) 670-0874 or e-mail them to Editor Georgina K. Carson at gcarson@babcox.com.