A good office manager can be the key person in determining a shop’s overall financial performance. Think about it: Your office manager has access to all the vital information management needs to make proper business decisions. Monitoring this data and reporting the results to you can truly make the difference between success and failure.
How do you turn your office manager into an asset rather than just another employee? It’s easy. Simply provide him or her with the necessary information and tools to perform the kind of tasks that will have a positive effect on your bottom line.
Setting Up Office
Let’s look at the typical office-management position in the average collision shop. Most shops have evolved over the years — from two- to five-stall shops with an owner and one or two helpers to mega-shops and multi-location facilities. In the old days, accounting and bookkeeping consisted of turning the checkbook over to an accountant monthly or quarterly. The accountant, in turn, would give the shop owner a balance sheet and a simple profit-and-loss report. He’d also balance the checkbook.
As the business grows and expands, it becomes increasingly expensive for an accountant to keep up with all the transactions. It’s at this time when a shop owner usually starts looking to bring this service in house. It’s important to weigh the expense of paying an accountant against the cost of hiring a part-time or full-time employee to do the same tasks. As a shop owner, you probably expect someone you hire merely to do the payroll, balance the checkbook and prepare a monthly financial statement. But should you expect more?
Above and Beyond
Because there might not be sufficient work to fill a full day, some shop owners look for additional duties for the office manager. All kinds of tasks can be assigned to this position, including writing estimates, answering phones, ordering supplies, managing production, running errands, etc. But don’t limit your office manager’s additional duties just to "busy" work.
What could your office manager be doing besides keeping the books? How about:
• Tracking estimate-closing ratios.
• Tracking the shop effective labor rate.
• Comparing estimates to finished repair orders.
• Tracking supplements.
• Calculating paint and materials gross profit.
• Evaluating results of the production scheduling system.
• Tracking shop performance.
Providing you with information about each of these key areas can contribute significantly to the shop’s overall performance. To better understand how measuring each of these items contributes to the bottom line, let’s take a closer look.
• Estimate-Closing Ratios — These are indicators of many key performance items, such as the dollar amount of estimates written vs. the dollar amount of estimates actually sold. If the average estimate written is $1,500 but the average estimate sold is $2,200, this reveals that the estimators aren’t selling the small jobs (usually the drive-in customers). A high estimate-sold amount would indicate that the tow-ins are being sold, but the drive-ins aren’t.
Comparing estimates written by each major insurance company in your market to estimates sold to each major insurance company in your market is an excellent way to determine if an insurance company is directing work away from your shop. The dollar volume of business a shop is receiving from an insurance company is also very helpful information if you’re considering applying for DRP status or deciding whether to give an insurance company a discount.
• Shop Effective Labor Rate — This is a measurement of the total amount of hours paid to technicians divided into the total labor sales for a given period (usually weekly or monthly). This measurement tells you how well the use of different labor rates is being maximized for different repairs, including frame work, mechanical work, etc. Ideally, if these rates are being applied to the estimates properly, you should have a shop effective labor rate that’s $1 to $2 higher than your posted rate. For a shop that does 1,000 labor hours per month, $1 more per hour can be a significant contribution to the bottom line.
• Matching Repair Orders to Estimates — This is an essential, yet sometimes time-consuming, process. Shop owners need to know if conversion (converting parts to labor and vice versa) is occurring in their shops. In the past, this was a common practice. Today, some states take the position that this is illegal. Whether conversion is illegal or not, it’s certainly immoral to charge a customer for something that wasn’t done.
The best way to determine if this is happening in your shop is to have your office manager study 10 random completed repair orders and estimates monthly. Separate the key components — including labor, parts, shop supplies, sublet, etc. — into columns on a spreadsheet. He might even want to break it down further by separating labor into its key components — including body, frame, paint — and breaking down parts into OEM, used salvage and aftermarket. In the rows of the spreadsheet, enter three items: repair order, estimate and difference. Studying completed jobs and entering this information on a spreadsheet allows you to see if and where conversion is occurring.
• Supplement Tracking — Tracking supplements can contribute greatly to a shop’s cash flow. It’s not unusual for us to encounter shops writing supplements on 90 percent of the repairs they complete. And, normally, supplements take longer to pay than the original estimate. If those supplements were for, let’s say, 15 percent of the total repair cost and the shop is operating on an 8 percent net profit, you have a negative cash-flow situation. When this occurs, you, as the shop owner, have to contribute cash from your own pocket to cover operating expenses until the supplements are paid.
How can your office manager minimize supplemental receivables and speed up the payment of supplements? Experience has shown that the quickest way to get paid for supplemental repairs is to thoroughly document everything. Items such as the date the supplement was called in, a copy of the supplemental estimate, the amount authorized and the person who authorized it are essential. Also, we recommend you fax a supplemental authorization form to the insurance company that includes all of this information and request that the authorizing person sign the approval section and fax it back to you. This really speeds up the payment process.
Another helpful tool is a log that records all supplements by the insurance company, including the date submitted, the date approval was received and the date paid. This log is very useful for shop owners to see which insurance companies take the longest amount of time to pay. We find that simply tracking this information will speed up the payment process, reduce receivables and improve cash flow.
• Paint and Materials Gross Profit — This is an area that’s not managed well in many shops, so your office manager can make a significant contribution to your profits by explaining this account. Two key areas need to be monitored: how much profit the shop is truly making on materials and how many dollars are tied up in materials inventory. We sometimes refer to this as "day’s supply" of inventory.
Profits are the materials income dollars left over at the end of each month. Paint and materials is considered an uncontrolled inventory item. By this, I mean that most shops don’t measure how much material is used on each job. Since this is uncontrolled, the only way to determine true materials gross profit is to perform a physical inventory at the end of each month to determine how many dollars worth of inventory you have in stock (on hand). With a good physical inventory, your office manager can calculate true gross profit on materials.
The formula is:
Beginning inventory (1st of the month) + Inventory purchases (throughout the month) — Month-end inventory (from physical count) = Dollar amount of inventory used (that month).
Paint and materials income (that month) — Dollar amount of inventory used (that month) = Gross profit dollars (that month) for paint and materials.
Materials gross profit dollars divided by Materials sales dollars = Gross profit percentage.
Our target is a minimum gross profit percentage of 35 percent. Remember that measuring true gross profit is dependent on a good inventory count, which means everything must be counted.
Also, you should minimize your investment in paint and materials. Since most jobbers will deliver supplies to your shop daily, it doesn’t make sense to have a huge supply of materials on hand. Our target is no more than a two-week supply of materials on hand.
The formula for calculating this is:
Dollar amount of inventory used (that month) divided by Number of working days (that month) = Dollar amount of inventory used (per day)
Month-end inventory divided by Dollar amount of inventory used (per day) = Days supply of inventory on hand. (Ideally, this wouldn’t exceed 10 days.)
• Production Scheduling — Scheduling workflow is a black art in many shops. Their methods of scheduling work consist of "bring it in on Monday and pick it up on Friday." But heavy hits take longer. And then there’s the scientific calculation where you take one day in the shop for every five hours on the estimate. These methods are simply guesstimates. But it doesn’t have to be this way.
Determining how long it will take to repair a vehicle can be calculated very simply, provided you have a production-management system in place. But before we go there, let’s back up. A collision repair shop is a manufacturing plant that manufactures labor. The shop’s capacity to produce labor is
limited to the number of technicians employed and the productivity and efficiency of each.
The formula for calculating a shop’s capacity is:
Number of technicians employed x Number of hours worked each day x Technician productivity and efficiency (proficiency) = Capacity to produce labor.
For example, a shop with five technicians working eight hours per day at 150 percent proficiency can produce 1,260 hours in a 21-work-day month. The equation looks like this:
5 technicians x 8 hours per day = 40 hours per day.
40 hours per day x 150 percent proficiency = 60 billable hours per day.
60 billable hours per day x 21 work days per month = 1,260 billable hours per month.
The thing that affects a shop’s capacity the most is when one or more technicians fail to produce at their capacity. If an individual’s performance drops off, the production capacity of the shop does, too.
Maximizing a shop’s capacity to produce labor is a matter of simply matching the inflow of work with the individual technician’s capacity to produce labor. This requires that the shop have a production-scheduling system that tracks work sold, parts available and work-promised times with each technician’s capacity to produce. Ideally, a good production system would allocate or pre-schedule an amount of billable hours of work for each technician each day. By pre-scheduling work and verifying parts availability before a technician receives a job, shop owners should be able to maximize the use of their technicians’ time.
How does your office manager fit into this process? Through payroll. Every week, or even every two weeks, your office manager should calculate how many billed hours a technician has produced and how many clock hours he actually worked. Divide the billed hours by the clock hours to determine the technician’s proficiency percentage.
60 billed hours divided by 40 clock hours = 150 percent proficiency.
By tracking this information and reporting the shop’s total results to you or your shop manager every pay period, your office manager can let you know how well the "manufacturing plan" is doing. As we’ve found with some of the other items discussed in this article, simply tracking key information and giving this information to the right person can dramatically improve results.
More Than Hired Help
Your office manager could be the key person in determining your shop’s overall financial performance — if you give him the responsibility and the tools necessary to do more than balance the checkbook.
By monitoring and analyzing the vital information needed to make proper business decisions and then reporting the results to you, your office manager will become a key player in the profitability of your shop. He may never pick up a spray gun or straighten the frame on a damaged unibody, but an efficient and informed office manager will contribute as much to your bottom line as your most-skilled technician.
Writer Larry Edwards, CMC, is president of Edwards & Associates Consulting, Inc. located in Charlotte, N.C. For more information on office-management training, effective selling techniques or advanced collision repair management practices, call Edwards & Associates Consulting at (800) 979-9904.